Ask HN: Why do we pay taxes if the Fed can just print money?
The Fed seems to have no issue printing money to prop up financial markets. What is stopping them from printing what we need to fund the entire government? Is there a reason why we still pay taxes?
58 comments
[ 3.0 ms ] story [ 122 ms ] threadPeople would sell their US dollars for Euros or CAD or whichever countries aren't doing this printing the moment they got paid.
Places have printed money like crazy before, and it can get bizarre if you do it enough.
https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
The biggest issue with this aside from creating an unpredictable currency is that everyone’s effective tax rate would be the same, so you would have to reinvent the welfare system to recreate progressive taxation levels.
Imagine two people each get paid $1000 USD and the available currency is doubling weekly.
The first person simply holds on to their money in cash. At the end of the week their money is worth half as much.
The second person buys Euro's the day their paid, and one week later they can exchange back to USD for $2000.
That person effectively paid 'zero' taxes.
What currently supports the entire apparatus is worldwide acceptance of the U.S. dollar as the reserve currency. If nations decide to end this policy (which they are free to do so at any time), then there is a good chance the money tied up in their reserves would end up back here in the U.S. and generate consumer price inflation, likely hyperinflation.
The consumer price inflation is highly undesirable because politicians will generally not be re-elected.
However, that reasoning is eroding bit by bit. It really got going in the 1960s - 1980s with the Johnson, Nixon, and Reagan administration, which acclimated the country to structural budget deficits in the name of national security and Great Society aspirations. With some (apparent) time off during the late 1990s, the budget deficit as a percent of GDP has risen and risen:
https://fred.stlouisfed.org/series/FYFSGDA188S
The Fed's mission currently is to slay the dollar bull, which is wreaking havoc with world financial markets.[1] Monetizing the entire Federal budget would go a long way to wrestling that animal to the ground.
There are many half-steps that could be taken along the way:
- payroll tax holiday, made permanent at some point
- income tax holiday, just extend the 2020 tax filing deadline indefinitely
- middle class tax cuts
- still more corporate tax cuts
All of these steps can be financed by the Fed, which simply buys the debt issued by the Treasury, keeps it on its balance sheet charging close to zero interest. Then dollar depreciation works its magic. Rolled over long enough with high enough inflation and the federal debt just goes away like a miracle.
The problem is this. After you've freed policy makers of any restraint whatsoever when it comes to spending, what's the endgame?
History has some lessons there, and they are all bad. The Weimar Republic, Zimbabwe, and Venezuela may be relevant.
Then again, none of these countries held the world's reserve currency when dabbling with ultra-expansive monetary policy.
America is the Saudi Arabia of dollars. We determine production. The world can't seem to get enough of the stuff, and it's required as an ultimate raw material for just about everything. What happens if the US absolutely floods the world with dollars? Will they run away in fear? Or will they embrace the debt relief and rejoice in the good times?
[1] https://www.lynalden.com/global-dollar-short-squeeze/
Not if some of those dollars are a hand out to other central banks. Right now they are calling them swap lines.
Assume that the Fed is just printing money... pretty soon, people will get wise that this money is worthless, and use something else. By taxing in the same currency, people need that money, and that creates demand (and hence value).
Taxes are necessary to avoid the devaluation of the currency (this is what inflation is).
As a matter of fact diamonds are know scam with overinflated price that are controlled by cartels that constrict supply to set and control the price. So is oil!
I can't believe we still talk about it.
The thing is every game is rigged and you must be actually delusional to think otherwise. The "invisible hand" of the free market is real and is there always stacking odds against small and weak.
Could do the same with real estate and the stock market...
Source: see gold.
If it is used responsibly, it's just another tool of monetary policy, and an effective one at that. But using it is a bit like crossing the rubicon, because once the precedent is set, it's hard to go back.
The other point is that taxes have several aims: to fund government spending, to influence behaviour, and to redistribute wealth. A tax via inflation would distribute wealth away from people on fixed incomes (e.g. people who can't negotiate a pay rise). That would tend to favour people who are already wealthy.
The fed would also enter an inflationary cycle where they devalue their currency which means more money needs to be printed which further devalues the currency.
It just wouldn’t work in the real world.
Printing money only makes money worth less, not other goods.
Because of that, it would ‘tax’ those with more cash and fewer goods more than those with less cash and more goods. for example, that would mean it would ‘tax’ house owners less than renters.
One could argue that is fine, but in practice, poorer people cannot choose between renting and buying a house, and some would find it unfair to have those poorer people bear the burden of paying for the operation of the government.
It would also lead to inflation. That would make currencies of countries that print less or no money more attractive. So, the situation where all counties print money instead of raising taxes might be an equilibrium, but it won’t be a stable one. A country that switches to raising taxes would see its imports get cheaper and cheaper. That’s good for it’s citizens (to a limit, as it also would make exports more expensive)
Government would still have control on who it spends money on. So it could spend more on the people it would normally tax less.
It would tax house owners less than people who had same amount of money but didn't buy house and kept money in bank. If both house owner and renter had $1000 in bank, they would lose the same.
Short answer is, it causes crazy inflation eventually. All other countries are doing this and the ones with weakest currencies are starting to have their money debased: Turkey, Brazil, South Africa. But they have few options.
The U.S. is the global reserve currency so our currency is set to deflate in relation to all other currencies. Eventually, after we deflate there is an expectation of the inflationary bill coming due. Which historically always ends in a debt jubilee (all debts forgiven!) because there is no sane way to proceed otherwise.
