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From what I understand, printing money gives the government more money while, in time, decreasing the value of the rest of the money in circulation (or reducing how much the value of the currency would otherwise have grown). In principle, it takes economic value from the country and gives it to the government, which from seems like basically the same thing as increasing taxes. So, is printing money any different from taxing people?

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    Somebody could link this to Modern Monetary Theory in an answer.
    – user253751
    Jun 7 at 15:36
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    This seems like a question that would be better for Economics Stack Exchange. The answer is that the two economic policies are not close to the same, but it deserves a detailed response.
    – Obie 2.0
    Jun 7 at 16:17
  • 9
    @Obie2.0 while it may be a better fit for economics stack exchange, it is still on topic here Jun 7 at 16:50
  • 5
    Note that there's also a difference between minting additional currency, and minting currency to replace currency that is being removed from circulation. Jun 8 at 6:20
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    One thing that's glossed over in all the answers is that taxation is what gives money value: the government forces you to pay taxes in the currency of your choice, so you had better organize your economic activity such that you end up with that currency. If there were no taxes and the government just started printing money (in the simplistic sense that this is usually said) -- well, everybody would start using another, more stable currency. But because of the need to pay taxes everybody at some point needs the government's currency of choice.
    – tobi_s
    Jun 9 at 15:38

14 Answers 14

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I can see one difference between taxing the people and printing currency. Taxing the people only takes money away from the people in that country, as the people outside the country don't have to pay taxes (except in special cases such as the US and possibly a few other countries, as mentioned in the comments). However, printing currency is takes money away from everybody who has that form of currency, including those outside the country.

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    It also taxes people who evade taxes.
    – user253751
    Jun 7 at 15:37
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    @user253751 does it though? What if they evade taxes by holding other stuff like commodities or shares? As for the answer, some countries do tax overseas, for example the concept of 'US person' may bring about such obligations even if one doesn't have US dollars.
    – JJJ
    Jun 8 at 1:34
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    I guess it also has effect on other currencies as well, as the printed money could be used to buy other currencies
    – Ivo
    Jun 8 at 7:30
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    Lots of people evade taxes by getting paid in cash and keeping money in cash, because it's a lot harder to track cash than bank accounts (this is probably truer of small-scale tax evasion). This is getting off-topic though.
    – Stuart F
    Jun 8 at 8:59
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    @ouflak actually three, as Hungary also taxes all of it's citizens worldwide. However compared to the US there are plenty exemptions that make this less of a concern: you are exempt if you're dual national, and you are exempt if you're getting taxed in one of the handful countries on the government's exemption list. This list is quite extensive (around 80 countries including most common expat destinations), but it doesn't include all - notably most African countries as well as all Pacific "tax haven" countries are all missing from the list.
    – SztupY
    Jun 9 at 1:17
42

Taxation

Taxes are usually paid on some sort of economic activity (earning income, purchasing goods or services, etc). In other words, they have value because the underlying activity has value. In theory, that activity has value because the government exists to create the environment in which said activity happens (e.g., fuel taxes pay for roads).

The worst taxes can do is act as a drag on the economy. Raise them too high, and you actually impair how much revenue you get (and increase the likelihood people start evading them). See the Laffer curve for more on the theory of how that can work.

Printing Money

We don't have to theorize about what happens because 1920s Germany gave us a real example of what happens when you print money to support the economy.

The strategy that Germany had been using to pay war reparations was the mass printing of bank notes to buy foreign currency, which was then used to pay reparations, but this strategy greatly exacerbated the inflation of the paper mark.[13][10] Since the mark was, by fall of 1922, practically worthless, it was impossible for Germany to buy foreign exchange or gold using paper marks. After Germany failed to pay France an installment of reparations on time in late 1922, French and Belgian troops occupied the Ruhr valley, Germany's main industrial region, in January 1923. Reparations were to be paid in goods, such as coal, and the occupation was supposed to ensure reparations payments.

When you increase the supply of money to pay for things, that money starts to flow everywhere within a given economy. As such, demand tends to rise. As demand rises under what is generally the same levels of supply as previous, prices rise. Thus the newly printed money is worth less than what it was. Thus you get into the real problem of printing: inflation. If a government could inflate itself out of debt, every country in the world would do it.

As France quickly realized, they needed valuable things to repay their own war debts, so they took over western Germany and started extracting money from the coal being mined there. This helped exacerbate the collapse of the German economy (and helped this guy come to power).

