IN our previous articles, the Scottish Banking & Finance Group has discussed why a Scottish Government deficit should not be seen as a problem but as a good thing for the economy, and why the exchange rate of our currency is not a matter of concern if our economy is providing all the goods, services and infrastructure we need to live well and in harmony with nature.

We have explained what a “fiat currency” is, and that money is created whenever the government spends in order to provide what we need. The money is created by the government instructing its central bank to make the payments for whatever goods and services it has procured.

But if a government can spend by drawing on the central bank why do citizens need to pay tax? This is an important question because governments with their own currencies and a central bank spend first then tax later. People pay tax with varying degrees of reluctance but the one thing that makes paying tax acceptable to them is the sense of duty that comes with it – the belief we are making a contribution for the good of our society and to the provision of public services.

Payment of taxes is an important part of being a good citizen. But tax doesn’t pay for government spending – governments with their own currency spend first then recover some of the money through taxation.

READ MORE: Independence will let Scotland provide for the true needs of its people

Taxation is an obligation on the part of citizens to the government in return for it having provided the goods, services and infrastructure we all need to fulfil our own potential and to live well.

If the government is democratically accountable to the people and has provided what citizens need in the form of health, education, food, housing, law, justice, security, infrastructure and so on, by paying tax, citizens are redeeming a debt they owe to the government and acknowledging its legitimacy to demand the payment of tax.

So, how much and what form of taxation is appropriate?

The overall level of taxation required is determined by whether the economy is at full capacity or not – taxation removes money from circulation and in the process is an important element in the management of inflation. When the economy is near full capacity with full employment and all available resources are employed, more government spending will just cause inflation so fiscal deficits then need to be reduced, and a fiscal surplus may be necessary (a fiscal surplus occurs when tax revenues exceed government spending).

What should be taxed?

This decision can only be derived from our social values and what kind of society we want to create. So taxation of excessive income or wealth may be appropriate, tax on unused or misused assets (such as land), taxation of harmful activities and products, such as carbon intensive activities/products and pollution. In future the Scottish Government will need to consider taxing “junk” products to help promote a circular economy. Junk products are those which use limited resources inefficiently, increase waste, cause harm and promote a “throwaway” culture.

Taxation can be used to help shape the sort of society we want to create because it is not needed to finance government spending.

READ MORE: These are the tax reforms that could transform an independent Scotland

The obligation to pay tax should also recognise the ability to pay it – this means that income taxes should be designed to work together with a national policy on minimum wages and minimum income, taking into account wages, welfare benefits and pensions. So, for example, if a national minimum income was set at £25,000 per year, then no income tax should be paid on any income below that level. Deciding what a minimum income should be is a matter for public debate and democratic choice.

If the government has been effective in providing what all citizens need in order to fulfil their own potential, to be self-reliant and to earn a decent standard of living, then citizens will have the means to discharge their tax obligations. The aim of government policy should be to ensure that every citizen has the means to live well and to fulfil their obligations to one another and to the Government.

To summarise; taxation is a means for a government to manage the economy, to shape society in accordance with the collective values of citizens, and an obligation which citizens owe.

A detailed paper written by Professor Richard Murphy has now been published by the Scottish Independence Convention about a post-independence tax system for Scotland. “SIC Transition Paper No 6 – Tax” can be downloaded at