If the government can create money, why do we pay taxes?

Taxes serve several important purposes according to MMT, but funding federal spending is not one of them. First, taxes create demand for the currency - because you must pay taxes in dollars, you need to acquire dollars, which gives the currency its value. This is sometimes called the 'tax-driven money' concept.

Second, taxes help manage inflation by removing money from circulation. When the economy is running hot and there's too much money chasing too few goods, taxes can cool things down. Third, taxes can be used to reduce inequality by redistributing wealth from those who have more to public purposes. Fourth, taxes can discourage certain behaviors, like carbon taxes to reduce pollution.

The key insight is that the federal government, as the issuer of the currency, doesn't need to collect taxes before it can spend. It spends first by crediting bank accounts, then collects taxes afterward. This is the opposite of how households and businesses work, which is why the household budget analogy is so misleading.