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Given that we are all using fiat currency, an interesting way to think about taxation is that the Government is destroying money through taxation, and creating

Given that we are all using fiat currency, an interesting way to think about taxation is that the Government is destroying money through taxation, and creating money from via spending. With this thinking, you can very much say that tax revenue does just disappear into some hole. The effect of taxation in this thinking is that it applies brakes upon the accumulation of wealth and causes existing wealth to be worth more (via deflation). This is counteracted by the inflation from created wealth via govt spending. A weird alternative to taxation could be to print more and more money without taxing any of it. This would be functionally a flat tax on all existing wealth in that fiat currency via inflation.

jlokier 6y ago
> With this thinking, you can very much say that tax revenue does just disappear into some hole. It doesn't just disappear into the misty fog of the central bank though. It goes onto some government ledger. This ledger has some considerable effect. It greatly constrains what the government can spend. If the ledger meant nothing, you would not see government needing to borrow via issuing bonds when it needs to spend more. The cost to government of borrowing goes up and down according to circumstances, and is outside of government's direct control. In other words, all the parts are related, partly by design, and this strongly affects the consequences of issuing (or destroying) currency at the central bank to the point where it's not really meaningful to think of taxation as destroying currency. If the government did issue enough currency to go on a spending spree, before long not only would inflation harm other parts of the economy, it would also find that the prices of its spending spree went up, so it would have to issue more, and... Ultimately no matter how much currency it issues, there's a strong drag in real terms on how many things the government can obtain from others and cause others to do via commerce. That limit on its spending power makes the ledger balance something much stronger than a hole into which tax disappears.

jlokier 6y ago

> With this thinking, you can very much say that tax revenue does just disappear into some hole. It doesn't just disappear into the misty fog of the central bank though. It goes onto some government ledger. This ledger has some considerable effect. It greatly constrains what the government can spend. If the ledger meant nothing, you would not see government needing to borrow via issuing bonds when it needs to spend more. The cost to government of borrowing goes up and down according to circumstances, and is outside of government's direct control. In other words, all the parts are related, partly by design, and this strongly affects the consequences of issuing (or destroying) currency at the central bank to the point where it's not really meaningful to think of taxation as destroying currency. If the government did issue enough currency to go on a spending spree, before long not only would inflation harm other parts of the economy, it would also find that the prices of its spending spree went up, so it would have to issue more, and... Ultimately no matter how much currency it issues, there's a strong drag in real terms on how many things the government can obtain from others and cause others to do via commerce. That limit on its spending power makes the ledger balance something much stronger than a hole into which tax disappears.