Abolish all taxes?

Ron Paul has called for the abolishment of all taxes. And I said online that I thought that that was one of the stupidest ideas I had heard from him. Someone asked me why so I felt I should respond.

It is a confusion of the current general public mindset that taxes pay for government. It stems from seeing government as like a household – where you need income to pay for your bills. But governments in general and the US government in particular is a sovereign issuer of its own currency. In this specific case taxes have a function – but it is NOT to pay for things.

The government pays for things by creating money out of keystrokes. Literally. For things that the government buys from the public, like warships and planes and VA hospitals, and roads and research, the money is paid out by the US Treasury and the Treasury incurs a debt. No income needed.

In reality taxes are necessary component of a fiat money system but they play a different part from yours or my income. They underpin the “confidence” of people in the currency. People accept the currency in transactions (and foreign governments use it in trade) because the US taxes people and people need dollars to pay taxes – so the US government CREATES a demand for dollars. If we were to abolish all taxes what happens to the demand for dollars and why should banks, state governments or even individuals create their own money? Secondly and somewhat less importantly, taxes decrease the money supply draining dollars out of circulation. When the US Treasury collects taxes it keystrokes the receipts into a column – which is called Tax Revenue (so we get that common confusion) – and this keystroke cancels out some of the money in the US Debt column and ALL THAT “money” disappears!

I get most of these ideas from what is called Modern Money Theory. The site which I follow for this is New Economic Perspectives.

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