Worldbuilding 201: Taxes & Modern Monetary Theory
Greetings and sublixation! ...Well, that might be a problem for you bonies 😀 As a limax, I have no bones! Yes, it is I, your great, beautiful, and handsome Limax writer, Vivian! Today's topic is modern monetary theory, which I will shorten to MMT, and taxes! It is recommended you read up on the currency blogpost that I wrote.
Two certainties
We all know the saying, right? There are only two certainties in life, taxes and death. Albeit I am not certain on that last one. But have you ever wondered, what exactly are taxes? Well, you know me and definitions!
Taxes are a transfer of value from an individual household to the government.
Some might say “Wealth” instead of value, but the point is that something, whatever it is, that we consider valuable is given to the state.
Paying taxes
Taxes can be paid in many ways, and the most common one today is through a currency of some sort. As I stated in the currency post, when it comes to fiat money, taxes are the thing that give the fiat currency its inherent value, as the government has dictated that it will accept nothing but its own currency.
But this has, however, not been the norm throughout the centuries. Sure, you have had commodity currencies–that is, currencies made out of things valued in their own right–for millennia, and yes, during that time, a lot of taxes have been paid through it. But another common tax through the sands of time is… well, what you produce. Are you a farmer? 10% of your grain, 5% of your raised cattle, and so on. A black smith? Hmm, 25 swords. Bowmaker? We’re gonna need that a lot, so 15 a month.
Which ties in to the oldest form of tax that has been paid, namely, labour. Labour as tax payment goes all the way back to ancient Egypt where during the flooding time when no one could farm, they had to do work for great projects by the state. Yes, these were used more than slaves.
Types of taxes
There are many types of taxes, and I think it is valid to go through at least some of them.
Income tax - Income tax is a fairly recent one in terms of history. It is tax that you pay as a worker by having an income.
Property tax - You own property, so you gotta pay.
Sales tax - You buy stuff, and the state wants a share.
Inheritance tax - You inherit stuff, so pay more.
Tariffs - Despite what some imbeciles think, tariffs are something the government's own people pay, not the exporting country.
Many more!
Anything can be taxed by a state for literally any reason.
Taxes are voluntary
I have to bring this up because… checks a thesaurus people with underdeveloped cerebrums and cognitive abilities have gotten the idea that taxes are theft. They are not, because they are voluntary. Some might be aghast by this statement given the severe punishments that come from not paying taxes. Well, it is entirely voluntary to enter into an agreement of getting a service and paying for it. You’d be mad if you did a service and didn’t get paid for it, wouldn’t you? That is in many ways how taxes are: states provide services, and in exchange, you pay a subscription fee called taxes. One can argue about if you get what you pay for, the value of the service, and so on, which is fair, but if one does not want to pay taxes, the jungles and islands exist for a person to enjoy away from all services.
Purpose of taxes
Now we will finally start to get to the main point of this, but not quite yet. Because the purpose shifts slightly depending on what kind of currency you have. I will not go into when you pay with sheep and the likes because that essentially falls under commodity money. Actually, let’s look at commodity money!
Commodity money is the simplest because it aligns with the common understanding of money really well, actually entirely. How do I mean? Well, if you want to do something or get some item, what do you do? You open your money pouch and pull out some bills and… Wait, this is commodity money, no paper bills then! You take out your coins and pay the gentlelady. Sensible and everyday life, and to have the coins to pay the gentlelady, you need to get more coins coming in through work somehow.
Now replace work with taxes and services with mostly military, and you have how it was for the vast majority of history. When it comes to commodity currencies, the taxes are literally the state income to pay everything it decides to do, and this is the generic understanding that people have to this day, as that is their everyday experience.
When it comes to a representative currency, it’s mostly the same with some ability to fudge the numbers by not overprinting money. For fiat? ...It is a completely different ball game. Taxes for the government that controls the money printer–that is, excluding local governments–have nothing to do with actually paying for services and goods that the government needs or wants.
I hear you ask
You devilishly beautiful Limax of alien proportions, then how does the government get anything at all?
