Money is going bad – the tax connection

There is a widespread idea that the purpose of tax is to collect money for the government to spend (or waste). There is another way of looking at what is happening: that all official money is created by governments. It is placed into circulation when they pay for their expenses (legitimate or otherwise). The purpose of tax is to remove this money from circulation, so as to complete the cycle. If this is not done, there is an undue increase in the supply of money, which is inflation, as properly defined. General price increases are a consequence of the inflation, but politicians and central bankers attempt to divert attention from the fact that the responsibility is theirs, by referring to inflation as the increase in prices.

The real problem is that surplus money cannot be removed from circulation because contemporary tax systems are not fit for purpose, since they are all based on the principle of punishing the creation of wealth. There is obviously a limit to the amount of taxes that can be raised by the taxation of wealth and of wealth production, without causing the economy to implode. However, before that happens, plenty of damage is done, with the result that the major portion of government expenses goes on mitigating the effect of the tax system itself, or consists of money, issued by the government, paid out to people for no other reason than for them to pay it back in tax! As a result, government expenses are between two or three times larger than they would reasonably be if they did not choose to collect back money in such a destructive way.

We have long since reached the point where taxes can pick up all the undue money in circulation. Inflation is itself a form of taxation, levied on all holders of balances in the curency of the country which is practising it. Inflation, and its consequences, are therefore inevitable until the tax system is reformed and governments can be cut down to size.