Which came first, money or taxes?
Which came first indeed? This is one of those strange questions because it’s like the chicken and the egg. I tell my children, if anyone ever asks you which came first the chicken or the egg, tell ’em its the rooster!
But seriously, this question does indeed force one to take another look at some widely held assumptions and beliefs. If we say that taxes came first, then it is obvious we will then have to ask, but what was it that was taxed if not money? This then forces us to question the reality of whether or not it is indeed taxes that fund things like government spending. If produce (corn, chickens etc) were the first forms of taxation, was it produce the government used to pay for bridges and roads to be built? Then we have to dig even deeper by asking, how is it possible for people to have the means by which to produce corn and chickens, in order to pay taxes, without some form of legal system to protect property rights? This then begs the question, if a legal system did exist in order to protect property rights so that people were secure in their abilities to produce corn and chickens, then what was it they paid the government in order to set up this legal system? Was it corn and chickens? If so, how did they produce them without the protection of property rights?
Ok, before we go baking too many noodles, lets go the other way; if it was money that came first, then where did it come from if not from taxes? Is it possible that money came from somewhere outside of government influence? If so, what form did it take and where did it derive its value? Because most of us are taught that barter existed before money, then we must assume that during that barter stage but just before money rushed in, that trust had already broken down and that what people bartered with and the means of production to produce these goods, must have already begun being treated as private property requiring a legal system and government to protect. What paid for this legal system before money rushed in?
The problem with trying to answer this question begins because our understanding of money is flawed if we do not understand that without a government, money, and therefore private property, cannot exist at all.
In 2014 the Bank of England published a short paper called an Introduction to Money, which I highly recommend, in which they described money as nothing more than an IOU. But what they do not explain is that for any IOU to be enforceable, there must exist a government and legal system in which to protect that ability, which is what is otherwise known as, property right. Therefore money, no matter what form it takes, whether it be gold, seashells, fiat currency, or bitcoin, at its core is an IOU, which is private property, and which can only exist if it is endorsed by a government and legal system,and therefore, it is the government and legal system which gives it value.
Fundamental in understanding money and taxes is the following: unless a government is willing to take upon itself the duty to protect private property, then private property cannot exist. Therefore, the more wealthy a society is, the greater the liability there is on its government to protect all that wealth and all the trade and exchange that goes on with it. Try to see it like a T ledger; on one side we have private wealth and all the forms it takes, and on the other side we have government liabilities and all the forms it takes; the only time these two sides do not match is when the country in question owes or is owed by a foreign country.
What taxes are is essentially is the right of government to destroy its burdens or liabilities.
Money is a liquid form of private property, and therefore a liquid form of government liability. At some stages in history, gold could be converted into paper money by depositing it with the government, and then the money reconverted back into gold. But if you paid that same money into government as a form of taxation, then there would be no re-conversion back into gold, because that liability was extinguished. What gave that money value, among other government liabilities, was the promise of the government to convert it into gold if was brought in for that purpose, but if it was used to pay taxes, its function was then to destroy the very liability of government that was attached to it and hence why taxation has value to a government.
In today’s monetary systems, the liabilities of governments in the form of money no longer include convertibility into Gold or any other specie of property, but rather include many other types of burdens including maintaining a stable currency, stable employment, stable markets, stable laws, and all other necessities which a growing economy based on private wealth require. In order to ensure a stable currency and economy, one of the duties of government is to ensure that the amount of liquid money in circulation does not get too low or too high; too much liquid money and we risk having inflation, too little and we risk having deflation, both of which upset the stability of an economy. The Central Bank contributes to this duty to keep things stable by swapping liquid government liabilities (money) for less liquid government liabilities (bonds and treasuries) or visa versa, when things call for it; the Treasury department contributes to this duty by either spending more money into the economy than it drains out by taxation, thereby adding to liquidity, or reducing liquidity by draining more money out of the system through taxation than it spends into the economy.
Therefore, as you can see, the question of which came first money or taxes should be re-stated to be ‘what enables money, and any other form of wealth, to exist in the first place?’, and along with there needing to be a government to accept the liability implicit in private wealth, the government must also have a tool by which to keep the value of this wealth stable, and this tool is taxation which is nothing more than a right to destroy government liabilities. Therefore, contrary to popular wisdom, taxes do not come first and do not fund government spending, and in fact, taxes really only serve tax-payers themselves.