You might be surprised to learn that the Commonwealth Government does not need taxes to finance it’s spending. In fact, because dollars are created by the Commonwealth, it would be impossible for the Commonwealth to collect tax before it spends. Until the Commonwealth spends dollars in the first place, those dollars do not exist – and there is nothing with which to pay the tax.
Technically, the main purpose of tax is to ‘define’ the currency. That is a fancy way of saying that, because people need to pay taxes in Australian dollars ($As), they choose to conduct almost all of their business using dollars.
Consider my local hairdresser, Nick. Nick charges me $A30 plus GST for a haircut. I always pay him in $As. But here is the interesting thing: there is no law that says I have to pay him that way. If Nick and I agreed, I could pay him in Vietnamese Dong, Indian Rupees or bottles of beer. As long as I pay him the agreed amount, no law is broken.
So, why do I always use $As?
Every time Nick cuts my hair, he has to collect and pass on GST to the value of 10% of whatever I pay him. And there IS a law that says that he must use $As to pay that GST to the tax office. There is another law that says he must also use $As to pay income tax, including withholding tax on the wages he pays his staff. So, whenever he or one of his staff cuts someone’s hair, he incurs several tax charges which he must pay in $As.
If Nick let me pay him in Rupees, he would then have the hassle of having to convert some of those Rupees into enough $As to pay his taxes. For a single customer, that might be OK. But Nick cuts dozens of people’s hair each week. That’s a lot of conversions. It is much easier for Nick if he asks everyone to pay him in $As in the first place.
Repeat this across every trader or employer in Australia, and you can see how the presence of tax means we all use $As to do business. Using anything else is just a hassle. The only people who might use something else (hello, Bitcoin users) are people who ‘prefer not to pay’ tax.
Taxes force people to use $As for most of their spending. And, in doing so, they ‘define’ $As as our national currency.
This is actually really useful, because it means we have an easy and quick way to compare the value of everything that we might buy – from chocolate bars to harbourside mansions and everything in between. Having a single, stable currency actually makes modern Australian life possible.