Here’s what my brain was pondering: a scenario where we abolish all forms of taxation, and simply “run the printing presses” to pay the government’s bills. I realize from the history of places like Germany and Zimbabwe, that this doesn’t work out very well in reality.
The stupid question I have, is why? If the government is allocating a certain number of resources to build a road, why does the effect of “running the printing presses” to pay for it cost the average person more purchasing power than taxation? Is it entirely because taxpayers have more of a stake in government—a reason to get mad if their resources are being wasted? Or are there other reasons?
Is there a situation where the powers that be could manage that kind of scheme well? If so, how?
At best, the question is ignorantly phrased. (Sorry, I don’t mean that as an insult.)
Governments do not “print more money” at a whim. (They don’t actually “print” all that much money to begin with - coins and currency are a small fraction of national “money.”) A national monetary system is a careful balance of forces based on the belief in the ability of the government to stand behind the value of the money it issues. We are way, way past economic systems based on hard assets, despite what the gold bugs will tell you at interminable length.
The simple answer, which isn’t and can’t be, is that even the strongest and most stable government can only issue so much money before it exceeds its available “faith and credence” and drives down the value of the money, sparking short-term, long-term or terminal inflation.
But you answer your own question by citing Zimbabwe; inflation.
Currently has no inherent value, it only has perceived value. If the government is simply running the printing presses to pay its bills, the currency will have no value, and the government will never have enough money. Everyone will know $1 today will be worth 50 cents tomorrow and nobody will save money or accept any transaction for money. Eventually the currency will be so worthless the government’s plan to run the presses will not work because nobody will want the money they print.
People are willing to possess American dollars (or euro, pounds, yuan, Canadian dollars, etc) because of the perception that they are limited in number and represent a measurable portion of the material wealth of the economies they represent. If they are not limited in number, they are of no meaning or value. What would the difference be between possessing an endless number of American dollars and trading in, say, peanut shells?
The Saudi Arabian government does not need taxes at all . . . because it owns productive property in the form of oilfields. I know of no other examples.
Yes, if government expenditure represented a small percentage of GDP, funding gov’t through printing money would only represent inflation of a few percentage points.
Since the public sector spends 30-40% (in the US, depending on year/accounting method) of GDP, a 30-40% inflation rate would likely become self-accelerating and very much reduce the utility of currency as a trade facilitator.
Taxes and money are two entirely different things. In theory taxes could be paid in goods or services, not cash. Do you want a cashless society, or a taxless one? If the latter, how do you imagine that the government convince anyone to do anything for it?
Put another way, that dollar bill you have is worth something, because you know that the US government and monetary system is stable enough for you to exchange that piece of paper for something else worth $1. That’s why the US Dollar is worth something, and some bill I print on my printer at home (Bump Bucks?) isn’t worth any more than a piece of paper. You can’t exchange a Bump Buck for much of anything.
Essentially the government doesn’t operate in a vacuum; while the government could easily just print up a pallet of bills to pay for something, they’re essentially not paying for it if they do that- they’re basically skimming off the value of all the other dollars in circulation.
Look at it this way- it’s like playing poker where every chip is worth the same amount- let’s say $1. Let’s also assume that the number of chips involved directly corresponds to the amount of money in everyone playing’s wallet, and that all debts are settled at the end of the night with what’s in each person’s wallet- no IOUs or anything like that.
Now let’s imagine that the guy hosting the game throws in an extra 25 chips to cover a bet without actually adding $25 into the game. Now you basically have to revalue the chips in the game to represent the same amount of real money with more chips. So overall, each chip is worth less than it was before, since there are now 25 more chips to represent the same amount of money. So in terms of the poker game, each person’s holdings in chips represent less real money than they did before, and the host’s bet covered by the 25 extra chips represents that loss in value.
Let’s just round off the government budget and say the United States spends $3 trillion per year. And let’s say that the government only has two ways of paying the bill: charge everyone in the country an average of $9,000 in taxes, or simply invent $3 trillion in cash.
