Governments Getting Money: Tax

What you choose to tax affects the economy just as much as who you tax and by how much. Governments have been known to get creative – Russia used to have a tax on beards, and the UK has one on tethered hot air balloons. Some are personal, taxing our purchases, property, and income, and others are business-focused, taxing corporate profits or value added by firms. Rising asset values, inheritance, or international trade might also be taxed.

What if taxes aren’t enough? Governments are constantly borrowing money to finance what they do, and often, the amount they spend exceeds the revenues they have. That’s a government deficit. If a government goes into deficit, it starts accumulating debt. To what extent this debt is really a problem is a subject of huge controversy among economists and the wider public.

Whether or not debt is an issue depends on a number of things. There’s some rules of thumb about what ‘good’ and ‘bad’ debt look like, but the extent to which they apply depends hugely on the country and the power balance at hand. Very generally speaking, debt borrowed in a country’s own currency is seen as less dangerous than debt in someone else’s currency, because if you’re in control of your own debt, you can print more money as a last resort, and there’s less chance of the debt being used as a political tool by the creditor country.

Surely if tax isn’t raising enough money, a government could just print some more and sort itself out that way? The main problem with this idea is that it’ll cause inflation, where the actual purchasing power of a unit of currency falls, because its value has decreased. The more the general level of prices goes up, the less one unit of currency can get you, so the more its value falls.