TL;DR

Taxes - Takes value from things that have intrinsic value. As long as the government uses it mostly to promote things that help or stabilize the economy, it can be beneficial.
Printing Money - Tries to create value from nothing, and can lead to economic instability

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  • Comments are not for extended discussion; this conversation about the effects of taxation on the economy has been moved to chat.
    – Philipp
    Jun 9 at 7:20
  • Simply not true. The ECB saved the Euro area by quantitative easing ("money printing"), it didn't create hyperinflation. QE is a useful monetary policy tool, so yes, maybe we need to "theorize" a bit about the actual causes of hyperinflation.
    – henning
    Jun 9 at 18:30
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    @henning QE worked because it was limited. The money printed was generally not given to the public, but used to stabilize banks. You'll note that the extra money was eventually removed from the economy. The question here was about using running monetary increases to replace taxes. That's not the same thing.
    – Machavity
    Jun 9 at 18:35
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Even allowing for similarities, the two differ in at least one important aspect:

The government controls its taxes, assuming it is efficient in collections. Therefore it can lower taxes rather quickly.

On the other hand, once inflationary expectations have been baked into an economic system, that cycle can be quite difficult to break since it is under no one actor's controls. A government may need to apply considerable pressure before gradually taming inflation, even once they have stopped printing money.

To be clear: not claiming that printing money means inflation or that inflation is only caused by printing money. Just that, if there is inflation (and it often goes hand in hand with printing money) then it can be a tricky beasty to deal with.

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    You mean people won't trust that the government really stopped printing money? Or where do these inflation expectations come from?
    – Trilarion
    Jun 8 at 6:05
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    As an example, price changes can take a while to filter through the supply system. So prices contingency continue to rise. Which means that pay continues to rise as workers want higher pay to maintain their standard of living. Which causes the prices of goods manufactured by workers to rise. And it becomes a self sustaining feedback system.
    – PhillS
    Jun 8 at 7:49
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    Good point, but nonetheless didn't stop governments from using inflation to "pay' off significant debt, especially one resulting from wars. politics.stackexchange.com/a/52952/18373
    – Fizz
    Jun 8 at 13:24
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    What @PhillS said. Plus, I think there is waaaay too much hubris in many ppl's assumptions that we know exactly how to tweak economies and that economics is an exact, mathematical, science, without messy human sentiments and irrationality having much of a say. The sample data - countries - on how to run a modern advanced economy using free market mechanisms is very small so a lot of theories simply back-fit observed outcomes. Doesn't mean theories are worthless just that they have limits. Inflation-wise, one ingredient is just how "hawkish" a central bank is perceived to be, for example Jun 8 at 19:03
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    @Jacob Inflation is measured by increases in prices of goods and services (the specific formula and goods and services notwithstanding). Crude oil is a major economic 'input'. If its price increases then prices of related goods and services (many, many things) increase as a consequence. So your unit of currency cannot buy as much of these goods and services today as it could before. And therefore you have experienced inflation.
    – Lag
    Jun 9 at 13:32
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tl;dr There are idealized-scenarios in which the government printing-cash would be largely equivalent to the government collecting taxes. This answer considers such an idealized-scenario, then considers departures from that idealized-scenario.


Thought-experiment: Idealization in which printing-money and collecting-taxes would be largely equivalent.

Let's construct a special-case in which printing-money and taxes are the same thing, then we can retreat from that idealized model to get a handle on any differences.

So, consider a country where:

  1. The government wants to collect monetary-power from tax-payers, so they're considering either:

    • a special round of taxes; or

    • a special printing of extra cash.

    The government already knows how much it wants from everyone; it's just considering how to best collect it.

  2. All tax-payers own cash proportional to how much the government wants from them. For example, tax-payers who the government wants 10-times more from have 10-times more cash too.

  3. No-one except tax-payers has cash (of the sort that the government would print).

  4. All contracts (e.g., agreements to sell/buy stuff), laws (e.g., laws involving fees or monetary thresholds), etc., that refer to amounts of cash are written to account for inflation.

    • For example, if Alice agrees to pay 100-USD for something next year, then inflation halves the value of a USD, then Alice's contract would be understood to require a payment of 200-USD.

    • For example, if the government requires banks to report transfers of at-least 10,000-USD, then inflation halves the value of a USD, then banks would have to report transfers of at-least 20,000-USD.

  5. Everyone involved is perfectly rational, well-informed, transparent, honest, law-abiding, collaborative, etc.. All administrative-costs, operational-costs, etc., are negligible. No-one tries to exploit anything; no other political issues are tied to how these taxes are collected.

In this scenario, if the government wants to collect an amount equal to 10% of the cash that its tax-payers own, then they can:

  1. Require all tax-payers pay 10% of their cash in taxes.
    This would cause everyone with the government's cash to lose 10% of their wealth in it, with the government gaining that wealth.

