Recognizing that taxes regulate economic activity and give money value is crucial to understanding economics in the modern age. Modern fiat money, no longer pegged to any commodity such as gold or silver, is used as a medium of exchange not simply because it is convenient but because at the end of the day every individual or corporation with a tax liability can service that debt with dollars and cents and nothing else. As issuer of the currency, sovereign governments operate as scorekeeper's of the currency regulating its value and aggregate demand or the general level of economic activity, with taxes. At Functional Finance we recognize this as the true nature of modern fiat money.
Taxes regulate inflation and pay for roads, schools, police and fire departments, national defense, social security, libraries and many other goods and services we need for our society to function properly. Institutions born out of the needs of its citizens in order to serve a public purpose that all too often we take for granted.
Understanding Taxes
Regulating Spending & Inflation
Taxes need not be levied with a view toward raising funds per se for redistribution or investment but rather to manage fluctuations in economic activity. In this view as economist Warren Mosler highlights
"There is no financial crisis so deep that a sufficiently large tax cut or increase in public spending cannot deal with it."
This manner of regulating prices, or inflation, provides a superior solution to the traditional interest rate adjustments by central banks being more targeted with less detrimental effect on the economy as a whole.
Shaping Incentives
Taxes also shape our incentives. We tax things that we deem to be harmful like tobacco and alcohol to increase their cost to lower consumption. Or provide tax breaks to encourage things we find beneficial like research and investment.
Maintaining Flow
The Functional Finance view of how wealth circulates in the economy provides an important insight into the effect of income inequality and disparity has on the economic system as a whole. As incomes rise to levels above that which they are spent the excess savings serves as a tax on economic activity as those funds circulate within the economy at a slower rate.
Support our efforts so that we can start to take the necessary steps to raise awareness and formulate solutions to better balance economic activity.
Taxes regulate inflation and pay for roads, schools, police and fire departments, national defense, social security, libraries and many other goods and services we need for our society to function properly. Institutions born out of the needs of its citizens in order to serve a public purpose that all too often we take for granted.
Understanding Taxes
Regulating Spending & Inflation
Taxes need not be levied with a view toward raising funds per se for redistribution or investment but rather to manage fluctuations in economic activity. In this view as economist Warren Mosler highlights
"There is no financial crisis so deep that a sufficiently large tax cut or increase in public spending cannot deal with it."
This manner of regulating prices, or inflation, provides a superior solution to the traditional interest rate adjustments by central banks being more targeted with less detrimental effect on the economy as a whole.
Shaping Incentives
Taxes also shape our incentives. We tax things that we deem to be harmful like tobacco and alcohol to increase their cost to lower consumption. Or provide tax breaks to encourage things we find beneficial like research and investment.
Maintaining Flow
The Functional Finance view of how wealth circulates in the economy provides an important insight into the effect of income inequality and disparity has on the economic system as a whole. As incomes rise to levels above that which they are spent the excess savings serves as a tax on economic activity as those funds circulate within the economy at a slower rate.
Support our efforts so that we can start to take the necessary steps to raise awareness and formulate solutions to better balance economic activity.