Why Governments Tax Despite the Ability to Print Money
Governments like the United States have the authority to issue their own currency. In theory, this means they could simply print money to fund their operations. Yet, taxation remains a core pillar of government finance. Why?
The answer lies in the complex interplay of economic principles, monetary stability, and systemic confidence. Taxation isn't just about collecting revenue—it's a foundational tool for managing the economy, preserving the value of money, and maintaining trust in the system.
1. Printing Money and Inflation Control
When a government prints money, it expands the overall money supply. If this expansion outpaces the growth of goods and services in the economy, it can trigger inflation—where too much money chases too few goods, driving prices up.
Taxation helps manage this risk. By removing money from circulation, taxes can dampen inflationary pressures and help stabilize prices. For example, the U.S. experienced inflation rates nearing 9% in 2022, in part due to pandemic-related increases in the money supply. Taxes play a role in correcting such imbalances.
Historical cases like Zimbabwe and Venezuela serve as cautionary tales: unchecked money printing without taxation or production growth can lead to hyperinflation and economic collapse.
2. Taxes Create Demand for the Currency
Another critical function of taxation is to reinforce the use of a government’s currency. In the United States, taxes must be paid in U.S. dollars. This requirement ensures that individuals and businesses demand and use dollars, sustaining its status as the primary medium of exchange.
Without this built-in demand, alternative currencies—or even barter systems—could begin to erode the dominance of the national currency. Historically, colonial governments established currency use by requiring taxes to be paid in newly issued colonial tender, laying the foundation for monetary stability.
3. Building Confidence in the Monetary System
Relying solely on money printing can erode public and international confidence in a country’s fiscal responsibility. Excessive or erratic printing may signal a lack of discipline, scaring off investors and weakening trust in the currency.
Confidence is especially crucial in economies like the U.S., where foreign entities hold over $7 trillion in government debt. Taxation shows that the government has structured, ongoing revenue—reassuring both citizens and investors that it’s not relying on printing presses alone.
This perception helps maintain stable borrowing costs and reinforces the strength of the currency on global markets.
4. Generating Revenue Without Expanding the Money Supply
The U.S. government collects approximately $4 to $5 trillion in taxes annually. This provides a significant portion of its operational budget without increasing the money supply or adding to the national debt, which now exceeds $34 trillion.
If the government chose to print this amount instead, it would drastically expand the current money supply—around $20 trillion—risking runaway inflation and financial instability. Taxation, therefore, offers a way to fund public services without creating economic chaos.
Additionally, with annual debt servicing costs nearing $1 trillion, there's limited room to rely solely on borrowing or money creation to fill revenue gaps.
5. A Balanced Toolkit: Taxes, Printing, and Borrowing
Governments don’t rely on a single method to fund expenditures. Instead, they use a combination of tools—taxation, borrowing, and money creation—to balance short-term needs with long-term economic stability.
Money printing is typically reserved for emergency spending (e.g., stimulus during economic crises).
Taxation provides stable, ongoing funding and helps regulate inflation.
Borrowing allows governments to spread costs over time without immediate money creation.
This toolkit gives governments flexibility to respond to changing economic conditions while managing inflation, growth, and public debt levels.
6. Theoretical Perspectives: Modern Monetary Theory (MMT)
Some schools of thought, such as Modern Monetary Theory, argue that sovereign currency issuers like the U.S. can rely more heavily on money creation, so long as inflation is controlled. MMT views taxes primarily as a tool to manage inflation and currency demand rather than to fund spending per se.
However, while MMT provides an interesting lens, practical limitations—especially the risk of inflation and currency devaluation—have kept governments anchored to more traditional fiscal strategies, including taxation.
Conclusion
Even with the ability to print money, governments continue to tax because it serves critical economic functions:
Curbing inflation
Sustaining currency demand
Preserving public and investor confidence
Providing stable revenue without expanding the money supply
Taxation, in this light, is not a limitation—it’s a stabilizing force that helps anchor the economy in a world where unchecked money printing could easily lead to financial disorder. By combining taxes with borrowing and judicious money creation, governments maintain a delicate balance that supports long-term prosperity and trust in the system.
