Here’s a letter to a long-time reader of my blog:
Thanks for your e-mail.
About the video  and chapter  that I recently posted (from my and Randy Holcombe’s The Essential James Buchanan ) you ask: “Can’t the government just keep paying off debts that come due by issuing new debt? Why does it ever have to use taxation to get funds?”
A government that has the confidence of borrowers can pay off some of its outstanding debt with newly borrowed funds, but it can’t do so forever. Any confidence that creditors have in a government to repay its loans is rooted in creditors’ belief that that government has access to sources of revenue other than borrowed funds. And any government’s chief source of revenue is taxation – either overtly (as through income taxation) or covertly (as through inflation).
A government that swore off taxation would tell the world that it plans to operate as a private entity – that is, no longer as a government. If this entity then announced that it plans to continue to supply citizens with goods and services paid for exclusively with borrowed funds – that is, never by charging citizens for these goods and services – this ‘government’ would immediately find itself unable to borrow as much as a cent. If you doubt this conclusion, ask what would happen if, say, McDonald’s swore off charging its customers for food. McDonald’s lines of credit would immediately collapse.
To get rid of taxation requires getting rid of the state. This letter isn’t the place to debate the practicality of a society operating successfully without the state. What is not debatable, however, is the fact that as long as the state exists, taxation will exist. The belief that the state can be funded exclusively with funds loaned to it voluntarily by creditors is equivalent to believing in the possibility of a perpetual-motion machine. Regardless of how lovely such a thing would be, it simply ain’t happening.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030