24th October 2026
Why do we pay tax? Most people believe taxation exists to fund government spending. But what if that is not actually its primary purpose?
In this Understanding Economics video, I explain why tax plays a much more important role in our economy and society than simply raising money for the government.
As a heterodox economist who approaches economics through modern monetary theory, I argue that the UK government creates money when it spends. It does not need to collect taxes before making payments. This raises an important question: if tax does not fund government spending, why do we need it?
I explain the six reasons for taxation and why each matters.
First, tax gives money its value by creating demand for the currency that the government issues.
Second, taxation helps control inflation by withdrawing money from circulation.
Third, tax can reduce inequality by redistributing income and wealth, creating a fairer society and limiting the concentration of economic power.
Fourth, taxation can discourage harmful activities, including pollution and excessive alcohol consumption.
Fifth, tax reliefs and exemptions can encourage socially beneficial activities, including investment, education and charitable giving.
Finally, taxation helps manage the economy as a whole. Governments can adjust taxes to influence demand, support employment and respond to inflation or recession.
These six purposes show why taxation is one of the most powerful economic tools available to government.
Tax is not simply about collecting money. It is about shaping the society we live in, influencing economic behaviour and making our economy work for everyone.
That is the argument I developed in my book The Joy of Tax, and it remains central to how I believe we should understand economics.
You can watch the rest of this series here: • Understanding Economics
https://www.youtube.com/playlist?list=PLaSguNBvHIto
00:00 Why Do We Pay Tax?
00:55 Does Tax Really Fund Government Spending?
01:49 Reason One: Tax Gives Money Its Value
02:43 Reason Two: Tax Helps Control Inflation
03:38 How Tax Keeps Prices Stable
04:32 Reason Three: Tax Reduces Inequality
05:27 Reason Four: Tax Discourages Harmful Activities
06:21 Reason Five: Tax Encourages Useful Activities
07:15 Reason Six: Tax Helps Manage the Economy
08:09 Why Tax Is About More Than Raising Money
08:48 Tax Should Make Society Better