In the first case, you’re taking a little bit (relatively speaking) from a whole lot of people to add up to a very large number. In the second case, you’re attempting to violate the rule of “there ain’t no such thing as a free lunch” by simply inventing money.
Could you elaborate why you think that people would not question the value of the dollar if, every year, the government simply adds $3 trillion to the number of dollars circulating in the economy? It seems perfectly obvious to me, so I’m not sure how to explain it further.
Pretty much what Amateur Barbarian and RickJay said, and a few others later. Such a policy would cause a currency collapse in short order. Such a currency would have an international exchange rate rapidly approaching nil, and so would both its international and its domestic purchasing power. People would move their savings to real currencies in real banks and moreover would clamor to get paid in real currencies like the US dollar or the Euro or pound. Eventually all the paper currency being printed up by this hypothetical government would be worthless, only good as packing material or wallpaper.
There’s also a secondary problem, and it’s a problem that can manifest itself even in relatively stable currencies when the government pursues inflationary policies. Taxation is an organized and systematic method of deploying a portion of a nation’s real wealth to public initiatives and infrastructure and the general public good. It can be infinitely fine-tuned in the interests of fairness, incentivizing desirable businesses and behaviors, and so forth. Whereas any benefits a government may get from inflationary policies like printing money is subject to no such controls, it just hits people and businesses in grossly unequal ways depending on their circumstances. Printing money is essentially an exercise in theft, parasitically exploiting and diluting the intrinsic value of the currency, and beyond a certain small tolerable percentage it’s flagrantly destructive and economically destabilizing.
A perfectly workable system could be based on selling votes. Every so often, the government would issue a new bunch of shares. Each share counts for one vote in the legislature.
Really rich people, big corporations, labor unions, religious sects, and other special interest groups would bid on these shares. As more shares are issued, the older ones become less valuable…but having a bunch of old shares is still a pretty good power position.
If the government did not collect money as taxes then the dollars it printed and tried to spend would be worthless - they’re be nothing to back them up. It would be like you trying to pay for everything with checks when you have no money in your checking account.
There’s even one economic theory that taxation is what creates the value of money. The idea is that the government can tell people they are going to have to pay a certain amount of dollars to the government. That creates a demand for dollars because people now need them to pay them to the government. And because dollars now have this value, the government can issue them and they will be accepted as money by the people. By taxing people, the government has created a demand for dollars that wouldn’t otherwise exist.
Beat me to that point. Taxation is a great way to either address negative externalities in markets or provide incentive to things that provide some aspect of public good.
I’d throw on that simply inflating the currency is a rough parallel of tax since it’s eroding the purchasing power of assets the citizens hold. Real value of citizens holdings decrease because of the government spending. That “inflation tax” can’t be targeted to areas where it minimizes market inefficiency. It just happens willy nilly.
It’s not an intrinsically bad idea and just saying “because inflation” is not a sufficient criticism without demonstrating exactly why inflation is so ruinous. If inflation is known and accounted for ahead of time and society is structured to work around it, then many of the negative effects are mitigated.
The process you’re describing is known as Seigniorage and the biggest difference is that most forms of government tax are taxes on income or profit but Seigniorage is a tax on wealth. A 100% tax on wealth is probably not the most desirable thing but there’s some optimal proportion of tax between income and wealth that’s probably not 100:0. Some amount of structural seigniorage would be sufficient to prevent the ability of large, dynastic accumulations of wealth to form which is probably a good thing.
The biggest challenge though, is that taxes on wealth disproportionately affect the rich which makes them hard to propose.
Saudi Arabia has taxes. Non-Saudis (who are also not members of the Gulf Cooperating Council), pay an income tax of 20% a year. Saudi citizens don’t, but they have to pay the Zakat tax, a traditional Muslim tax of 2.5% of your income that’s supposed to support the poor and clergy. Saudi Arabia also has a social security/old age pension program for some workers, and people who qualify for the program pay 9% of their gross income, with an equal contribution by their employer. They also have custom duties and tariffs.