Of course there is a tidy Wikipedia entry about the inevitability of this for reserve currencies: https://en.wikipedia.org/wiki/Triffin_dilemma
That s euphemism for "the US has the military power to get the world to buy its currency"
Whether they are rational in trusting it is perhaps a different question...
To participate in the US growth story you have to contribute in USD.
do you think it would be possible without the military might? any historic precedents?
Monetary policy is all about balance.
The Swiss National Bank has foreign exchange reserves worth of about $800 billion today. Not even included is something like a sovereign wealth fund. I read that the Swiss bought a lot of Apple shares, for example.
I don't know whether this is good or bad for the Swiss. I imagine they could play this game: if everybody wants the Swiss Franc, sell them out of thin air for a price they can set themselves by just selling as long as there is demand. If demand plummets, buy the Francs back for a lower price. Nothing is lost?
It's almost a scam the Swiss are playing to the world. But what can the Swiss do? If they don't do anything, the Swiss franc will rise like a rocket and wreck the export-oriented economy. If they play this game the reserves of the Swiss National Bank are ballooning like crazy.
The Swiss National Bank director is saying that it is dangerous to have these large balances because of the other side of the balance sheet: the obligations. They could be due suddenly and brutally. I really don't know.
It doesn't tax people at all who convert all their income and wealth immediately into assets.
Taxation can tax people in any way it likes.
[1] = Printing money creates additional dollars in circulation without increasing the supply of goods those dollars are chasing. If you imagine adding a zero to every dollar simultaneously (aka 10x the money supply), without actually creating anything new, after a brief period of adjustment all goods would essentially just add a zero onto their cost to find equilibrium. This is "inflation" in effect. In practice though, people tend to just print 1.1x what they printed yesterday ad infinitum, and so this effect compounds (aka "runaway inflation") and you end up like Zimbabwe with wheelbarrows full of worthless cash.
[2] = Currently, price rises (relative to a dollar) have been steady in aggregate, aka "chronic low inflation". This is a subject of economic debate as to why, but suffice it to say that is where we are and thus there appears to be "slack" in the currency to print a little more without runaway inflation.
[3] = Usually demand suffers a sort of chronic shock as part of a recession or depression. In these cases you can expect it to be depressed next year too, which means investment is useless and thus the cycle of depression lasts and causes a feedback loop. In such a situation, printing additional cash is very inflationary because the supply of goods being sought by those additional dollars is depressed and the supply chains and required demand to justify creating them is not there. In today's world the US economy was broadly fantastic until five minutes ago, and provided this lockdown doesn't last too much longer (flushing out a lot of small business and causing cascading failure), the underlying conditions will remain ripe for growth soon, and thus the newly-printed dollars can reliably chase future goods that are forthcoming.
Turns out banks also create money, not just government. 97% of money in circulation is actually bank credit. (banks have a special legal right here)
In other words, when you take out a loan, you increase thr money supply!
But anyway, without taxes (the threat of physical hardship) you don't have the base demand for a currency.
Governments hold the monopoly on money because they also hold the guns. I can't create my own money because that would be illegal (because for my money to gain traction I would need to tax too, just like the government)
Cheers.
That's literally their job.
> What is stopping them from printing what we need to fund the entire government?
Inflation. Specifically, the fact that if they did so with no countervailing force the amount of money required to do so would increase rapidly in a positive feedback loop, collapsing the currency in the process.
Well, I mean, that's what stops the government generally from doing it.
What stops the Fed specifically from doing it is that they have a policy mandate and that isn't it.
...does not exist. The Fed is a government entity whose policy-setting body (the Board of Governors) consists entirely of Presidential appointees confirmed by the Senate, and who can be removed by the President (at least “for cause” based on a collateral reference, and possibly without cause though that's murkier, though no explicit boundaries exist on the qualifying causes.).
It is “independent” within the government (has it's own policy-setting body which exercises directly-delegated powers, and whose members have terms not tied to Presidential terms and at least arguably cannot be removed by the President without cause), not independent from the government.
You're misunderstanding what the Fed does when it trades USD for Products in short term/long term arrangements.
There's no net creation of money from the Fed.
When the government spends money into the economy, it creates money (also, increases demand). When the government taxes money out of the economy, it deletes money (also, reduces demand).
The main issue is how much is created over how much is deleted, in a given time frame.
Assume more is created than deleted in a given time frame, so there is a net demand increase over that time frame.
Now compare the net demand increase to that required to bring the economy up to the full employment level. If the net demand increase is less than or equal to that required amount, there is no inflation. If it is more, then there is inflation.
If you didn't have any taxes at all, the net demand increase would be massive and inflation would happen much more easily.
2. Assault eugenics on the poor (even if they get big refunds in April, they are still subject to withholding on their meager paychecks). More time wrestling with payday lenders and scrambling to get their 39 hours in == less time making more babies.
In short, a sovereign currency issuer is not like a household, business, or gov't entity lacking this ability; it need not offset expenditures with income (taxes) to spend. In fact, that's a backward way of thinking of it — gov't spends first, then taxes to remove money supply from the economy. Taxes are tools to contain inflation, reduce concentration of wealth (and the power/influence of select few), and incentivize/decentivize targeted economic activities (eg spur solar power adoption, discourage smoking, etc.).
This site is a great primer on MMT: https://modernmoneybasics.com
However tax policy in the US is broken because it favors economic parasites and looters.
In practical terms, printing money is a tax: Inflationary tax. It transfers wealth from the people who receive the new money last to the people who receive the money first.
Therefore, the question itself doesn't make much sense, because money printing is a (more subtle) form of tax.
Thanks, I will how some reading to do over weekend :)