<p>In order to answer this question, first let me quickly provide some relevant context:</p>
<ol>
<li><p>Most modern governments cannot print money directly. They can do it indirectly, most central banks (which are government institutions) can buy government bonds with newly created reserves. Some central banks such as ECB have even power to actually print money. This is analogous to financing government with printing new money. However, in developed countries central banks are nominally independent (like courts or police force) from central government. Hence this option is, in most countries, only available if technocrats at the central bank are willing to play ball with government.</p>
</li>
<li><p>Even in cases where executive power in the government does control money supply or  central bank is willing to play ball, monetizing government finances results in larger inflation. There are numerous empirical studies that show there is (sometimes endogenous) causal effect of money supply on inflation (e.g see <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9442.2005.00406.x?casa_token=eB3vl6f0WOMAAAAA:6uR2-Wov04WFV2K6ZBLO--Az7Z5KWLLPgiXfLMy-IrL3xrvZShOwiDC-gU_I4_me4ak5vI39UFEspwZA" rel="nofollow noreferrer">Grauwe &amp; Polan (2005)</a> or <a href="https://www.esr.ie/ESR_papers/vol35_3/Vol%2035_3Frain.pdf" rel="nofollow noreferrer">Frain (2004)</a>). So there is a trade-off here between monetizing spending and inflation.</p>
</li>
<li><p>Issuing more bonds is costly since the bonds have to be repaid with interest (unless sold to central bank where point 2 applies).</p>
</li>
</ol>
<p>Hence there is no free lunch. Government intertemporal budget constraint is given byL</p>
<p><span class="math-container">$$G = T + \theta - B$$</span></p>
<p>Where <span class="math-container">$G$</span> is government spending, <span class="math-container">$T$</span> tax net of interest payment, <span class="math-container">$\theta$</span> high powered money (i.e. monetizing gov finances) and <span class="math-container">$B$</span> government borrowing.</p>
<p>Now to circle back to your question:</p>
<blockquote>
<p>what are the pros and cons of increasing taxes or printing more money or selling bonds?</p>
</blockquote>
<p>The pros of using <span class="math-container">$B$</span> or <span class="math-container">$\theta$</span> is that government does not have to raise taxes now (which is unpopular), depresses <em>current</em> economic activity and leads to deadweight loss to economy which is just pure waste for society. The con of <span class="math-container">$B$</span> is that government will have to raise even more taxes in the future (to cover for spending and interest). Finally the con of <span class="math-container">$\theta$</span> is higher inflation.</p>

CC BY-SA 4.0
2023-10-21T14:52:54.050Z
Isn't inflation increasing equivalent to increasing taxes for everyone the same amount? It's like a company issuing new stocks. Everyone's dollar value decreases uniformly. So printing money would be equivalent to a tax
JobHunter69
CC BY-SA 4.0
2023-10-21T14:55:43.000Z
@JobHunter69 no, inflation can be viewed as a tax on money or other nominal assets but it does not “tax” everyone with the same amount since different people have different money holdings. What even more inflation does not increase prices uniformly so people with different consumer basket than the one used by CPI might experience different levels of this “tax”. Moreover, even though it can be thought of being equivalent to tax on nominal amount it’s definitionally not a tax so one should separate them.
1muflon1
CC BY-SA 4.0
2023-10-20T21:05:04.667Z
2023-10-20T21:21:09.143Z
2023-10-20T21:21:09.143Z
1muflon1
<p>Assuming a government needs to raise money, what are the pros and cons of increasing taxes or printing more money or selling bonds?</p>

CC BY-SA 4.0
2023-10-20T19:20:28.227Z
I have no background in macro economics or politics. I am just wondering about this
JobHunter69
CC BY-SA 4.0
2023-10-20T20:06:04.140Z
Governments don't print money. Central banks are in charge of money supply to prevent rapid inflation. Financing everything via taxation is similar to you financing your house /apartment entirely with your income. You either have to wait for a long time or get debt (bonds are a form of debt).
AKdemy
<government-debt><government-spending>
Why do governments issue bonds rather than just increasing tax or printing money?
JobHunter69
# Why do governments issue bonds rather than just increasing tax or printing money?

(Asked by: username_0 on 2023-10-20)

Assuming a government needs to raise money, what are the pros and cons of increasing taxes or printing more money or selling bonds?

**Tags:** government-debt, government-spending

> **Comments:**
> **username_0**: I have no background in macro economics or politics. I am just wondering about this  
> **username_1**: Governments don't print money. Central banks are in charge of money supply to prevent rapid inflation. Financing everything via taxation is similar to you financing your house /apartment entirely with your income. You either have to wait for a long time or get debt (bonds are a form of debt).  

---

## 1 answers

### Answer by username_2 on 2023-10-20. Score: 1 | Accepted answer

In order to answer this question, first let me quickly provide some relevant context:

1. Most modern governments cannot print money directly. They can do it indirectly, most central banks (which are government institutions) can buy government bonds with newly created reserves. Some central banks such as ECB have even power to actually print money. This is analogous to financing government with printing new money. However, in developed countries central banks are nominally independent (like courts or police force) from central government. Hence this option is, in most countries, only available if technocrats at the central bank are willing to play ball with government.
2. Even in cases where executive power in the government does control money supply or central bank is willing to play ball, monetizing government finances results in larger inflation. There are numerous empirical studies that show there is (sometimes endogenous) causal effect of money supply on inflation (e.g see [Grauwe & Polan (2005)](https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9442.2005.00406.x?casa_token=eB3vl6f0WOMAAAAA:6uR2-Wov04WFV2K6ZBLO--Az7Z5KWLLPgiXfLMy-IrL3xrvZShOwiDC-gU_I4_me4ak5vI39UFEspwZA) or [Frain (2004)](https://www.esr.ie/ESR_papers/vol35_3/Vol%2035_3Frain.pdf)). So there is a trade-off here between monetizing spending and inflation.
3. Issuing more bonds is costly since the bonds have to be repaid with interest (unless sold to central bank where point 2 applies).

Hence there is no free lunch. Government intertemporal budget constraint is given byL

$$G = T + \theta - B$$

Where $G$ is government spending, $T$ tax net of interest payment, $\theta$ high powered money (i.e. monetizing gov finances) and $B$ government borrowing.

Now to circle back to your question:

> what are the pros and cons of increasing taxes or printing more money or selling bonds?

The pros of using $B$ or $\theta$ is that government does not have to raise taxes now (which is unpopular), depresses *current* economic activity and leads to deadweight loss to economy which is just pure waste for society. The con of $B$ is that government will have to raise even more taxes in the future (to cover for spending and interest). Finally the con of $\theta$ is higher inflation.

> **Comments:**
> **username_0**: Isn't inflation increasing equivalent to increasing taxes for everyone the same amount? It's like a company issuing new stocks. Everyone's dollar value decreases uniformly. So printing money would be equivalent to a tax  
> **username_2**: @username_0 no, inflation can be viewed as a tax on money or other nominal assets but it does not “tax” everyone with the same amount since different people have different money holdings. What even more inflation does not increase prices uniformly so people with different consumer basket than the one used by CPI might experience different levels of this “tax”. Moreover, even though it can be thought of being equivalent to tax on nominal amount it’s definitionally not a tax so one should separate them.  

---

