Welcome to the July, 2024 Issue of Swan Private Insight
Inside this issue you’ll find:
Bitcoin on the Ballot by Jason Bassett
If They Can Print Money, Why Do We Pay Taxes? by Stephan Livera
From Fiat Family Home to Bitcoin Mining Trailer: Off-Grid Steve by Joe Nakamoto
Digital Assets, AI, and Energy Prices by Lyn Alden
Beauty Will Save the World by Aleks Svetski
Bitcoin News Roundup by Drew Mealey
… and more!
Nowadays, I often hear the line, “If they can print money, why do we pay taxes?”. Lots of people have their answers. For some, it is about the control system that taxation represents. In this view, taxation is a way to discourage certain behaviors and encourage others (i.e., create desired incentives). This is true, but it’s not the ultimate reason. What is the ultimate reason? Taxation is just part of an overall con game. The state needs enough people to believe in the system. If not enough people believe in the fiat money system, it collapses.
The ‘control system’ view
In this view, taxes can be seen as a way to discourage undesired behaviors and encourage desired ones. Sometimes, they want to discourage drinking, so they impose alcohol taxes. In other cases, they discourage everyone’s productivity with an income tax. Now, do governments want to discourage productivity? Generally, no they don’t. But what happens in practice is that they need the taxation revenue to pay down government debts that result from government overspending. In many cases, the politicians have such a desire to over-promise on government projects and spending, that the government ends up taxing so highly that it discourages private sector productivity.
This control system view also helps explain why many governments have very complicated tax codes because politicians and bureaucrats have tried to encourage or discourage different things at very fine levels of detail over time. The end result of continual meddling is this disjointed hodgepodge tax code that is not cohesive. It’s not that this control system view is incorrect. But it’s not ultimately as important as the next reason we’ll discuss.
So what is the ultimate answer?
The state requires resources. To get those resources, it needs a way to command them. In the modern era, states generally issue debt, and states use those funds to pay for government projects. Politicians love to make big campaign promises, right? Those generally translate into government projects.
For an example of government debt issued, consider treasury bills (also known as government bonds). When you buy these, you are effectively loaning the government money under the promise that they will repay you a coupon rate and the full face value when the bond fully matures (which could range from months to years to decades).
Government generally requires bag holders. It needs enough people who are willing to hold government bonds. Oh and by the way, did I mention that these government bonds typically yield negative returns in real terms? What does this mean? It means if you buy government bonds, and hold them to maturity, your actual purchasing power decreases over time. How can this be? Over time, authorities print a lot more fiat currency units, and the actual amount of goods and services you can buy with some amount of fiat currency goes down over time. Governments don’t always succeed in getting people or companies to fund all the debt they issue. In these cases, they face a temptation to directly print more fiat currency. In historical cases of hyperinflation such as in Zimbabwe, governments transition from “borrow and spend” mode into “print and spend” mode. In simple terms, they print the difference. In times like these, it is highly inadvisable to remain holding a fiat cash balance.
If you have an investment portfolio, has your return after fees and taxes exceeded 9.1%? If not, you’re losing purchasing power over time. You are being robbed! Now given government bond yields are generally far lower than 9%, you’re obviously losing money in purchasing power terms by holding them.
Back to the con game
Let’s consider it this way. Imagine a world or country where the government followed through on what the title question implies of printing money instead of collecting taxes. Imagine they had zero taxation revenue and simply printed money to fund government projects or repay lenders. Who would lend them money in this scenario? Or would they even need to borrow at all? What would happen if they simply printed and didn’t tax or borrow? Ah, but then the jig would be up! Runaway inflation would be upon us and the people would realize the con game.
And sure, when it comes to printing fiat, the state might be able to ‘get away with it’ for a short time. But eventually, the cost of living spirals out of control. It would become clear to the masses that inflation is a hidden tax on top of all the explicit taxes that they already pay.
Con game dynamics
Try to put yourself in the shoes of a lender, looking for yield. Would you loan your money to a counterparty who has zero income, and simply ends up printing more of the underlying money to repay you? To ask this question is to answer it.
Conclusion
So to put it simply, if the state had no other means of revenue, the only way it could repay these loans is by printing more fiat. This would tremendously discourage the use of its national currency and the holding of government bonds. While the ‘control system’ answer also helps explain taxation, the even more existential question for governments is that they need enough people to believe that they’re not just printing money. They need you to believe in their system.
You have a choice. There is the government fiat con game, and there is a monetary system without any reliance on a state being fiscally responsible, Bitcoin.
Bitcoin is a real solution to the issues surrounding the question of “If they can print money, why do we pay taxes?”.