  2. Print 1/(100% - 10%)-1, which would be about ~11.1%, of the cash currently in circulation.
    This would cause everyone with the government's cash to lose 10% of their wealth in it, because:

    1. there'd be ~1.111... times more cash in circulation,

    2. causing each USD to be worth ~1/(~1.111...) times as much, which is about 90% as much,

    3. leaving tax-payers with their cash now worth 10% less than before,

    with the government gaining that wealth because:

    1. the government would gain about ~11.1...% of the cash that tax-payers had,

    2. which, after inflation, would be worth about as much as (~11.1...%)/(~1.111...) in terms of pre-inflation money, i.e. about ~10% of what tax-payers previously held.

And since we're assuming that all costs (like printing-money and collecting-taxes) are negligible, the government could basically do either – presumably it wouldn't really matter.


Real-world considerations.

As potential departures from the idealized-scenario to consider:

  1. Tax-burdens often aren't proportional to how much of the corresponding-government's cash someone has.

    • Typically, people pay taxes to governments in which they're a citizen, live, work, etc., rather than from which they hold cash.

    • This sort of taxation would be more like a wealth-tax, except only wealth from cash.

  2. Printing-money would effectively tax entities that don't normally pay taxes, including the government itself.

    • For example, if the government itself held a large amount of money, then it'd tax its own monetary holdings too. This wouldn't really hurt the government (since it'd effectively be transferring that value to itself), though it'd reduce the effective amount paid by others (since the government would be absorbing part of the value-loss from inflation, rather than it being 100% on other tax-payers).
  3. A lot of real-world contracts might not be inflation-adjusting.

    • This would presumably favor folks who owe money over folks who are owed money.

    • Employees' real-wages might tend to fall, at least in the short-term, as paychecks for the same amount of cash would transfer less wealth than before.

    • Folks with a lot of debt, including perhaps the government itself, might enjoy the real-debt decreasing.

  4. Laws with monetary-thresholds might not be inflation-adjusting.

    • For example, laws about theft might have a threshold-amount beneath which a theft would be considered "petty", e.g. beneath 1,000-USD. If the value of a stolen-item changes due to inflation, then such thresholds may apply differently.
  5. Cash-based transactions might be different, with coins/bills/etc. representing different real-values.

    • For example, vending-machine that'd be mechanically designed to dispense products for a quarter (0.25-USD) would be receiving coins with different real-values.
  6. There might be all sorts of illogical, cultural considerations that'd be affected.

    • For example, a "dollar store" that'd sell products for 1-USD would presumably be selling products for lower real-prices, or else have to adjust their model.

    • For example, a lot of smaller items might be priced at X.99-USD, e.g. 7.99-USD. If such pricing-systems stick to similar presentations, then there might be a lot of minor rebalancings.

  7. There could be a lot of dynamic-equilibrium effects.

    • For example, if energy-costs were changing a lot in response to market-forces, then they'd be suddenly shifted (presumably downward, due to inflation). So if energy was under-costed, inflation might exacerbate it, while if energy was over-costed, then inflation might help reduce it.

Conclusion: They're similar in ways.

Raising-taxes and printing-money are similar in ways.

Broadly speaking, we might consider three categories of differences between them:

  1. Differences in how tax-burdens are allocated.
    Printing-money would essentially be a cash-specific wealth-tax (as opposed other types of taxes like income-taxes, sales-taxes, non-cash property-taxes, etc.).

    It'd be broadly undiscriminating in its application (no special tax-breaks or tax-exemptions; no differing tax-rates; harder for tax-dodgers to cheat; taxes would even apply to foreign-governments and buried-treasures with the cash).

  2. Consequences on market-dynamics.
    If cash changes its value, then folks may differently value it, potentially motivating adjustments in costs, salaries, debts, etc..

    This might be a relatively interesting topic as different market-actors might respond differently, for strange emergent-effects.

  3. Weird, odd-ball things.
    Miscellaneous little things, like how coins/bills/etc. would be for different real-valued denominations, or prices might be rounded differently, or how labels like "billionaire" might have shifting meanings.

So in thinking about this topic, perhaps:

  1. First consider changing how tax-burdens are allocated, because the analogy really holds best in that context. In other words, if there's some difference between printing-money and collecting-taxes, but that difference follows from how tax-burdens are allocated, then we might say that that difference is less about inflation and more about tax-burden allocation.

  2. Then think about how the market's dynamically evolving, and how cash having changing-values would differently affect such dynamic-evolution.

  3. Maybe occasionally consider if any odd-ball effects could be understood. For example, say stores like selling stuff for X.99-USD – presumably a bit of inflation might affect that with some consequences, but exactly how might those consequences be described?

