As I’ve pointed out on past posts, and what is inherently obvious to anyone who thinks about the topic for a few seconds, there is obviously no need for a sovereign government, like the US federal government, that has a monopoly on paper currency issuance to ever need money. They can just print it.

However, if the federal government doesn’t need our money to finance itself, then why do we have federal taxes (note: I leave out state taxes here, since that’s a different story altogether)?

The answer, as pointed out in a recent article by Warren Mosler is that Federal Taxes serve several purposes, none of which has anything to do with revenue. I highly encourage you to read Mosler’s article, since it has a great article called “Taxes For Revenue Are Obsolete”, written in 1946 by Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York.

Basically, Ruml believes taxes are needed to:

” 1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.”

In other words, taxes are a policy statement.

Without going too deeply into the purposes mentioned by Mosler, it’s probably best to summarize the purposes of taxes as follows: To serve as a safeguard against inflation (a persistent threat in our credit-driven economy), and more importantly to properly allocate labor in society. What the proper level of taxes should be to serve the above goals, is of course, open to interpretation, though I’m sure most would agree that it’s significantly lower than the current tax rate. Since there are ample secondary methods to control inflation, i.e. limit credit creation by banks, it doesn’t seem to me that taxes need to be the primary tool used to fight inflation. The high current tax rate is apparently the result of a misunderstanding of taxes as a means to generate revenue, and also seemingly a way to guarantee work for the accounting profession.

What the foregoing interpretation of taxation does imply though, is that taxation policies should be based not on one’s absolute income, but on how one has generated one’s income. For example, most doctors and scientists, who provide a vital service to society, should be taxed at a much lower rate than speculators on Wall Street who provide no benefit to society.

I wonder if a “taxation by trade” scheme has ever been implemented in the US in some fashion for personal taxes (it’s been used, of course, on an industry basis, as opposed to an individual basis, with certain industries receiving favorable tax benefits). I’m positive that it would work wonders to generate sustainable economic growth as entrepreneurs rush to develop businesses in beneficial industries where personal taxes are low, while shunning mostly “useless” industries where taxation is high. Ironically, this type of situation would also prove beneficial to Wall Street, by providing a host of new and ultimately real businesses to invest in and finance.