What Are Taxes For?

Paul Krugman
NYT

Brad DeLong and Noah Smith have some fun with a bizarre post by Steve Landsburg — even more bizarrely endorsed by Alex Tabarrok — in which Landsburg asserts that you can’t tax a man if you can’t persuade him to reduce his consumption.

There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place. They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.

Consider first the taxes raised by, say, the state of New Jersey. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. It’s true that in the short run, if we ignore the legal restrictions on state borrowing, he can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.

Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

(More here.)

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