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    For example, a "dollar store" that'd sell products for 1-USD would presumably be selling products for lower real-prices, or else have to adjust their model. And this has really happened. My local dollar store is now a $1.25 store. Jun 8 at 16:53
  • 1
    They could also specify that their "dollar" items were in like, 1990s dollars or something.
    – code11
    Jun 8 at 19:42
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    @manassehkatz-Moving2Codidact furthermore, dollar stores used to be called dime stores, and before that five-and-dime stores.
    – phoog
    Jun 9 at 17:07
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    @manassehkatz-Moving2Codidact but when five and dime stores came into being, they did sell their wares for five and ten cents, which is where they got their name, just as with dollar stores.
    – phoog
    Jun 9 at 19:32
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    @manassehkatz-Moving2Codidact in further inflation news (not exactly news, but you get the idea), at some point in early 2008 or so, as the subprime mortgage crisis was unfolding, someone approached me on the subway asking for a dollar. I thought, "whatever happened to 'Brother, Can You Spare a Dime?'?" So I looked up the song, found it had been written in 1932, and, using the consumer price index, found that the inflation adjusted title at that time should have been "Brother, Can You Spare a Dollar Forty-Nine?" (Now $2.13.)
    – phoog
    Jun 10 at 7:32
10

Not only is printing money different from taxing people, it is in fact the exact opposite.

Since you talk about "printing money," I assume you are talking about a country with a fiat currency.

  1. In such a system taxing people does not give the government "more money" because the government, being able to print as much money as it wants at any time, already has unlimited money. Taxing people does, however, reduce the money supply.
  2. Printing money increases the money supply. The effect of this varies depending on the current economic circumstances of the nation and what the money is used for.

It's worth examining point 2 a bit more closely because there's a mistaken perception that printing (or more accurately, creating) money inevitably leads to inflation. While it's the case that creating money can lead to inflation (and we have plenty of examples of this happening!), it's not the case that it must lead to inflation.

Inflation is a natural consequence of the laws of supply and demand, in this case the supply of and demand for money. It should be obvious if money is created but not spent (for example, the government gives me a billion dollars in cash and I simply hide it in a vault) it won't cause inflation: I'm not spending the money so I'm not adding any additional demand for goods or services to the economy. But this can also apply when when I spend the money on something for which there was no demand, so that my new money is not competing with existing money to buy things. Here's a (massively simplified) example that shows the general idea:

If you have ten employers each wanting to pay $50 to hire a worker for a one-day job, and ten workers willing to do the job for no less than $50, the market clears at $50. Add an eleventh employer wanting to pay $50, but not an additional worker, and one employer is going to go without a worker. Through normal market forces the employers who find it worthwhile to pay more than $50 for a worker will offer a bit more money, other employers will respond by offering more, and the price of a worker will rise until one employer decides he'd rather go without a worker than pay that much, and the market will clear at a new, higher price.

But what happens if you add a new worker, also willing to work for no less than $50? That leaves you with a market still having only ten jobs at $50 each, so that worker is left unemployed and his potential to work is wasted. On the other hand, if the government prints $50 and uses that to pay the eleventh worker to make something that the other employers and/or workers would buy or can use, there's not necessarily any inflation here. What's actually happened is that, with that eleventh worker employed rather than sitting at home doing nothing economically productive, the size of the economy has increased along with the size of the money supply. There's an extra $50 out there to be spent, but there's also an extra $50 of stuff to buy because labour that would otherwise have gone to waste was put to use making that extra stuff.

Obviously the real world is far more complex than this, but the core thing here is that labour is a huge part of any economy, nothing is created without some labour being put into it, and in most economies there is always some labour going to waste. (It's actually labour that's lost forever to the economy; once someone's not worked for a day, there's no way you can ever recover that day of labour that went unsold.) So any money created by the government that buys goods or labour that otherwise would have gone unsold is not "inflationary" money but is instead growing the economy.

Of course, it can be very tricky to determine if the money a government is creating and spending will compete with existing money. It's made even more difficult by a second avenue of removing money from the economy: government bonds. These can be modelled as destruction of money: when you buy a bond, you give the money to the government and it vanishes from the economy. The government may have to create money again later to pay back the principle on the bond if you decide to cash it in, but as long as you're turning over the bond at maturity, that money remains out of the economy. (For simplicity, I'm ignoring the interest payments here.)

Occasionally people get nervous and prefer to save money in some safe way rather than spend it; they go buy government bonds and thus reduce the money supply. That can lead to a shrinking economy unless the government replaces that money. But as we can see here, anybody with government bonds is capable of increasing the money supply all on their own every time a bond matures by simply cashing in the bond, so the likelihood of that also has to be taken into consideration when creating money and injecting it into the economy. (And it's meta-circular; the increase or lack of shrinkage in the money supply that comes from creating money may increase confidence and move people to save less.)

