(4)*** Studying Modern Monetary Theory (MMT) — The Secret Life of Taxes

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Continued from here.


The Functions of Taxes

If government does not need taxpayers money to fund its spending, why does it bother to raise taxes at all?

Taxes have a number of functions unrelated to government funding.

(1) Taxes give intrinsically worthless fiat money value.

(2) Taxes ration purchasing power, so that vying between government and non-government for the products of the economy does not trigger inflation.

(3) Taxes can be used to accelerate or slow down economic activity, regulating the business cycle.

(4) Taxes penalise undesired behaviour — like making smoking very expensive by imposing a high tax charge on cigarettes.

(5) Taxes charge beneficiaries with the social costs underlying privately enjoyed benefits — like making users of automobile routes pay for the publicly provided road network via a tax on patrol.

Functions (4) being of no further concern for our present purposes, we shall examine only functions (1), (2), (3), and (5) more fully below.

1. Taxes Giving a Currency Value

ad (1) A Dollar bill by itself is virtually worthless. There is hardly anything one can do with it that is useful enough to command much value. It is not even much of a help in keeping you warm when you burn it. So something that is not intrinsic to a Dollar bill must be introduced into the world to give it notable value. 

To do that, government turns the Dollar into a symbol with which you can do special things — valuable things.

Like the operator of a stadium may use pretty worthless pieces of paper and turn them into a symbol that signifies that the holder of such a so-called ticket is entitled to watch a football match millions of people are eager to attend. Suddenly that paper shoots up in value tremendously.

To appreciate its own currency, to make it sought after and hence genuinely valuable, the government attaches to many of the things we need (income etc.) or like to do (drive a car etc.) a charge for not going to prison. Depending on how much you earn, you must pay government a certain price so that it will let you continue to live as a free person rather than getting thrown into prison. That charge is called a tax. And the way to pay that freedom tax is by delivering to government certain special symbols that represent the currency it issues: government money.

Consider this example: as a result of working hard, you are able to build a house to live in. Everyone rich enough to afford such a house are liable to a freedom tax on housing. If you were into exchange in kind and had built this house entirely of your own resources, perhaps with additional help from friends or by using means acquired through mutual barter, in other words if you had not earned money denominated in the national currency, the house would make you go to prison. You are unable to pay the freedom tax levied on having a house as nice as your freshly build mansion.

There are many other freedom charges the government imposes on its citizens.

So people will want to earn government money. It keeps them out of prison and enables them to enjoy openly and without fear countless things humans tend to like, a nice car, a beautiful house, lots of money in a savings account etc.

Imposing a freedom tax on housing, the so-called hut tax, was exactly the method by which the British got members of a certain region of Africa to adopt the currency the Empire intended to prevail in the area. If you wanted to keep your hut, you had to earn money denominated in the government's currency. Suddenly everyone was eager to offer goods and services that would earn them the special symbols by which they could settle their freedom tax liabilities with the government, stay free and keep their homes.

In a modern exchange economy, money is ubiquitous. You cannot live without it. So everyone is interested in acquiring the currency that attracts the largest demand: the money with which you can do the greatest number of useful things (like getting a loan or settling a debt owed) and accomplish the most important things (like humoring the tax collector to stay out of prison). Even if you are not liable for taxes for some reason, you will still prefer the currency in which people are required to pay taxes. Those who do have to pay taxes obviously prefer that money and so it will tend to be in demand in the most diverse kinds of economic activity.