I know, I am really beautiful, and I don’t even need to try! But besides that, the government gets what it wants by paying for it by using currency that it doesn’t get from taxes!
Yes, I know it sounds like sorcery and witchcraft that belongs in the old school mental asylums, but hear me out. Imagine you have this magical bag
You put in money into it, and it spits out the money you put in and also even more money. What would you do? Quit your day job? Undress and rub your genitalia against your boss’s stuff? Take a piss instead? Well, you certainly would be using this magical bag’s money to pay for everything and no longer worry about having money come in. This magical bag is, in normal parlance, called a money printer, and fiat currency states have it. They can always print more money to pay for anything, so all government budgets made at the level that can print money are never, ever, restrained by how much money they have; after all, the magical bag can always make more! So what is the job of taxes for fiat? I’ll come back to it shortly.
The cost
We have solved the issue of infinite wealth! Or have we? 🤔 Yeah, we ain’t. Even if we can make the printers go brrrrr
There is always a cost associated with everything, and a money printer isn’t a magical device that can solve everything. If you just keep printing money, what happens? I am certain the vast majority of you all already know where this is going. A quirk of the way that people value things is that the more there is of something, the less you come to value it. Which evolutionarily makes sense if you think about it.
Value is a way to assign importance to something, and if you can find something easily, it is not that important as it is easy to get anyway. But if it is scarce, you don’t know when you will find it again or when you will have use for it, so value increases, and you are less interested in getting rid of it. Currency is the same: the more currency there exists, the less value people assign to it. This phenomenon is called inflation when currency loses value in the eyes of people. It is important to note that inflation is not the rise of prices, it is the loss of value in currency. The rise in prices is a natural consequence of currency losing value. A loaf of bread has relatively stable value under normal circumstances, and if each dollar bill is now valued less than 5 years ago, then you need more dollar bills to cover the value of the loaf of bread.
Here we can see 3 famous examples of when inflation goes wild due to overprinting: the Weimar republic, Zimbabwe, and Hungary. They all experienced hyperinflation, where inflation can be measured by the week, days or even by the hour instead of yearly. They started printing en masse, and that caused huge inflation as people saw more of it and started valuing it less. And this kicks in the worst part of hyperinflation: the expectation of inflation. Sure, inflation is always there for everyone, so the 1 dollar bill today is not expected to be as valuable next year, but you don’t feel any need to run off and buy something with it because by the time you reach the store it has already lost half of its value, which is what happens during hyperinflation. So if governments can print money, why doesn’t hyperinflation or huge inflations happen everywhere?
Combating inflation
Taxes
And we circle back to the purpose of taxes in fiat currency! If the issue is that too much currency gets into the system and people start to devalue it, the solution is simple: get rid of some of the currency! And this is the main purpose of taxes: they are not to fund things, they are to pull currency out of the economic system and prevent inflation from running amok!
This is, of course, a very delicate balance, because no person wants to pay taxes and lose currency as that means they can purchase less of what they want. So the government is faced with maintaining a balance of keeping people happy enough to pay the taxes, and providing the services they want and the government needs. You can think of it like taxes are taking money and burning it in a furnace while the money printer puts new money into the system; of course that is inefficient, so you move what you can from the pile to burn into the pile going out.
Bonds & Loans
But you know what people do love? MORE CURRENCY! In their pockets, that part is important, in their own private pockets. If it’s not there, it will not make them happy or love it. Though if you just give it to them willy nilly, we get the inflation problem again.
This is where government “loans,” aka bonds, come in. While normally a loan to a private person during commodity currency era means a sudden cash inflow that can then be used for purchasing whatever, for a fiat currency, money printing state, this makes no sense. Why would you need to “loan” money when you can go BRRRRR and have more money? Of course it is pure nonsense.
