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Comment by fbonetti | Hacker News Reader

> Money enters the economy via government spending. Money leaves the economy through taxation.

Dollars enter the economy when the Federal Reserve creates reserves out of thin air and trades those new reserves for treasuries or other assets.

Dollars are destroyed when the Federal Reserve sells off assets on its balance sheet.

Taxation plays absolutely no role in this process. The Federal Reserve controls the monetary base. This would be true even if the federal government levied zero taxes.

> Governments don't need to tax in order to spend, they are the issuers of the currency.

Governments can earn revenue entirely from selling bonds or printing money - you're absolutely right that they don't need to tax in order to spend. However, this statement doesn't back up your assertion that governments destroy money through taxation.

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The effect of taxation is precisely the same as that of destroying money - it means that the money is no longer available for non-government entities to use. On the other side of the transaction, for the government, as you recognize, taxation presents no increase in buying power.

To directly compare the two scenarios - taxation and burning money - private entities can no longer use the money and government can still spend as much as it wants subject to self imposed limitations. There is no functional difference.

> The effect of taxation is precisely the same as that of destroying money

No it's not. The effect of taxation is the same as theft. The thief gains and the victim loses, but the overall purchasing power of the dollar is unchanged. Destroying money would increase the purchasing power of the dollar.

> On the other side of the transaction, for the government, as you recognize, taxation presents no increase in buying power.

Taxation is one of three ways the government can earn revenue (taxation, selling bonds, or printing money), so yes it does increase buying power.

> To directly compare the two scenarios - taxation and burning money - private entities can no longer use the money and government can still spend as much as it wants subject to self imposed limitations. There is no functional difference.

Those two aren't comparable. Burning money would mean that nobody can spend that money. Money gained through taxation can still be spent (and is spent).

If the government collected taxes but never spent that money, I would concede that the net effect is the same as destroying money. But that clearly doesn't happen. The government DOES spend the money it garners through taxation. So the claim that taxation destroys money doesn't make any sense.

The government can spend as much as it wants without needing your tax money. It doesn't matter how much money the government collects in taxes, it can spend as much as it wants regardless, because it can print as much money as it wants.

> The government DOES spend the money it garners through taxation

The government can spend the money regardless of how much it raises in taxes. Your taxes do not fund government spending.

Money is fungible. If government taxes $x and then spends $y, it is the same result as if it burns $x and then spends $y of newly printed money. In both cases the money supply changes by $y-$x

I don't disagree with you that the government is unconstrained in regards to how much it can spend. The government doesn't need to tax or sell bonds at all. It can just print money and force everyone at gun point to use it.

But you still haven't provided an argument as to why you believe taxation destroys money. Taxation merely transfers dollars from one entity to another. It doesn't change the amount of base money in existence.

See https://poseidon01.ssrn.com/delivery.php?ID=8011181001001220...

Thanks, I'll take a look at this paper.

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