Now there are doubtless soon going to be a zillion or more comments below this answer pointing out details that I've left out. But keep in mind I'm not writing a textbook here, I'm just trying to point out a core principle: inflation is not some special phenomenon of its own but is simply the result of supply and demand coming together to clear markets. If a market has unsold supply, buying that is not going to increase prices because nobody is competing for that supply. And there's almost always unsold supply in an economy. "Printing money" may simply create demand for that supply that wasn't there before.

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    The body of the question makes a lot of sense, but I don't see how it leads to the conclusion that printing money is the opposite of taxation. It just sounds like printing money may not always have the same effect as taxation
    – T Hummus
    Jun 8 at 14:23
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    @THummus almost nobody asks: "How do you unprint money?" If they did, they would realize that taxation is one of the only ways for the gov't to take money out of circulation and reduce the supply. Jun 8 at 19:05
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    @THummus exactly. what's strange about the statements made in this answer is that we don't have to look at theory books to see they are wrong, we are living it right now. Excess stimulus during COVID (by printing a lot more money) directly led to much higher inflation then we would have otherwise had, leading to people having a lot less money as vital goods have increased in price. This doesn't always have to be the case (the stim after 08 was too small) but it's absolutely the case now that printing the money was functionally the same as an increase in taxes. any difference is semantics
    – eps
    Jun 9 at 0:04
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    @eps Leaving aside whether the COVID stimulus really is the main reason for the current increase in inflation, going from "A and B both cause people to have less buying power" to "A and B are functionally the same thing" seems a bit of a stretch. Would you say, for example, that, like excessive printing of money, excessive taxation should be avoided because it will cause inflation?
    – cjs
    Jun 9 at 4:32
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    @T.E.D. ah, thank you
    – T Hummus
    Jun 9 at 16:58
3

Yes and no.

Let us start with the no answer. They are no different from taxes.

The net difference between the cost of producing the money plus the depreciation in the value of existing bonds is a tax called seigniorage. It is a proper tax in every sense of the word. It is a reversible tax, however. If the government creates a one-dollar bill and the recipient uses it to pay taxes, then one tax extinguishes the other. Indeed, the government is out the printing costs.

So it is revenue to the state as long as the money is produced profitably. The U.S. penny loses the government about half a cent for each coin, but Congress will not allow them to be discontinued or altered so that they are profitable.

Now for the "yes."

Money is also a form of debt. Under a commodity-based money, such as gold, the government owes a certain lump sum of gold in exchange for the money. Under a fiat standard, money is still a debt of the government to the holder, but it is only extinguished by the payment to the government for goods, services or taxes due. In other words, a dollar bill is actually worthless, but the government will allow you into Yellowstone Park if you have enough to cover the entry fee.

However, instead of demanding goods or services in barter for entrance, they will accept worthless paper because it extinguishes the government's debt.

One of the important exceptions to this is the money of Scotland which is not produced by the government. The seigniorage belongs to the bank that produces the banknote.

There is a large advantage to requiring taxes over printing money, though. Imagine that a government has decided that it needs to produce something and requires some good to do so. If the price of the good exceeds the taxes collected, and let us assume the people will not allow additional taxes, then a private citizen that has enough money can outbid the government and win. Taxes can be a binding constraint if seigniorage is not allowed.

On the other hand, if the government funds itself through the printing of money, then, in the absence of some binding but artificial constraint, it can always outbid its own citizens as long as it has the ability to engage in unlimited printing.

Both of these examples presume that the government's borrowing constraints are fully binding. A government with the capacity to borrow could outbid its citizens if someone else would poney up the cash for them in exchange for future repayment.

Nonetheless, if taxes are binding, that is a permanent future claim on the government's revenue stream. Future governments are bound and future taxes are no longer available. With explicit taxes, the population can see their own tax bill and hold elected representatives accountable.

People have, already, mentioned the inflation effects of printing money, but that is not quite correct.

Inflation is not always the consequence of printing money. It often is. It can also be catastrophic, but usually, the danger happens when there is a supply shock of physical goods rather than a currency shock. We are in that dangerous place right now.

Had Russia not invaded Ukraine, it is likely the pandemic-related supply shocks would have finally worked their way through the system. That would likely not have been dangerous in the long run. It would be unsurprising to find a quarter billion people die of famine due to the war in the next twelve months.

Central banks try to maintain a stable amount of cash per person to meet per capita demand. With the destruction of goods and services due to the war, there is more money out there than is needed to meet demand. That money is being used to bid for the remaining available food and fuel. Rich nations and people will outbid poor nations and people.

