The Myth of Taxpayer Money

16/03/2016 16:14 | Updated 17 March 2017

We are told, time and time again, that the government should spend taxpayer money wisely, efficiently, and sustainably. Often these pronouncements are followed by promises to use taxpayer money well by cutting government spending and making efficiency improvements. There is an assumption behind these statements that is utterly inaccurate and dishonest, however. Namely, that there is such a thing as "taxpayer money."

Not only is there no such thing as taxpayer money, it is not the case - ipso facto - that the government spends taxpayer money. To see how this is so, assume that taxpayer money exists and assume that the government spends it. As we shall see, these assumptions actually lead to a paradox.

In this world, where the government spends taxpayer money, the following situation holds. The government invokes a tax on the population - say, an income tax. This income tax takes money from the people who qualify and adds it to the Treasury account. The Treasury, then, takes that money and spends it on whatever the government wants to buy: a new hospital, school, submarine, or whatever.

Where does this money come from, assuming God does not randomly drop it from the sky? Well, it is "taxpayer" money. So the money, presumably, belongs to the taxpayers - so it must come from them (i.e. the taxpayers must issue/print it). Well, that is all well and good, but it does not represent this world. Taxpayers, in the UK, do not print pound sterling. That would, of course, be a criminal offense.

This creates the paradox: if taxpayers do not print "taxpayer money," and the government needs to get "taxpayer money" before it can spend, then how can the government spend (where does it get the money from?) and how can taxpayers pay their taxes (where do they get the money from?)? This is an important point to mull over.

In order to tax someone, there must be something there to tax. Since taxpayers do not print their own money, there is nothing there to tax. And in order for the government to spend, the government must first tax. But since there is nothing there to tax, the government will never collect tax and so will never spend.

Clearly, this description is not one of our world. In this world, the government does spend, and taxpayers do pay their taxes. Something has to give - our initial assumptions must be wrong: there is no such thing as taxpayer money and/or governments do not require taxes to spend.

If we jettison the second assumption, then it turns out that the government must spend before it collects taxes. This is because if it does not spend, then there will be nothing to collect - remember, taxpayers do not print their own money and it does not magically fall from the sky. Spending precedes taxation, by necessity. Now that we can see the money in circulation is government money - money issued by the government - it follows that taxpayers do not own it; so the first assumption is jettisoned. Therefore, the notion "taxpayer money" ceases to have any content.