Change your perspective and you may better understand the income tax.
A common belief is that the Federal government uses the income tax to pay for government spending. Look at the assumptions we make when we make that statement. It might be wrong! Let's start with the absolutes.
1. The Federal government creates the currency (dollars). For everything the government pays, it (only and always) uses dollars.
2. The government demands that taxes be paid in dollars. The only way to pay your tax burden is to pay it in the sovereign currency (dollars).
Because the government creates the currency, there is nothing that can be denominated in dollars that the US government cannot buy. If the above two absolutes are true, then the government merely needs to issue more money to do anything it wants, at any time, for any reason, without limit.
There is no comparison between the US government and an American family; an American family must use someone else's currency! The US simply creates more of its own money. The analogy we so often like to use is completely wrong!
Federal Reserve Chairman Greenspan once said, "The US Government will never default on its debt." I remember sitting in a movie recently where Greenspan's confident statement was a punchline and the audience laughed out loud. Because of the recent fiasco, it looked like we actually could default.
Truth be told, the most likely (and perhaps only) way that we could default is if we go back to a gold standard. If the US adopts someone else's currency, gold or otherwise, over which the US has no ability to tax, then the US government could default. If the US government could default, then the riskiness of (all) our investments would increase dramatically.
When President Wilson created the income tax, the United States was NOT on a gold standard, as you might expect. In fact, the gold standard was a brief experiment in the long history of a fiat currency--not linked to anything but the good faith of the US government.
The Gold Standard was an experiment, fiat currencies like the US dollar are the norm, and the strength of the US dollar depends upon the ability of Uncle Sam to tax. When we pay taxes, we are really not paying for Uncle Sam's debts and/or spending at all. Instead, we are participating in the cycle that perpetuates the stability of our economy. The government spends money, increasing the amount of money in the economy. The government issues taxes and pulls money out of the economy.
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