
Ask HN: Why do we pay taxes if the Fed can just print money? - xoxoy
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?
======
Someone
That would give the government no control over who pays how much in ‘taxes’.

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)

~~~
al_chemist
> it would ‘tax’ house owners less than renters

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.

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soVeryTired
What you're describing is called debt monetisation. People tend to be scared
of it because if it isn't used responsibly it can cause all sorts of nasty
market distortions. The principal ones being inflation and loss of trust in a
currency (which are sort of two sides of the same coin).

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.

~~~
gaukes
People who are already wealthy could also store their wealth in something like
gold and convert to the dollar only when needed which means their effective
tax rate is 0.

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.

~~~
soVeryTired
Agreed that you can't run a country on tax-via-inflation. But it's worth
noting that the bank of england monetized government debt last month and the
markets didn't bat an eyelid.

~~~
m0llusk
That is kind of an oversimplification. The UK government arm twisted companies
into not doing mass layoffs using tax policy and some legal wrangling. The
amount of debt monetized was small relative to what the US is doing. While the
US dollar has the advantage of being the global reserve currency the pound
sterling gets substantial value from being relatively well managed. And
markets did tremble significantly and there is much speculation that the rally
in London and New York exchanges is actually rather shallow and flimsy.

------
lubujackson
I went down the rabbit hole of this last month.

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](https://en.wikipedia.org/wiki/Triffin_dilemma)

~~~
buboard
> is the global reserve currency

That s euphemism for "the US has the military power to get the world to buy
its currency"

~~~
AnimalMuppet
Not at all. It's a euphemism for "The US dollar is the currency that the rest
of the world trusts more than any other."

Whether they are rational in trusting it is perhaps a different question...

~~~
lotsofpulp
Part of that trust is based on military power, but much of it is trust in the
people and government and judiciary of the US to do the consistent (and
perhaps “right”) thing most of the time (compared to other governments around
the world).

~~~
nojito
It's based on economic might.

To participate in the US growth story you have to contribute in USD.

------
jetpackjoe
MMT states that taxes are what creates demand for the currency.

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).

~~~
r32a_
This is why in the long run Bitcoin wins.

~~~
thefounder
Lol...bitcoin is a distributed casino. Nothing more. I can't believe we still
talk about it.

~~~
me_me_me
So is gold, diamonds or stamps, or anything at all in this world.

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.

~~~
thefounder
At least you can make jewerly with gold and diamonds. Let's not mention what
you can do with oil. I can fork bitcoin and have as many bitcoins I want...but
we both know they are worthless.

~~~
thefounder
With bitcoin you get the worst of both worlds: no jewerly to show off and a
"scam with overinflated price that are controlled by cartels". Go in, have
fun, but don't delude yourself that your are "investing" something more than a
ponzi scheme.

~~~
me_me_me
First off all, I have not said anything about "investing". Its obvious that
bitcoin is controlled be massive whales that swing the price. But how is that
different than FED pumping money into stock market? All of the stories about
'boys club' doing blatant insider trading.

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.

------
mijkal
I've become more persuaded by Modern Monetary Theory (which is more
descriptive than prescriptive).

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](https://modernmoneybasics.com)

------
Wolfenstein98k
Printing money causes "inflation" [1]. This effect is lessened in chronically-
low inflation environments (like our current one) [2]. In situations where
demand is artificially low (like lockdown), and therefore will broadly bounce
back when allowed to, you can print a lot without that inflation [3].

[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.

------
dzonga
I'm zimbabwean, yeah the currency wasn't the reserve currency. but inflation,
if it's not real to you. will become real. prices change every 30mins. that
major retailers used electronic price tags, makes changing of prices easier.
not only is the monetary system disturbed. but everything as well. the other
way, the Fed would be able to make money without printing money, or raising
taxes - would be to go to war. wars are effective, they enable mass production
of good, plundering etc. but also come at a great cost. See what Eisenhower
has said war. Also why the US has managed to keep inflation at bay, endless
wars since the crazy inflation in the 70s.

~~~
m0llusk
I appreciate your direct testimony, but as someone who lived in the US in the
1970s it is very clear that the "guns and butter" economics of the time
included very strong contributions to inflation through rampant war spending.
Much of what ripped the US out of Vietnam was the population suffering as the
economy started to melt down.

------
woofcat
The main problem with that is it would result in massive inflation and market
instability.

People 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](https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe)

~~~
brockwhittaker
In theory in a model where the government just prints it’s own expenditures,
your taxes are in the form of inflation.

