Yves here. The continuing rise in Federal debt levels is producing yet more scaremongering. Let us repeat: deficit spending is not bad. In fact, it is necessary since the private sector chronically underinvests so as not to create full employment, which would give labor too much bargaining power. See Mikhail Kalecki’s classic, The Political Obstacles to Achieving Full Employment, where in 1943, he predicted negative interest rates. So again, governments that engage in excessive or unproductive deficit spending will not default involuntarily. They will produce a different bad outcome, which is high inflation.
Here, Tom Neuberger unpacks the role taxation plays for governments that are currency issuers like the US. Governments that do not issue currency, like California and Germany, must use taxation or other fees to fund their budgets.
“[Government] ought to be so constituted as to protect the minority of the opulent against the majority.”
There I noted a simple fact — you can’t create dollars; only the government does that— and likened the U.S. dollar to “airline miles”:
For an analogy, consider “airline miles.” This is money in exactly this sense. Airline miles have value. You can spend them, but you can’t create them. To get them, you have to do things (buy tickets and fly). Airlines, however, can make as many as they like.
Airlines also control the supply of miles (which makes sure flights aren’t too cheap) by taking them back when they like. Remember that trip that once cost 20,000 miles? If it now costs 30,000 miles, your supply of miles goes down faster. Yet the airlines’ supply doesn’t go up — infinite miles + 10,000 is still infinite miles. The miles it takes in, like dollars the government takes in, just disappear.
Readers found the analogy helpful. Then I suggested some follow-up questions, such as:
Why do governments tax if they don’t need the cash? Why does the bond market exist? What is the deficit? And what is the national debt?
Let’s start with the first: Why do governments tax their citizens?
The Primary Purpose of Taxes: Control
If our government, or any government that makes its own money, doesn’t need taxes to spend, why levy taxes at all?
In other words, if a government can “print money” — which everyone with power and a mic agrees it can do — then why are we taxed? (Ignore the bonds comment below; we’ll deal with that later.)
Great question! The primary reason, as always with organized states, is maintaining control. Consider the following example.
The British Conquer an Island
Imagine a small island far in the blue Pacific. There is no organized state on this island, just villages, and not that many. These are not “primitive people”; they’re just people like us. They grow things, they herd, they drink, have husbands and wives; they mainly agree how to live; they’re born and they die.
For money they trade anything of value. On this particular island, they trade IOU slips from the island’s most popular bar. There are plenty of these slips; the bar does a lot of business.
If I have an IOU slip for 15 pints (because that’s what I drank last month) and you have another for 10, we can trade slips. I now owe 5 pints less, so I give you a bushel of wheat to make up the difference.
Had I said “dollars” instead, there’d be no difference. I bought the wheat from you for “five IOU pints.” I gave you 15, you gave me 10 in change, and I got the wheat. These IOU slips are real money, people use them like cash, and as long as the bar is popular (which I hear it is), its IOU slips will have value. (How does the bar redeem these IOU slips? The barman, who runs a mill, takes wheat as well.)
The British Set Up a Colony
Suddenly, in come the British, gunships and all. They “declare this land in the name of the Queen” or whoever, and take over. They have pounds, but nobody wants them. What can I do with a pound? Can’t eat it. The bar won’t take it.
But the British are smart. They have guns. They levy a tax. If you don’t pay your taxes, you die. And you can only pay taxes in pounds. (These are very bad British.)
The results are immediate: everyone has to have pounds.
- I die if I don’t have enough pounds.
- The only way to get pounds is to do what the British want.
And get this: How hard I have to work is controlled by the British.
They set the amounts. If taxes are high relative to what I can earn, I work like slave. If taxes are low relative to can earn, I have much more free time and excess cash for myself. And if taxes are high for some and lower for others, the lower-taxed people are favored while others are not. The Brits can rebalance society.
However you slice it, the goal of a tax is control.
The Purpose of Taxes: A List
Not every state is as bad as our pretend colony is. This is a list of reasons why governments levy a tax:
- Enforce demand for the currency — See the example above. Once the British showed up and created a state, the pound was the only money anyone wanted.
- Manage inflation — If there’s so much money around that the price of beer or burgers or land gets too high, the government can easily step in, raise taxes on everyone, pull wealth from the system (i.e., lower the money supply), and prices will fall.
- Change public behavior — Want people to do something? Offer a tax benefit. Want them to really do it? Make the benefit big. Remember, the government creates all money, so the cost to the government of any tax rebate is zero. If the government needs money, it can always make more. (Note: Current U.S. tax policy makes people want to be rich. Elsewhere people want other things. Yes, that’s true. Really.)
- Redistribute wealth — If government wants to alter the balance of wealth between social groups, the fix is easy. Use taxes to take from one group; use taxes to give to another. The government always decides who has money and who doesn’t.
Side Note: The Jetsons Economy
A side note. Consider the last purpose above — redistributing wealth. This can be done for any reason at all — to make rich people more rich, to make new mothers more comfortable, to make older people secure.
It can even be done to create the Jetsons economy, where all the benefits of increased productivity created more leisure, more time, instead of more wealth for the rich and enslaving the rest.
In 1962, when The Jetsons was made, people actually thought this was the plan. The rich, of course, had other ideas. This is wage slavery today— Jeff Bezos greeting his people (emphasis on his).
Jeff Bezos’ income compared to worker video goes viral pic.twitter.com/fl70SbqqnW
— RTVisual (@RT_Visual_on_X) August 19, 2026
And this is the Jetsons economy, where people work hardly at all and machines do the rest. The Jetsons own their own time, real freedom, in case you forgot.
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