Taxes pay for things, or do they?

That's putting it mildly!

 

I refer you to the Office of National Statistics (ONS) on public spending and taxation. Spoiler: the government does, indeed, spend the taxes it collects (and then some); they don't just get deleted from a spreadsheet once collected.

 

But that would be precisely and functionally identical to taxation, just significantly more convoluted.

Thought experiment time!

Let's make an economy, just you and me. We each have half the 200-unit monetary supply, which we'll call £s. I have £100; you have £100. A loaf of bread costs £10. We can, theoretically, buy ten loaves each.

We need to build a thing, which costs money. We introduce a 50% tax rate to pay for the thing. This leaves us both with £50 and £100 in a central pot for building the thing; now, we can only buy five loaves, and the rest of what was previously our money has gone to build the thing that needed building.

You decide you don't like tax, so instead of introducing the 50% tax rate we agree to increase the monetary supply by 50% to £300, leaving us both with our original £100 but with £100 in a pot we can spend on building the thing that needed building. Trouble is, our £100s used to be worth half the overall value of the monetary supply; now they're worth a third of the overall monetary supply. The result: the cost of a loaf of bread increases from £10 to £20, to maintain its value as a proportion of the overall monetary supply. Even though we still have our original £100, we can only buy five loaves - meaning that printing the extra £100 is exactly equivalent to introducing a 50% tax rate.

EDIT FOR CLARITY: If you're wondering why the monetary supply went up 50% but the bread went up 100%, it's because there's a step missing from the above for the purposes of simplification: the fact that the £100 that would have been sufficient to build the thing under taxation now isn't sufficient to build the thing 'cos the cost of building the thing has gone up as well in order to maintain its value as a proportion of the overall monetary supply. Effectively, you'd have to increase the monetary supply 100% to £400, rather than 50% to £300, to cover the cost of building the thing - and the cost of the bread would rise 100% accordingly.

Obviously, this is dramatically simplified, but it's what you're suggesting above.

EDIT: Anyway, this is diverging from your question, which was "do taxes pay for things" and to which the answer is a resounding yes. Could something other than taxes pay for things instead? Yes, but that wasn't the question you asked, and it would boil down to being taxation under a different name.

 

i think it's viable to say "taxes dont always pay for the thing they're named as"

National Insurance is a great example.
So is Road Fund License

 

This, I fear, is at the heart of your misconception. When I took the £50 in tax, the money didn't go away; it was spent on building a thing, rather than loaves of bread. It's not yours any more, but it's still in the system. The physical £10 notes I took from you still exist; the overall monetary supply is still £200. There was no bonfire on which I burned the money. Thus the value of the bread stays the same.

Try this: forget about "pounds." Let's invent vouchers, and each voucher is good for one loaf of bread at a local supermarket; in this scenario I've negotiated with the supermarket that the vouchers can be exchanged for said bread. There are twenty vouchers, and we have ten each. I can go to the supermarket and get ten loaves; you can go to the supermarket and get ten loaves. We decide to feed the hungry, and each give away five of our vouchers leaving us five each.

How many loaves of bread can we now get with our vouchers?

Replace "vouchers" with "£10 notes" and "feed the hungry" with "build a thing" and you've got exactly the same scenario as above, and in neither case does the 'cost' of the loaf of bread increase.

When it was known as the Road Fund Licence (which was only the case between 1920 and 1936, so you're older than I thought!) it did pay for the roads. The Road Fund, introduced in 1920, paid into a taxation pot used exclusively for the roads (known technically as hypothecated taxation). It stopped being hypothecated with the introduction of the Finance Act 1936, after which the Vehicle Excise Duty (note: no longer called the Road Fund Licence) tax began being paid into general taxation.

 

I'll stop you there, because that doesn't work. The entire reason we introduced the tax was to pay for building a thing; burning the money you collected in tax doesn't pay for building the thing.

 

Trouble is, the builder needs to eat - which you're conveniently forgetting. If you offered him £100 from the current monetary supply to build the thing and a loaf of bread costs £10, he can build the thing then buy ten loaves of bread to feed himself and his nine hungry kids. If you print a fresh new £100 and give him that instead, he can only buy five loaves of bread and five of his kids go hungry. Thus, he's going to ask for £200 so he can feed his family. If you print £200 instead, he's going to ask for £400. If you print £400, he's going to ask for £800. Eventually, Zimbabwe.

Lets go back to the bread vouchers. In the case of the bread vouchers, I've clearly provided some kind of backing to the vouchers - in the case of real-world "get a free loaf of bread" vouchers, that would be paying for the bread in advance of the vouchers being used or promising to pay for the bread once the vouchers have been used. Let's use the former, 'cos it's easier: so, I've pre-paid for 20 loaves of bread and printed 20 "get a free loaf of bread" vouchers.

Now I print an extra 10 vouchers. Do you think the supermarket will honour those, considering that I've paid for 20 loaves of bread but the scheme now requires them to give out 30 loaves? 'Course not: they'll either reject the vouchers outright, demand 1.5 vouchers per loaf, or give you 66% of a loaf per voucher.

It's the same with printing your own money. Here's what happens to the value of the Pound Sterling when the government just talks about the possibility of printing more money.

Again, focusing on your original question: did you look at the ONS link? Did you see how the government not only spends every single penny it raises in taxation but several billion it borrows on top? I'm really not sure how much clearer it can be made: you can't print infinite money and have it still be worth anything (see Zimbabwe), and taxes do pay for things.