A fundamental principle of MMT is that the imposition of taxes allows the government to manage the state of aggregate demand. So if nominal demand is outpacing the capacity of the economy to respond in real output terms then tax rises withdraw non-government purchasing power from the expenditure system and reduce the multiplier.
Taxpayers do not fund anything. They just lose or gain purchasing power....
In his study of colonial Africa, Forstater similarly concludes that by imposing a debt obligation (taxes) on colonial Africans denominated in foreign currency (British Pounds), the British were able to dismantle the pre-existing economic structure in Africa and to monetize its whole economy and population (2005). In other words, the British government succeeded in creating a new money of account (British Pounds) in colonial Africa by coercively indebting the population and demanding British Pounds as the only means of payment to extinguish the Africans’ liabilities to the colonial government. This effectively moved the African labor power to production desired by the British colonizer since the only means to acquire British Pounds were to work at British farms or mines (Forstater, 2005). British Pounds immediately became the new money used by the colonial Africans. Hence, levying a tax liability denominated in foreign currency was sufficient (though not necessary) not only to compel the population to use new money but also to move labor power to desirable areas. Note that in this process the British Pounds must first be spent into the hands of the colonial Africans to allow for any tax payment.
Some unknown level of taxation gives a national fiat currency its value, by ensuring that people will need that currency to pay their taxes. Taxes also can drain excessive reserves and net financial assets from the financial system, reducing aggregate demand when this is desirable. They can also be used to reduce levels of behavior society believes is undesirable, or to incentivize behavior it considers desirable, and to reduce the accumulation of wealth across generations, or to drive resources to charities, and for other purposes as well.
But, what they cannot do in a fiat currency system is to function as the actual effective means of “paying for” sovereign spending. The instrument that, in fact, enables such spending day-to-day is the sovereign and sole authority of the Government to create high-powered money. In the United States. This means it is the whole process of interaction among Congress, the Fed, and the Treasury that creates such high-powered money which determines the amount of spending we have and not the specific taxes we collect from any specific generational cohorts.
Now, to be sure, taxes are not the only obligation that will drive the currency. As we’ve pointed out countless times, the farther you go back in history the more you will find that other kinds of obligations drove the currency—tithes, tribute, fees, and fines. History is on our side. There are very few examples of currencies that do not have such obligations behind them.
....tax rates should be set so that the government’s budgetary outcome (whether in deficit, balanced, or in surplus) is consistent with full employment.