It is possible to contract the global money supply, but the US government would have to convert the money into debt at interest. It is also hard to guess which nations would be impacted by the US Government sucking the money out of the planetary banking system.

There is a political difference to that as well. If the US Government shrinks the world's money supply and a small nation has its banking system collapse and the people starve to death, they could blame the United States for their starvation. On the other hand, if the local money supply is too small to buy food, that is Russia's fault for destroying farmland and grain and the consequences of that. People had enough money, then Russia attacked. Now they do not. That is emotionally different than if you took the money out of the banks. The same people still die, who is blamed changes.

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    "they will accept worthless paper because it extinguishes the government's debt" - hardly worthless then, is it?
    – Steve Kidd
    Jun 8 at 10:59
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    Regarding coinage, it's also been observed that when two coins of the same denomination have different values, people will hoard the coin with the higher inherent value and spend the coins with the lower inherent value. Example: People will keep pre-1982 US pennies, and spend the post-1982 pennies, because the metal content of the former has value just under three times its face value.
    – EvilSnack
    Jun 8 at 12:45
  • @EvilSnack yes, that is Gresham's Law. I did not realize that the multiple was so great on pre-82 coinage. I knew it existed, but I didn't realize it was so high. Jun 9 at 2:41
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    The pre-1982 copper penny (which includes the wheat pennies, aside from the steel ones minted in 1943) weighs 3.11 grams each and is 95% copper and 5% zinc, so 2.9545g of copper in each. The spot price (as of this split second; copper prices are highly volatile) is about one cent per gram.
    – EvilSnack
    Jun 9 at 5:16
3

First, it is good to know that "printing/minting money" is usually not how the modern governments cheat when taxes cannot adequately fund the policies envisioned.

What they do is to play with the interest rates and the government debt. One of the important differences is that by bumping the interest rates, the government (or the central bank, if somewhat independent of the government) can reduce the money acting on the market without forcefully collecting them from the population.

Either way, the inflation can be considered "tax-like" in a sense that it reduces the available income (and to some extent, wealth) for everyone.

Then again, things are different:

  • While the inflation depletes the average citizen of their money's value, this value usually goes not go to the government. A part of it goes to traders/speculants. And, most of the value simply disappears from the economy in the form of goods not made and services not done. When the government gets the money from the taxes, it (at least in theory) does useful things with them.
  • Inflation is not targeted. It acts on the money itself, and whoever holds it at the moment. Goods and property are safe (-ish) from inflation. Taxes can be as precise as "tax tobacco products", "tax diesel and gasoline at different rate", "tax the income from rent differently from the labor-related income", "tax higher income at higher rate" or "no VAT for printed media".
  • Inflation is good for borrowers at the expense of the lenders. Taxes may target both sides equally well.
1
  • "the government (or the central bank, if somewhat independent of the government) can reduce the money acting on the market without forcefully collecting them from the population." How does that help fund projects? "And, most of the value simply disappears from the economy in the form of goods not made and services not done." Most of the value is not destroyed, just transferred. Jun 10 at 2:38
2

Both taxes and printing-press inflation are a transfer of purchasing power from the people to the government, so in that matter they are the same.

The chief difference lies in the strategies that the people can employ to minimize the amount of their loss. For taxes, that would mean moving their economic activity to areas which are taxed less (or not at all). For inflation, that means moving economic holdings away from cash to other forms of value.

However, these differences lead to this similarity: The rich are more easily able to avoid the harm than poor and middle-class people; they can take advantage of tax laws (and can arrange for the tax laws to be favorable), and they are more likely to have large amounts of non-cash assets to shield themselves from inflation.

2

Short answer

Government cannot print money! It borrows it or it raises taxes, those are the only two (legal) options.

Because money is debt, borrowing money actually creates new money and causes inflation. Inflation doesn't simply take economic value from the country and give it to the government, it can have all sorts of unpredictable and disruptive effects.

In addition to inflation, debts incurred by government will have to be paid back one day.

Long answer

One important difference is that money isn't created by the government. It is created by a group of 12 private banks confusingly known as "The Federal Reserve". The government borrows this new money by using "treasury securities", but will ultimately have to pay it back. With interest.

Before we had "The Federal Reserve" system any bank could create new money. Now only a select 12 have this privilege, and they are required to follow a lending policy made by the politically appointed Federal Open Market Committee.

The tool at the governments disposal is not "money printing" but "deficit spending".

Inflation due to deficit spending

Say the government needs $1.9T to fund their COVID stimulus program. They can either raise taxes, or borrow the money by creating "Treasury Securities". The reserve banks can then create the necessary $1.9T and lend it to the government by purchasing the securities.

So the government can't create money directly, but does have a group of banks that give it an unlimited line of credit.

