I'm late to this thread and haven't read all 30 pages yet. I have a simple question none of my friends can answer about this (sorry if it has been covered here).
How come I still have to pay taxes if printing money is the way to go now. Everyone said the money printing in 2008 would cause hyper inflation and it didn't. Now they are doing it again as a casual response to people out of work. If the fed has a perpetual money printing machine that does not cause hyper inflation, why don't they use it to build roads and other infrastructure as well? And yes, why do I have to pay federal taxes now? They can just print what they need for the roads and other stuff and leave me alone. I would like that a lot.
Can anyone here answer that question?
1. Taxation is what gives money its value. So long as you have to pay taxes in dollars, then dollars will have value to you. So long as taxation makes dollars valuable, we can use them as a convenient medium of exchange.
2. Progressive taxation keeps rich people from owning the government and telling it to screw you over. I mean, not completely, but some. A little bit. It could be better.
3. Tax policy is social policy. Look at windmills as an example. (I'm making up this example, but I nonetheless assume it is true.) We didn't want to be at the mercy of OPEC during some crisis, so we decided to become energy-independent, in part by building windmills. It would take a whole lotta windmills, though, and nobody wanted to build them. Building windmills was not cost effective. There was no profit in windmills. The government didn't want to build windmills itself; it wanted free citizens to do so voluntarily. So we changed the tax code, making the parts cheaper, and the profits protected from taxation for a period of decades. People began to build windmills. The nudge provided by these changes in the tax code have made us an energy exporter. This energy independence gives us more national security than would be provided by an additional fleet of aircraft carriers.
4. Taxation has a deflationary effect. It tends to offset the inflationary effect created by government spending.
Let's say that government spending is half of the gross domestic product (GDP). And let's say that GDP is $100 a year. So government spends $50 a year. If it also collects $50 in taxes, the GDP will remain at $100 a year. The government adds in $50, but it also takes out $50, so the total remains constant.
But now the government hears your plea, and it quits collecting taxes. Instead it just announces that it will print $50 this year without collecting taxes. This will cut the value of the dollar by a third. A black current pop tart that costs $1 this year will cost $1.50 next year.
Next year, the GDP will be $150. (It's not that the economy has grown; it's just that dollars have gotten cheaper.) To spend half of the GDP, as before, the government will have to spend $75.
And then in the next year, the GDP would be $225, and government spending would be $112.50. And so on.
But the above example only works if people are blind idiots with no foresight at all.
Suppose, in the first year, you have a pop tart worth $1. Now the government announces there will be no taxes, so the inflation rate will be 50% per year. Are you going to sell your tart for $1 now when you can sell it for $1.50 next year? No, you won't.
You'll value your tart somewhere between $1 and $1.50. And your neighbor will value his dollar (worth less than a tart next year) at somewhere between one tart and half a tart. You strike a bargain at $1.25, and sell your tart to your neighbor.
The thing is, the government hasn't spent any money yet. It only announced that there would be a 50% inflation rate. The
expectation of inflation has caused actual inflation. Which means the government can't get by on $50 this year, but will have to print $75. Which means the actual inflation rate will go up above 50%, and expectations will go above 50%, so the government will have to print even more money.
And we're still in the first year. Inflation would continue to spike after that.
So that's why we can't go tax free by running a deficit. You still want to know why we can run a deficit sometimes.
The reason we have to collect taxes is to offset the inflationary effect of government spending. Collecting taxes has a deflationary effect.
In stable times, if taxes and government spending are balanced, the value of the dollar will remain stable.
Let's return to our original hypothetical: GDP is $100. Taxation is $50. Government spending is $50.
Now Godzilla comes out of the ocean and stomps Houston flat. That's a $5 loss. That's the same loss as if government had collected an extra $5.
It doesn't matter whether you send in your tax money, or burn it in your front yard, the deflationary effect is the same. It doesn't matter whether we pay $5 in taxes or a monster stomps Houston. The economic effect is the same.
So, if government spends an extra $5 to rebuild Houston, the dollar will remain stable.
If the economy falls by $20, and government spends an extra $20, that's all good. No inflation.
But that's recession. Let's look at boom times.
GDP is $100. Taxation and government spending are both $50. But now things are looking good. Manufacturers are all thinking they can sell half again as much as usual next year. So they're competing fiercely for raw materials, bidding up prices. The dollar that bought one tart's worth of black current jam last year will only buy half as much this year. Inflation is upon us.
The proper government response is to cut spending or increase taxes. Or both. This will reduce inflation, stabilize the dollar.
So government should run a deficit (spend more than it collects) during recessions, and should run a surplus (take in more than it spends) during booms.
Your system would have government run ever-larger surpluses, regardless of the business cycle. This would lead quickly to hyperinflation.
But careful overspending during bad times and underspending in good times would not cause inflation.
A note: We like a little inflation, maybe 3 or 5 percent. But, for the sake of simplicity, my above hypotheticals have assumed that zero inflation is good.
