Can We Unlink Taxation From Public Expenditure?

Abstract

Although central banks strive in most countries to regulate financial markets through monetary instruments while treasury departments formulate fiscal policies to attempt to match taxation with public expenditure, the economies of these countries continue to generate uncontrollable budget deficits and inflation. The key question addressed in this paper is whether the policies of the treasury departments and central banks are relevant to the functioning of the financial markets where fiat currency is supposed to facilitate transactions rather than being a commodity. A parsimonious model of the macroeconomic system subsuming also the fiscal and monetary interventions is presented. The model is used to understand the relevance of taxation to fiat money and to explore alternative policy instruments for funding public expenditure and regulating money supply while delinking it from taxation, which would allow public spending to proceed without excessive budget constraints.