Below is an extract from a commentary originally
posted at www.speculative-investor.com
on 11th June 2006.
If asked the question "why do we have taxation?"
most people would probably respond with something along the
lines of "the government collects taxes so that it can
pay its bills" or "taxes finance the operations
of government". However, rather than going through the
extremely costly exercise of collecting taxes -- the process
of collecting taxes is costly to the government and the steps
taken by people to minimise the amount of tax they pay place
a large burden on the economy -- the government could simply
print all the money it needs.
But wouldn't the printing of all this new money
create an inflation problem? The answer is yes, there would
be more inflation (money supply growth). However, inflation
is really just a surreptitious form of taxation, so if the
government were to print all the money it needed then people
would be taxed indirectly rather than directly. There would
potentially be a net benefit to the economy, though, if all
forms of direct taxation were replaced by the surreptitious
tax of inflation. This is because all the public and private
resources that are presently consumed via the unproductive
tasks of collecting and avoiding taxes would be freed up.
It is also worth noting that if money printing
replaced direct taxation then the total addition to the money
supply would be a lot less than the replaced tax revenue because
the government's expenses would be a lot lower. The elimination
of the huge government network that exists solely for the
purpose of bringing in tax revenue -- something we've already
mentioned -- is one reason why expenses would be lower. Another
reason is that there would be no federal debt if the government
printed whatever money it needed. To give you an idea of what
a big difference the elimination of the federal debt would
make to the government's annual expenses we'll note that the
US Federal Government paid $350B dollars in interest during
the 2005 fiscal year and has already paid about $250B in interest
during the current fiscal year.
Which brings us back to the question: why do
we have taxation?
As far as we can tell there are two inter-related
reasons, the first of which can be explained with the help
of the following extract from Richard Kelly Hoskins' book
"War Cycles Peace Cycles".
"When the crusaders first left their
homelands in Europe for the crusade to the Holy Land, they
took with them almost the entire circulating supply of gold
and silver coins. This left western nations, England in particular,
with no money.
In the year 1100 A.D. Henry I, 4th son of
William the Conqueror, ascended the throne of England. Finding
the treasury empty and his needs great, he cast about for
a source of income. Having wise advisors he soon hit on a
plan. The plan, with a few refinements, remained in effect
for the next 726 years - and can be reinstated tomorrow. He
A tally was a stick about nine inches or
so long with each of the four sides about 1/2 inch wide. On
two of the sides, the value of the "tally" was carved
into the wood. On the other two sides, the amount was printed
The tally was then split in half lengthwise.
One half remained in the treasury and the other half was given
to soldiers for their pay, to farmers for wheat, to armorers
for armor, and to laborers for their labor.
At tax time, taxpayers were required to
bring in one half of a tally to pay their taxes. Woe unto
the man who did not have the required number of tally sticks.
As a consequence, these intrinsically worthless sticks of
wood were in great demand. Gold and silver coins were fine
if you traveled abroad for a crusade or something, but at
home if you did not have your tax-tally at tax time - you
Upon receipt of a tally the treasurer would
immediately match the presented half with the half stored
in the treasury. THEY HAD TO TALLY - which is what gave it
the name. Counterfeiters lost their heads! Actually, it was
practically impossible to counterfeit a tally. The wood grain
had to match - the notches had to match - and the ink inscriptions
had to match. This could only come about if both pieces came
from the same split tally stick.
There you have it! An inexhaustible source
of revenue for the government. The means were available to
make tallies as long as there were trees. There was a demand
as long as the government required the tallies for taxes.
The system flourished as long as tax-evaders and counterfeiters
were punished and they always were. For 726 years the system
In the historical example described above, the
government created strong demand for essentially worthless
pieces of wood by requiring that all taxes be paid using these
formerly worthless objects. Something that would otherwise
have had no value hence became valuable. It's a similar story
today in that taxes create demand for essentially worthless
pieces of paper. For example, if you have a lot of gold, a
large dollar-denominated tax bill and a small amount of dollars
then you will need to sell some of your gold in order to obtain
the dollars needed to pay your tax bill. Even though gold
is much better suited to be money than any of today's national
currencies and would be a lot more useful to the government
than the paper it churns out at almost zero cost, we don't
know of any government that would accept gold in payment of
a tax bill.
Taxation not only supports the currency directly
due to the need to obtain the currency in order to pay the
tax, it supports it indirectly by fostering the general belief
that the currency is actually worth something. After all,
if the government is prepared to accept the currency it creates,
and ONLY the currency it creates, in payment of taxes then
the currency must have genuine value, right? On the other
hand, if the government were to announce that there will be
no more taxation and that all future government expenses will
be paid by turning on a monetary printing press then light-bulbs
would suddenly appear above the heads of millions of people.
People who previously hadn't given the nature of modern money
a second thought and who hadn't stopped to consider why a
piece of paper with the number 100 printed on it should be
worth 100-times as much as a similar piece of paper with the
number 1 printed on it would quickly come to realise that
if the government can just print as much money as it wants
then the money must have no real value; a realisation that
would lead to the question: why should I work hard for something
the government can produce in unlimited amounts at no cost
In summary, without the underlying demand
created by taxation there is a good chance that the purchasing
power of today's national currencies would collapse. Taxation
is therefore a critical component of the current monetary
system, but not for the reasons most people think.
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