The federal reserve banks keep the securities on their balance sheets. The promise is that the government will one day pay back the $1.9T, plus interest, using future tax revenue.

But what if the government never pays it back? What if it just keeps borrowing more money every year?

Well, that's what's been happening federal debt chart, and that causes major inflation.

Inflation due to mortgage lending and the 2007 crash

In addition to government, banks can also borrow "new" money from the federal reserve. When a bank issues a mortgage, they don't need to have that money in deposits. Rather, they can borrow "new" money from a federal reserve bank. Mortgages are in effect, creating new money.

Imagine if banks didn't have strict lending criteria for mortgages, and anyone could borrow as much as they wanted. We would see a massive increase in house prices as people outbid each-other with borrowed money. That's exactly what happened in the property market from 2003-2007 with house prices inflating by 20-40% each year due to freely available credit.

Eventually however, many people were unable to pay back the loans, lending criteria was tightened, money supply was reduced, and prices crashed in 2007. Government stepped in and used massive deficit spending to "bail out" failing companies. This prevented a more disruptive "correction" in the short term, but contributed to the federal debt and inflation in the long term. https://openlab.citytech.cuny.edu/econ1101-e604-smacdonald/files/2018/04/The-Housing-Market-Crash-of-2007-1.pdf

Winners and losers of deficit spending

Winners

  • Federal reserve bankers
  • Government, its employees, contractors, and other beneficiaries

Losers

  • Everyone else using the currency
  • Future taxpayers who will need to pay back government debts
Source:

https://stefanievonjan.medium.com/money-creation-in-the-fiat-system-a-balance-sheet-analysis-of-banks-and-central-banks-363251bd2eb4

Wikipedia: Federal Reserve Bank

https://en.wikipedia.org/wiki/Federal_Reserve_Bank

Alternative to federal reserve banking

The US dollar was once backed by gold, inflation picked up dramatically after this policy was ended. https://seekingalpha.com/article/127585-the-gold-standard-and-inflation

In the past, it was possible for the government to print money directly, it was used to fund the Civil war in the form of "greenback" notes. Note though that these were backed by a promise of eventual payment in gold.

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  • "...money isn't created by the government. It is created by the federal reserve." Isn't the federal reserve part of the government in some way? At least in many countries this seems to be the case and then this distinction, which part of the government exactly creates the money, would be kind of irrelevant mostly.
    – Trilarion
    Jun 12 at 7:26
  • No, the federal reserve banks are private banks that are authorized to create new money, but required to follow a centrally planned lending policy. Before we had central banking, any bank could create new money by issuing loans or bank notes that didn't have to be backed by hard currency. from wikipedia: > "The Reserve Banks are organized as self-financing corporations and empowered by Congress to distribute currency and regulate its value" en.wikipedia.org/wiki/Federal_Reserve_Bank Jun 12 at 23:20
  • If the Federal reserve bank is really private, who owns it? The Wikipedia article mentions that they are somewhere in between with a legal status that is also somewhere in between. One could still say that ultimately they are acting on behalf of the government only.
    – Trilarion
    Jun 13 at 6:48
  • who owns it? it's complicated, stock is owned by private banks who are given access to newly created money at the baseline interest rate. But the stock doesn't give voting rights or a share of profit. Instead, it's managed by a politically appointed board, and additional profit is payed back to the government. It serves the interests of both member banks and of the government. A strange hybrid. thebalance.com/who-owns-the-federal-reserve-3305974 Jun 13 at 7:19
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I think taxation is much more stable and more predictable for people to manage their financial life. When you pay tax, although it may (and it is) be unfair, but it is finished. You subtract the amount of tax from your asset and then you are not worried about its side effects. But printing money would result inflation which in many cases has much harsher side effects on people's life and it's much more difficult to predict the future.

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My two cents regarding this question

  • First off all, it's not an undisputed fact that increasing the money supply necessarily causes (high) inflation and subsequent wealth loss of the inhabitants of a country. New monetary theory for instance calls into question this automatic correlation.

  • Wealth loss/inflation caused by increasing the money supply will most probably divide the tax-burden in a different way than the current tax system of any given country. People dependent on fixed incomes and/or capital will suffer more. But for people with automatic cost-of-live adjustments this form of taxation will have less/little impact.

  • When the government would have/would be given this power, increasing the money supply will be quite a simple operation. With almost all money nowadays just being numbers in bank accounts, increasing the money supply essentially could be done by just a press on a button. At least it would be far more simple than the government having to keep track of all incomes, properties, sales and other things they are currently taxing. So taxing by increasing the money supply would be far, far simpler than any current tax system.

