By Beardsley Ruml in 1946.
Chairman of the Federal Reserve Bank of New York.
Sovereign government does not need taxes for revenue, but to create a demand for its currency. With that in mind, we need to rethink tax policy. For things such as reducing the inequality in the country and to discourage people in engaging in certain economic or social activities.
The state own currency is a form of a credit money. When the state spends it becomes a debtor and a liability to the state. The beneficiary of the state spending becomes the holder of the asset. Money is the most liquid asset the world as ever known. The state credit is a special type of credit which is redeemable by the mechanism of taxes. Imposing tax liabilities payable in state currencies drives money and creates the acceptability. Any issuer of debt must accept back its own IOU as in payment. Imposed tax obligations on private sector will get cleared by handing over state IOUs to the tax collector.
In conclusion, sovereign government does not need taxes for revenue, but to create a demand for its currency. Government first creates a money of account (Dollar, Pound, LKR, Yen) and then imposes tax obligations in that money of account. Subsequently, government will be able to issue currencies denominated in the same money of account. Government must enforce the imposed obligations to drive the money. Other than taxes, there are secondary government obligations which drive the currency such as government fees, charges and fines. All these obligations are also payable from the national currency.
The Role Of Taxes
Beardsley Ruml “father” of income tax who was the chairmen of the Federal Reserve bank of New York wrote two important papers about the role of taxes in 1946. They are as follows
1.Taxes as an instrument of fiscal policy to help stabilize the purchasing power of the currency
(This to take away the purchasing power of the economy and to reduce the aggregate demand. Taxes are a useful fiscal policy tool to combat inflationary pressure in the economy.)
2.Express public policy in the distribution of wealth and income and estate taxes
(This is a great policy tool to reduce the income inequalities in an economy. While taxing the wealthy, poor can be subsidized resetting the society.)
3.Express public policy in subsidizing or penalizing various industries and economic groups.
(This way some industries can be encouraged and some can be discouraged as per the wishes of a certain country)
4.Isolate and access directly the cost of certain national benefits, such as highways and social security.
(This way certain economic benefits can be distributed for selected, deserving social groups)
Taxes create demand for the currency, which allows the government to purchase the resources to pursue public purpose by spending currency. Once the economy is monetized, most must work to earn money to buy necessities of life. Not working means, not earning income which is necessary for consumption. When economy is monetized to this stage, income tax drives the currency.
By
Gayantha Dehiwatte Entrepreneur and Socialist Advocate