If you have not read Part 1 and you are unfamiliar with the concept of Modern Money Theory [MMT] then please click here for a short introduction. There are 5 reasons why taxes are necessary even in an economy built to take full advantage of MMT descriptions of money. A central observation of MMT is that taxes are not required to fund the government. But still taxes have an essential role and of the 5 reasons the first 4 are listed below. The last reason will appear in a separate blog following this one.
- Collecting taxes payable in US currency establishes the dollar as a legitimate currency. If taxes must be paid, and you provide a service where you collect your pay in a barter agreement, then how will you pay your taxes? Some may romanticize using such a system for payments, but it is just not practical. Using dollars allows us to spread out our debts into manageable chunks, paying taxes in dollars reinforces that the dollar has a critical value.
- Taxes are the simplest means the government has to control the money supply allowing it to manage inflation, which by the way does not happen if the government creates more money. But, should other external events like the 1970’s energy shortage in the US and inflation gains momentum, raising taxes can take the wind out of that sail real fast. But, the tool also goes both ways, taxes can also be lowered to provide stimulus during a slowdown. Ideally, in a well-managed economy the tax tool will be needed infrequently. MMT, by noting that we overburden taxes by assigning conflicting economic tasks creates an economy that is easier to manage by lessening the workload we currently needlessly assign to money.
- Taxes and fines can be used to manage socially positive behavior. We do this now with taxes on alcohol and cigarettes, along with fines on selling those items beyond the legal parameters. This may be the most controversial issue of what taxes (and fines) but one must also consider that the use is not just for “sin” taxes but is also the justification behind a carbon tax and other environmental issues. Encouraging, not just people but business interests as well into acting for a Public purpose or not acting against a public purpose is a critical role of a civilization, and taxes are a powerful tool for enforcing that. Also, by adhering to the principle that taxes are not needed to fund the government’s expenditures, means that these sin taxes don’t end up as necessary to fund the government.
- When taxes are not driving all expenditures then tax collections can do all of the previous three tasks and help in the redistribution of unequal wealth acquisition. Yes, Robin Hood taxes may not actually redistribute wealth, but it does, at a certain point, force high earners to reconsider whether or not being paid only 30 cents of each dollar earned is a wise way to make more money. Forcing wealthy, highly paid persons to truly push their wealth back into the economy can significantly help to reverse current income trends.
In the next post I will discuss the 5th reason for we need taxes. And that reason is based on politics, not economics.