Every time I look at this blog's glossary, I seem to note more gaps or omissions than explanations that I need, even though there are already many hundreds of terms defined within it.
Rather embarrassingly, I have noted in the last few days that the word tax has no entry, which seems like a fairly significant omission, so I have added this entry to the glossary:
Tax is a compulsory charge imposed by a state on individuals, corporations and economic activity.
Tax is often misunderstood as the means by which a government supposedly raises money to fund spending. In a modern monetary economy (such as the UK's), that description is wrong. Tax plays a far more fundamental role in:
- Legitimising a currency.
- Controlling inflation.
- Shaping economic behaviour.
- Managing demand.
- Addressing inequality, and
- Reinforcing democracy as the consideration in the social contract.
Tax is therefore a core instrument of political economy. Its key functions include the following.
First, tax gives value to money.
The requirement that taxes be paid in the state's currency creates demand for that currency. This underpins the monetary system. People work, trade and accept money because they must ultimately settle tax obligations with it.
Second, tax controls inflation and manages demand.
By withdrawing spending power from the economy, tax helps prevent inflation when total demand exceeds productive capacity. The purpose of tax is not to “pay for” public spending, but to make space in the economy for that spending to occur without causing price instability.
Third, tax shapes behaviour and markets.
Tax influences what activities are encouraged or discouraged. It can restrain harmful behaviour (such as pollution or speculation), support socially valuable activity, and correct market distortions. Tax systems always embed political choices about what and whom an economy values.
Fourth, tax redistributes income, wealth and power.
Because markets distribute income according to power and ownership rather than need or contribution, tax is essential to counteract inequality. Progressive taxation on income, wealth and rents is a key mechanism for reducing the concentration of economic and political power.
Fifth, tax expresses democratic legitimacy.
Tax is one of the most visible expressions of the social contract. It reflects collective decisions about obligation, fairness and responsibility. A tax system perceived as unjust – because of avoidance, evasion or favouritism – undermines trust in both the state and the economy.
From a Funding the Future perspective, tax should be understood as a tool for economic management and social justice, not as a household-style budget constraint on government. The real limits on public spending are ecological capacity, productive resources and inflationary risk – not the availability of tax receipts.
A well-designed tax system is therefore essential to a politics of care: one that curbs excess, supports public provision, restrains rent extraction and ensures that the benefits of economic activity are shared rather than captured by those with the greatest power to avoid contributing.
See also Reasons to Tax.
Please note that the last line refers to another new glossary entry on 'Reasons to Tax'. This is as follows:
Since I wrote my book The Joy of Tax in 2015, I have suggested that there are at least six reasons to tax, which are as follows:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation since people who pay tax tend to vote;
6) To reorganise the economy through fiscal policy.
You will note that each of these includes the letter R. If you reconstruct them without trying to make them the “six Rs of taxation”, and instead present them in plainer English, they then become:
1 - To give the currency value.
When the government requires taxes to be paid in its own currency, everyone needs that currency to settle their tax bill. That guarantees it will be used in everyday transactions.
2 - To withdraw money the government has spent.
Tax takes back some of the money the government has put into the economy so overall spending stays under control and inflation is limited.
3 - To reduce inequality.
Tax can shift income and wealth from those with the most to those with the least, helping create a fairer society.
4 - To influence prices and behaviour.
By taxing some things more and others less, a government can make certain goods and services more or less attractive, changing what people buy and produce.
5 - To strengthen democracy.
People who pay tax tend to engage more with politics and are more likely to vote, which deepens democratic participation.
6 - To shape the economy deliberately.
Tax is a key tool for steering the economy, supporting some activities, discouraging others, and aligning economic outcomes with social goals.
Tickets are now on sale for the Funding the Future live event in Cambridge on 28 February. Tickets and details are available here.
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Most useful glossary item to provide to individuals who continue to claim taxes fund government spending. I think too it would be useful to add in an historical perspective somewhat along the lines of:-
Before the advent of money human beings, whether living in a tribe or a state, had an obligation to commit resources whether goods or labour to help mutual thriving. As time went on it made sense for a variety of reasons to monetise that obligation.
https://tools.bard.edu/wwwmedia/resources/files/1267/WP%2055%20-%20The%20Origin%20of%20Money%20-%20Semenova.pdf
Noted
Glossary entry updated, a bit.
