By Denis Hay
Description: Why Taxes Don’t Fund Government Spending
Discover why federal taxes don’t fund government spending and how this myth is used to justify austerity. Learn the truth about monetary sovereignty.
Introduction – Why This Myth Persists
Imagine this: You’ve just finished filing your taxes, and as you watch thousands of dollars leave your account, you console yourself with the thought that this money will go toward roads, hospitals, and public services. But what if that wasn’t true? What if your taxes didn’t ‘pay’ for any of these things at all?
For decades, politicians, media, and economic ‘experts’ have repeated the mantra: “We must increase taxes to fund essential services,” or “We can’t afford it unless we raise revenue.” But what if this entire narrative was a carefully constructed illusion?
This article will expose the truth behind one of the biggest economic myths – why federal taxes do not fund government spending.
Where the Myth Comes From – Who Benefits?
A Legacy of the Gold Standard
Under the gold standard, government spending was constrained by how much gold a nation held. Taxation was needed to fund public services, and borrowing was necessary to cover shortfalls. However, in 1971, Australia abandoned the gold standard, shifting to a fiat currency system.
Yet, politicians and economists continued to promote the outdated idea that taxes must fund government expenditures, misleading the public into thinking the government was financially constrained.
Politicians and Media Reinforcing the Myth
• Politicians use the “taxpayer money” narrative to justify budget cuts and austerity.
• Corporate-owned media pushes the same story, influencing public belief.
• The myth convinces voters that public services are “too expensive” to support.
The Role of Neoliberalism in Spreading the Myth
• Neoliberal ideology promotes small government and privatisation.
• By convincing the public that spending requires tax revenue, politicians justify cuts to welfare, healthcare, and education.
• The wealthiest individuals and corporations benefit as the focus shifts away from public investment and toward corporate tax cuts.
How Government Spending Actually Works
The Reality of Monetary Sovereignty
As a currency issuer, the Australian government does not rely on tax revenue to fund spending. It creates money when it spends and removes money from circulation when it taxes.
Government Spending Comes First, Not Taxes
• The government must spend money into existence before it can be taxed.
• Spending precedes taxation, not the other way around.
• Historical examples: WWII war financing, COVID-19 stimulus, and public infrastructure projects funded without prior tax collection.
The Role of Taxes in the Economy
• Control inflation: Taxes regulate the money supply, preventing excessive inflation.
• Redistribute wealth: Progressive taxation reduces income inequality.
• Ensure currency demand: Taxes drive demand for the Australian dollar.
• Regulate behaviour: Taxes discourage harmful practices (e.g., tobacco taxes).
What Does ‘Available Resources’ Mean?
One of the most misunderstood aspects of government spending is the concept of ‘available resources.’ Many assume that government spending is limited by the amount of money in circulation or the revenue collected from taxes. However, government spending is constrained only by the economic resources available.
Real vs. Financial Constraints
• Financial Constraints (Myth – Applies to Households, Businesses, and State Governments): A household, business, or state government has a fixed budget and must generate income (through wages, profits, or taxes) before it can spend. Their ability to spend is constrained by their revenue.
• Real Constraints (Reality – Applies to the Federal Government): The federal government, as the sole issuer of the Australian dollar, does not need to earn revenue through taxation before it can spend. Its spending is limited only by the availability of real resources (e.g., labour, materials, infrastructure). The government can create money as needed, but must ensure that its spending does not exceed real economic capacity to avoid inflation.
Examples of Available Resources
• Labor Force: If there is unemployment, the government can spend to create jobs without causing inflation.
• Raw Materials: If roads, hospitals, or public housing need to be built, the government must ensure it has access to the necessary steel, concrete, and other materials.
• Technology & Infrastructure: The government can fund research, innovation, and expansion of public infrastructure, provided the expertise and materials exist.
The Risk of Inflation and Resource Shortages
• If the government prints money without considering real resource constraints, inflation can occur.
• Example: If all construction workers are already employed, extra spending on infrastructure could drive up wages rather than increase output.
• Solution: The government must invest in expanding productive capacity alongside spending.
Understanding ‘available resources’ helps debunk the myth that government spending is constrained by tax revenue. Instead, spending decisions should focus on ensuring that real economic capacity is fully used for society’s benefit.
Proof That Taxes Do Not Fund Government Expenditure
Direct Statements from Central Banks and Economists
• Former Reserve Bank of Australia officials acknowledge that tax revenue does not constrain government spending.
• Leading economists (e.g., Stephanie Kelton, Bill Mitchell, Steven Hail, Steve Keen, and Warren Mosler) support this view.
Real-World Examples of Money Creation Without Taxation
• COVID-19 stimulus: Billions were injected into the economy without raising taxes.
• Military spending: Huge defence budgets are approved without a need for ‘funding’ from taxpayers.
Budget Deficits and Surpluses – What They Mean
• A government deficit is a private sector surplus—meaning more money in citizens’ pockets.
• Surpluses remove money from the economy, reducing economic growth.
Q&A Section
Q: If the government can create money, why not print unlimited amounts?
A: To avoid inflation, the government must ensure spending aligns with tangible resources. Printing money is only problematic when demand exceeds available goods and services.
Q: What happens if the government runs persistent deficits?
A: Persistent deficits are not inherently evil. They often fuel economic growth by increasing private sector wealth. Problems arise only if deficits create inflationary pressure.
Q: If taxes don’t fund spending, why does the government tax?
A: Taxes serve purposes like controlling inflation, redistributing wealth, and ensuring currency demand, but they do not fund government programs.
Conclusion – Busting the Myth Once and for All
• The Australian government, as a sovereign currency issuer, does not need tax revenue to fund spending.
• The ‘taxpayer money’ narrative is used to justify budget cuts, privatisation, and regressive tax policies.
• An informed public can challenge this myth and advocate for policies that serve the people.
Call to Action
Do you see opportunities for community-driven change in Australia’s dollar sovereignty?
If you found this article insightful, explore more on political reform and Australia’s monetary sovereignty at Social Justice Australia.
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References
Creating Money Out of Thin Air
Tax and modern monetary theory
Does MMT say we can spend without limit?
Debate Brief · Government Spending & Modern Monetary Theory
Federal Taxes Do Not Finance Spending, and Cost-Benefit Analysis Must Change
The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy
Modern Monetary Theory: A Critiqueorg
Modern Monetary Theory: The Right Compass for Decision-Making
What is Modern Monetary Theory?
This article was originally published on Social Justice Australia
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For Government spending to be governed by taxes the following question has to be asked, realising that the Australian constitution only allows for the Australian Federal Government to produce Australian currency (either pound or dollar).
How does the Australian Government tax in Australian Dollars, if it hasn’t created them from nothing in the first place?