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.

~~~
woofcat
You're correct, however unless you restricted the exchange of currency you'd
have people paying no taxes.

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.

------
mempko
Taxes are there to provide a base demand for the currency. Imagine the money
supply as a bathtub. Government spending is a tap and taxes are a drain. You
want the water line to be just right for a given economic growth. The
government doesn't need to tax to spend, but why would you accept it's
currency as payment for goods the government demands? Because you owe the
government a tax in that currency! This system was figured out thousands of
years ago.

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.

------
joaogfarias
Printing money is a mechanism aimed at increasing the wealth of the friends of
the King, aka the people who receive the new money earlier; bankers, big
companies, high-level politicians, etc. This is called Cantillon Effect.

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.

~~~
me_me_me
Never thought about it in this way, but it sounds right.

Thanks, I will how some reading to do over weekend :)

------
Tomminn
Printing money can only ever tax people in proportion to how much of cash they
have.

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.

------
jstewartmobile
1\. Elite suppression of the upper-middle class ( _upper-middle class pays
most of the taxes_ ). Imagine the kind of market competition / wage pressures
they'd face if doctors/lawyers/engineers only had to pay the same rates Warren
Buffet does.

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.

------
aazaa
In the past, the reason seems to have been fear of high inflation. Conjure
trillions of dollars into being every year, and you'll end up with roaring
inflation and one heck of financial hangover. The country lived through such
an episode in the 1970s-1980s and it was a miserable time.

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](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/](https://www.lynalden.com/global-dollar-short-squeeze/)

~~~
naveen99
> What happens if the US absolutely floods the world with dollars? Will they
> run away in fear?

Not if some of those dollars are a hand out to other central banks. Right now
they are calling them swap lines.

------
m_nyongesa
For a moment, pretend the Fed and the Treasury are one institution instead of
two. Call it "the government" for simplicity.

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.

~~~
wolco
The first year and then it would be factored in.

~~~
m_nyongesa
What would be "factored in," to what?

------
generalpass
The propping up of financial markets distorts the economy in terrible ways,
but it does not tend to have the same impact as pumping money directly into
the economy as the latter directly generates consumer price inflation.

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.

------
nappa-leon
This is the idea behind modern monetary theory (MMT) and in that context taxes
are only used to prevent against inflation. Borrowing money doesn't increase
inflation because it doesn't add new currency. One problem with MMT is that
makes it very easy for governments to spend lots of money and very unpopular
for politicians to support raising taxes because we have infinite money. It's
why you don't let your kid eat dessert before their vegetables because they
wouldn't eat their vegetables.

------
markus_zhang
Money to the government is not really revenue, but something needs to flow out
and back. It's more or less like water IMO. Taxation is one way for it to flow
back.

------
Gibbon1
The best primary reason I've seen put forth is that the government taxes in
order to 'make room' in the economy for the production of public goods. Taxing
both suppresses consumption and allows you to fine tune whose consumption gets
suppressed. In thoery it's a better system.

However tax policy in the US is broken because it favors economic parasites
and looters.

------
advaypal
[https://www.collaborativefund.com/blog/who-pays-for-
this/](https://www.collaborativefund.com/blog/who-pays-for-this/)

------
CawCawCaw
Why stop there? Why not ask, why do we work if the government can just print
money and give it to everyone?

------
nojito
>The Fed seems to have no issue printing money to prop up financial markets

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.

------
dragonwriter
> The Fed seems to have no issue printing money to prop up financial markets.

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.

~~~
apta
It's quite absurd that the Fed is a separate entity from the government. Just
shows how corrupt they are.

~~~
nimblebill
What? The FED’s independence from the government (politicians) is exactly what
keeps it from being corrupted, from being used as a partisan political weapon.

~~~
dragonwriter
> The FED’s independence from the government (politicians)

...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.