Very interesting article recently in TNW magazine (December 4th 2025) concerning the reporting of tax changes. It states that
“Over the last few months, a curious formulation has been popping up more and more often in our political journalism. Any government proposal to raise tax is now liable to be written up as a “tax raid”.
By the weekend before the Budget, this phrase had appeared at least 3407 times in our national newspapers since last year’s election – more than six times a day. That’s more than its total number of appearances for the previous 40 years.” the article goes on to say
“Why does this matter? Because a “raid” is a sudden, violating act of force: the kind of thing carried out by either soldiers, armed police, or thieves ram-raiding a bank. Which makes it a dubious word to use about the fiscal policies of a democratically elected government.” It concludes
“A democratically elected government has the right to raise taxes, even if they didn’t specifically say they would. Trust in mainstream democratic government is at its lowest for decades. Casting it as criminal is unlikely to fix the damage.”
Fascinating.
Thank you.
and just today from The Telegraph “1.3 million savers to be hit by cash ISA raid”
except it’s not by any reasonable sense a “raid” It’s the reducing of a tax allowance, reducing a benefit for those rich enough to save £20k+ a year in cash so it now only applies to £12k+ a year savings and it’s just repeating, yet again, something from the budget.
The stat in your post is good because it highlights how much they use aggressive metaphors and of course, it’s just one of many little language “tricks”, they always do it but are inclined to do it much more under a Labour government. “cash grab” is a variation that’s sometimes used.
Conservative media use violent metaphors a huge amount, beyond economics, For example when conservative politicians have a normal discussion with a political opponent, they’re said to have “destroyed”, or “hammered” or “slapped down” or “crushed” or “smashed” their opponent, and in many cases, even if a neutral viewer would reckon they’d actually lost the argument
Much to agree with
Hi Richard,
Thanks for this informative post. Honestly, until now I have thought that tax is, simply, to fund government spending – so this post has given me a much better understanding.
I recently had a conversation with a family member who saidthey would vote for whichever political party “puts more money in their pocket”. This person seems to believe that tax is undeniably ‘bad’ (as it takes money “out of their pocket”) and claims that tax is not used for any positive benefit by the government.
This conversation happened a few months ago, and it still bugs me (and it now strikes me how this view is very ignorant). There is a certain logic to this mindset (i.e. “I earnt this money, so it is my money, so who are they to take it away from me?”) which, for some reason, part of me finds difficult to argue against (perhaps as I do not have a real understanding of tax and the economy). In fact, when faced with this logic, I am thrown off – is it not my money? Did I not work for it? Where are they taking it? Possession is a part of this logic, as is ‘I’, a sense of entitlement/injustice, and, perhaps, a sense of the government being ‘other’ (seperate from me, untrustworthy, distant).
I just wanted to highlight this mindset, as I am sure it is commonplace, and share my thoughts. And I wanted to ask how you would challenge this logic? (specifically the sense of this money being ‘mine’ and thus being entitled to it fully)
Thanks!
David
This mindset is very common, and it is not stupid or irrational. It is the result of how tax has been talked about for forty years.
The key mistake in the argument you describe is the idea that income is created privately and only later interfered with by the state. In reality, your income is only possible because a state-created system exists first. Money, contract law, employment rights, property rights, courts, infrastructure, education, healthcare, policing and regulation all pre-exist your pay packet. Without them, the income you call “mine” could not be earned, protected or spent.
So yes, you worked for your income. But you worked within a system that made that work meaningful and rewarded in money that only the state can issue and enforce. Tax is not the state taking something that was fully and independently yours. It is the mechanism by which society reclaims part of what it made possible in the first place.
This is why tax is not primarily about “funding spending”. It serves several purposes: it gives money value by creating demand for it; it helps control inflation by withdrawing spending power; it reshapes behaviour (for example discouraging pollution or speculation); and it redistributes income to sustain social stability. Public services are not charity funded by tax; they are part of the same social contract that allows incomes to exist at all.
The “government as other” story is deliberate. If the state is presented as hostile, distant and wasteful, then tax feels like theft. But in a democracy, the state is not an external predator. It is the collective mechanism we use to organise a complex economy.
So the honest response to “it’s my money” is this: it is your income, earned through your effort, but it exists because society exists. Tax is not punishment for success. It is the price we pay for living in a functioning economy rather than a free-for-all.
That is the argument worth making.