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The government does receive wealth when it prints and spends money, so unless the printing of money produces wealth somehow, that wealth has to come from somewhere, and that somewhere is from people who hold currency, so it the sense that it transfers wealth from the people to the government, it is a tax. It's similar to dilute stock shares: if a company starts out with 1000 shares, and then prints 1000 more, then shares are worth half as much, and everyone who started out with shares has half as much as a percentage of company ownership.

Insofar it is a tax, it is a tax on wealth, but more specifically on wealth denominated in the currency. Since people in debt have negative currency, they would have a negative tax. This would then encourage people to not hold their wealth in the currency, which decreases the value of the currency even more, and so at some point you get runaway inflation.

Now, cjs said that printing money is the opposite of a tax, and I didn't see that they explained that. What they are probably thinking is that while it acts like a tax is terms of moving wealth, its effect on the money supply is opposite of a tax. If half of all the money is collected by the government in taxes, then the total amount of money available is half as much, but (taking government spending as a separate event) the amount of goods and services is the same, so there will be a deflationary effect: people have half as much money, so they will be able to bid up prices half as high.

I did parenthetically say "taking government spending as a separate event" above, because when government spends money to buy something, they are taking goods and/or services out of the economy, which is inflationary. When government collects taxes and then spend the money they get, those two events largely cancel out as far as inflation: collected taxes is deflationary, and spending it is inflationary. If the government just spends money, and doesn't collect money in taxes, then only the inflationary part is there. So this may be what cjs meant by "it's the opposite": normally governments collect money in taxes and then spend it, but printing money eliminates the "collect taxes" part, and not collecting taxes is the opposite of collecting taxes. However, I disagree that that is the opposite; in a sense, printing money means that the government is collecting taxes, but in a different form. The government is eliminating the "take value from people through forcing them to give you currency" part by replacing it with "take value from people by reducing the value of the currency they hold", and most people would consider the "take value from people" to be the most salient part.

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You have to put your question in the context of modern fiduciary currency system. I agree with the other answers that allowing the government to print money instead of collecting taxes would lead to a very unstable balance on the inflation, and once this balance tips, it will be very hard to contain the inflationary rundown.

BUT that is only because, currently, there are many economical actors that are able to increase the monetary supply. And they are not the government. Banks operate extremely leveraged, they typically don't have one tent of the money needed to cover all their clients deposits (just found an article saying EU banks are required to hold reserves of 1% of all deposits). While regulations somewhat controls how leveraged the banks can be (and is hard to decrease the leverage without bankrupting a few banks, reducing credit, and facing extreme backlash from the most powerful economical actors on the society), nobody controls what percentage of the currency is deposited (and redeposited after a loan) into banks: this creates an exponentiation effect on any tiny inflationary force.

Assuming any asset deposit must be 100% backed up, and any deviation is considered a crime of fraud (as many argues this is how it should be), and any loans with client's money are consented where interest (minus spread) are paid in due, then the only inflationary forces would be from the guy running the money printer and the economy itself.

In this case, I don't see any exacerbated risk of uncontrollable inflation for the government to print money instead of collect taxes to pay for its expenses: to the contrary, considering how much money there is in existence, I highly doubt printing money for the government budget (assuming the same expenditure we have today) will make any noticeable dent in inflation, and such currency would most likely be highly deflationary.

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Since this is SE:Politics, here's a political answer:

Unlike printing money, paying taxes makes people feel as if they have a stake in the country/state/etc... . You get to tell civil servants "my taxes pay your salary". As a Taxpayer, you have a right to your opinion as to how your money is spent.

Secondly, taxes are more interesting and difficult as far as raising money. You have to say how you're raising the tax. You can use a cigarette tax to pay for hospitals. A property tax can pay for the bike path (which makes the neighborhood housing prices rise). Or a sales tax in a college town is a good way to take more from pesky students. People might go for a tax "on the rich". These are more difficult since they all have a direct connection to taking the money from someone; whereas printing money is diffuse -- you say you want to subsidize daycare and no one says "where are you going to get the money?" in a printing money system.

Lastly, following up, unlike printing money, taxes are directed. You can have a "sin" tax to discourage alcohol and tobacco consumption. Gas taxes seem like a more fair way to pay for road construction. You can use a property tax to ensure low-income neighborhoods have terrible schools. There can be a tax break for something desirable like installing solar panels; or you can raise campaign cash as lobbyists donate to your campaign in exchange for tax breaks. You can eliminate sales tax on food and basic clothing to tax the poor less; or you can simply have higher tax brackets for income tax.

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  • The fact that taxes can be targeted (different kinds of activities, entities, rates, bands, reliefs, allowances, credits etc) whereas inflation has a blanket effect on the currency is the first thing that occurred to me.
    – Lag
    Jun 14 at 9:17

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