Reliance of the Government on a Central Bank’s Printing Press
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Abstract
This research paper explores the debate surrounding a government's dependence on central bank money creation instead of taxation, often termed "monetary financing" or "helicopter money." Examining the advantages and drawbacks of this novel approach, the paper finds that reduced taxation can enhance fiscal flexibility, stimulate growth, and benefit businesses and consumers. Examples from regions like the United Arab Emirates, Monaco, and Texas illustrate the viability of low or no taxation models, though extreme positions are common.
Critics raise concerns about central bank independence erosion, inflation risks, and intergenerational fairness. The absence of taxation can spur economic growth but may lead to rising money supply, inflation, and worsened trade terms. Modern Monetary Theory suggests that money printing is viable until full employment if higher taxes absorb excess money.
While it offers flexibility in crises, the absence of taxation can foster fiscal recklessness, potentially causing currency crises and excessive inflation. It may encourage overspending, leading to central bank debt monetization, known as fiscal dominance.
Furthermore, taxation's absence raises equity concerns, impacting wealth redistribution, market correction, and efficient resource allocation. Taxation plays a crucial role in achieving economic policy goals, including debt management, deficit control, and inflation regulation.
In summary, relying solely on central bank money creation has short-term advantages but poses long-term risks to economic stability, equity, and fiscal discipline. Striking the right balance between taxation and money creation remains vital in modern fiscal policy.