Tax revenue provides a national government with non-inflationary spending capacity.
Answer: True
The answer is True.
You might consider this a trick in the sense that taxation is not required by a currency-issuing government to "fund" its spending. That is true. But that observation just raises the question as to what the purpose of taxation is in a fiat monetary system. Then you have to think a bit more deeply than the obvious ... and a bit more deeply again.
In a fiat monetary system the currency has no intrinsic worth. Further the government has no intrinsic financial constraint. Once we realise that government spending is not revenue-constrained then we have to analyse the functions of taxation in a different light. The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.
In this way, it is clear that the imposition of taxes creates unemployment (people seeking paid work) in the non-government sector and allows a transfer of real goods and services from the non-government to the government sector, which in turn, facilitates the government's economic and social program.
The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.
It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).
Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn't desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.
The purpose of State Money is for the government to move real resources from private to public domain. It does so by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
So the point is that for a fiat currency to be used in an economy, people in the non-government sector have to have a motive to get hold of it. The imposition of a tax obligation that can only be extinguished in the fiat unit of account provides that motive.
However, the government could impose any obligation, which could only be met by people in the non-government sector by acquiring the fiat currency and returning it to the government. This is the reason
Imposing a fine for people every time they walked down the street would be one alternative to taxation to accomplish a "demand" for the particular fiat currency. Once people have to get hold of that currency they will willingly exchange goods and services in return for public spending.
The reference to non-inflationary is also important. The government could spend whenever it wanted to without the tax revenue creating the real resource space. But then, if the economy was already at full capacity such increases in nominal aggregate demand would be inflationary.
Clearly, when there is mass unemployment, taxes are already "too high" relative to the current spending. But that doesn't negate the truth of the answer.
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