Modern Monetary Theory argues that income tax (and alll other direct taxes) are unnecessary because the government can riase fund via fist money and its indirect taxation via inflation.
This is effectively a tax on the entire economy and challenges every sector or segment to grow price (including labor wages!) or lose value.
This is pretty poorly argued and doesn’t even touch on some commonly shared arguments about taxes.
For example, I’m sympathetic to the perspective that federal taxes are really about preventing inflation. I’m not sure it changes anything fundamental, but it suggests that we can be less concerned about deficit spending as long as inflation is low. (But this assumes the government can predict what will cause excessive inflation far enough in advance to avoid it.)
Also, in the presence of inflation, income taxes and wealth taxes are similar since you need to earn a return just to stay even with inflation. In a way, we already have wealth taxes, but they’re mild since inflation is low.
There’s a lot more that could be said. It’s a complicated area.
Taxes are unnecessary in any country with fiat currency. This is plainly evident by the complete lack of correlation between tax revenues and government spending. The government can simply create as much money as it needs. Taxes exist only to track and control the citizenry.
I hope that it is interesting and noteworthy for you to learn that many, many smart and thoughtful economists do not agree with that. In fact, they strongly disagree.
Current thinking in modern economics - specifically in MMT[1] - is that money is created by loans and destroyed by taxes.
Which is to say, the government (provided it is a sovereign issuer of its own debts, like the US or the EU) has no particular use for revenues since they can just create whatever money they need. What is actually happening when money is taxed is that it is, effectively, destroyed.
The MMT argument for taxation is that it's necessary to encourage demand for a currency, thus making it more valuable. But there's no fundamental reason that a government which controls its own currency must collect taxes to pay for various services.
Congress could pay state and local governments directly each year.
If you're willing to throw away some property rights, then state and local governments could theoretically lease land as a means of raising revenue without direct taxation. (this is a terrible idea)
I got downvoted last time I said this, but with fiat money there is no reason for anyone to pay income taxes. Obviously there is no correlation between income tax revenue and government spending. They just create the money they need, the never-to-be-paid-off deficit grows, the value of the dollar shrinks, and we move on.
Taxes serve as a means of coercing the behavior of the citizens, in the sense that certain things are rewarded with tax deductions or credits, and other things are punitively taxed. That is the reason they still exist.
We should just do away with taxes. People's work and business activity, conducted in terms of US dollars, creates value. The government takes some of that value by simply creating more dollars. Why do we need a huge, complicated taxing bureaucracy in the middle of it?
Maybe income tax is just a bad idea? Bad for humans, that is, not for maximizing government power. The U.S. got along without it for a long time, and economists have argued for other bases like a land-value tax or consumption taxes. I dunno, myself; it's not like I get to choose.
Taxation is obsolete as a revenue mechanism for a monetary sovereign. The only value of taxation is to discourage an activity. To discourage the generation of income is profoundly counterproductive.
Governments should be forced to choose between collecting income taxes _or_ taxing everyone through the general monetary inflation (a.k.a. money printing). They currently practice both - the income tax taxes the non-rich, and the inflation also only taxes the non-rich, because the freshly-printed money goes to the rich.
Taxes are really important, even if they don’t really ‘finance’ monetarily sovereign Governments at all. From a macro perspective, it’s basically as if taxation destroys money and new money appears when they spend (unlike private bank accounts, where money transferred between them still stays in the economy). Of course, it looks like taxes fund spending because of the accounting involved (because it actually did in gold standard days, and things are mostly recorded in the same way just because that’s what people have always done) and various policy, etc.
That’s why the idea of a ‘soft default’ doesn’t really exist in the modern economy.
Basically, taxes are the main anti-inflationary mechanism that the economy has. The Government needs to spend money (and the private sector really needs them to spend, because in the modern economy we can’t create new money without creating debt - only the Government can do that), but if they spent without taxing aggregate demand would be way too high and you’d get inflation.
The Government doesn’t need your money at all, but they do need the private sector to not have it and spend it. Some economists looking at these kind of monetary issues call that ‘fiscal space’.
Secondly, you need taxation to have a stable currency, because it creates a baseline demand. Without a population of people required to pay taxes in a currency, it may become more attractive to the private sector to switch to a different currency.
Third, taxes are useful for encouraging (by tax breaks) or discouraging certain activities (by taxing them more). And finally, taxes can serve a redistributive purpose if you have a progressive system, reducing the financial assets of the wealthy somewhat while balancing it out a bit with spending.
By the way, you still haven’t understood what I mean about the EU...
You could also argue that income tax makes no sense, because the people are going to pay sales tax or property tax with it anyway.
The more you concentrate the tax in one area of the economy, the more you incentiveize people to try to find a way around that specific tax. Spreading it out reduces the risk of making people behave otherwise irrationally just to avoid paying tax.
The idea behind taxation is "the government needs money to function, and it alone has the authority to take it by force". Anything else is a post hoc justification.
As I understand it taxes in MMT are just destruction of money, it's the essential counterpart of money creation used to balance supply. It's irrelevant to GDP and spending in that model, since in MMT the government doesn't need taxes to spend, it just print what it needs, that's the core idea.
Govt spending creates inflation which is a tax on everyone. Sometimes its obvious, like Quantirative Easing, and sometimes it's subtle, like wasting human labor and natural resources on worthless stuff/activity instead of value creation.
Formal taxation just redistributes the pain.
Side note: taxes do not fund spending in countries that issue their own currency and that currency is not pegged to something else. In this sense, the US does not need taxes to fund spending on healthcare, in the same way it does not need taxes to spend nearly $1 trillion on the military.
Modern monetary theory describes taxes as primarily tools to reduce some effects of income inequality (and that is not done anymore) and, most importantly, provide the value of money. In essence, taxes (and the threat of imprisonment if you do not pay them) is what makes paper, and now numbers on computers, a thing you will die without.
This is effectively a tax on the entire economy and challenges every sector or segment to grow price (including labor wages!) or lose value.
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