So why does the government do bonds that you pay money to get and then are paid interest on? Sure sounds like a loan to any normal person! Well, I am not normal, and life is not normal! It is weird as fuck! As I stated before, people get really miffed with high taxes, so bonds and “loans” are another way to pull money out of the system. This way, people willingly give you money to not spend! You hold onto it and reduce the inflation for the moment, and people are happy! Sure, you have to deal with it later again when you have to repay the entire bond and all, but you can do this again and again! For all eternity! ...Except eventually, it will bite you in the butt if you do it too much. Where the line goes is a complicated economical question that I will not go into, primarily because no one knows, but to all 🇺🇸s, it is, from my readings, generally considered that the “debt,” aka outstanding bonds used to not have inflation spiral out of control, more or less where it should be and can continue to grow for the foreseeable future if nothing catastrophic changes.
Modern monetary theory
When will I ever start discussing this!? Well, I already have! What I have gone through with all of this is the modern monetary theory! What does it exactly state in short? Keep in mind, this only applies to states with fiat currency that they control.
Governments can pay for anything without taxes.
Government bonds are a monetary policy device, not a funding device.
Governments cannot be forced to default on bonds denominated in its own currency.
Governments are only limited in currency by inflation.
Monetary policy is the policy to govern the money/currency supply. All of this is what I have gone through in this post! Just in a different way. Well, maybe not the third one in detail, but it really only says that they cannot be made to default because …brrrr pay them.
You might ask why it matters? Well, I will give a section in a bit on writing, but in real life, it matters a lot. Governments that are not local need to learn to use this more. A lot of representatives do not understand this, so they make budgets not fully grasping the tools they have, and in turn, it means that when economic troubles happen, they are not ready to use the full toolbox that they have. I will go into these kinds of situations in another blogpost later–ANNE! Add “Government economic intervention” to the list!
MMT in writing
Alright, this is not going to be in every world or writing because the huge factor that determines it is fiat currency. So for commodity currencies or representative currencies, MMT is not a viable thing to use because they literally have to get the currency in order to pay for anything.
But if you do modern or later, where the government can print their own money, this matters when you have the government involved. I have far too often read books with governments and them going “We cannot afford that,” bullshevik! It can afford it, but the issue is, the author is ignorant, aka doesn’t know, how it works. Which is fine, not everyone can know everything, but I am writing this blog so you know! This is especially egregious in scifi stories set hundreds to thousands of years in the future. You are telling me all that time, and this idea is still not understood? Yeah, I don’t buy it, given other economic ideas have penetrated into politics and how to do things. The success rate of politicians listening is a mixed bag from year to year, but it is there! So it would be more prevalent in the future, and other economic ideas we have yet to figure out! But I don’t blame someone for not knowing what has yet to be figured out; not everyone is psychic.
Summa Summarum
So everyone got their pencils? We are having a test now! Or not, I am not a teacher officially on here …but I still teach; where is my raise!? Anyway, MMT is strongly tied to taxes, but the reason goes entirely against what people expect. Instead of taxes being a method to afford things and services, it is an inflation management tool, and any government with fiat money can afford anything and everything they want. This, however, is as I have said, not free as inflation is the cost instead. So hopefully you can write better stories about government money and taxes, and make more believable worlds! Now there is a tariff on the way out of this blog…
Want to dive into a discussion about Stellima or the art of writing on Discord? We’d love to have you! And if you have any topics you struggle with or that you would like to suggest for a future blogpost, we’re open to suggestions!
Interested in supporting our work? Join our Patreon and become a part of Stellima as a citizen of Mjatreonn! Or would you like to give us some caffeine to fuel our writing? Consider buying us a coffee at Ko-fi! Every contribution inspires our creativity and keeps us going. Thank you for your support!
Copyright ©️ 2024 Vivian Sayan. Original ideas belong to the respective authors. Generic concepts such as modern monetary theory, taxes, and economic types are copyrighted under Creative Commons with attribution, and any derivatives must also be Creative Commons. However, specific language and exact phrasing are individually copyrighted by the respective authors. Contact them for information on usage and questions if uncertain what falls under Creative Commons. We’re almost always happy to give permission. Please contact the authors through this website’s contact page.
We at Stellima value human creativity but are exploring ways AI can be ethically used. Please read our policy on AI and know that every word in the blog is written and edited by humans or aliens.
