This is the fourth video in my series on money. I've explained what money is and how banks create it, but the government can also create money, and does. So it's important to understand how they do that, and why in the process they give money its value.
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Hi Richard,
Many thanks – another useful and informative video. Sometimes witjh new ideas it is useful to push concepts to the limits to fully understand them. With the adoption of fiat currency, I am trying to understand whether the purposes of taxation are largely historic and whether in turn the government could run the economy without any taxation at all. I understand that the government doesn’t need to tax to create funds for expenditure, but are all the other reasons for taxation still valid.
a) To prevent inflation – the government uses taxation to prevent an oversupply of money leading to inflation. However, instead of paying £25K in salary to a government worker and claiming £5K back in tax, it could simply pay £20K with no tax. Likewise with no taxation, private companies could pay their workers less and they still have the same spending power. If £20K creates too much money, simply reduce to £19K (exactly the same effect as raising tax).
b) To give money ‘value’ – around 1/3 of GDP is government spending. If the government only spends in UKP, does this not in itself give the currency value. All government employees will only have UKP to spend. If any organisation wants to tap into this spending power it needs to accept UKP as valid currency which in turn gives it value
c) To redistribute wealth to reduce inequality – cannot the government achieve the same objective by simply giving poorer people more money (eg benefits, free health care etc)
etc etc…
I’m trying to impagine an economy without tax. Is it feasible? Is it beneficial?
In a word no
Read MMT and understand that no macroeconomy can run without tax
Full stop