In Nation X, Y% of GDP has to be collected in order to fund the Government. Traditionally this meant that there was a large bureaucracy tasked with extracting the funds from its citizens. But the government of Nation X decides to do something different. Instead of collecting the taxes, the government just prints the money it needs to fund itself and lets the people keep all the money they've earned. Why wouldn't this work (or would it)?
To make it interesting I'll address what I suspect would be the most common response which is that this would be inflationary.
- Let's assume that every unit printed diminishes the purchasing power of every other unit in circulation proportionately. So if you the money supply is 100 units and you print 100 units, the purchasing power of a unit drops by 50%. I am a resident of Nation X. I make 100,000 units a year. For the sake of simplicity let's assume everyone gets taxed the same rate of 10% a year. If the taxes are collected, after the collection I am left with 90,000 units. Now let's assume that instead of collecting the taxes, the government simply prints the money. If GDP is 1 trillion and they print 100 billion the money supply has increased by 10 percent and, based on our prior assumption, the purchasing power of the currency has decreased by 10%. And what am I left with? 100,000 units that have lost 10% of their purchasing power leaving me with effectively: 90,000 units.
People would have one thing to focus on instead of two and they could effectively tackle it. Why would the enemy organize itself in a manner that can be defeated?
Governments tend to spend closer to 20% of gdp per year. If everyone knows the currency will devalue by that much, they will bet against the currency, causing it to collapse even faster.
People would also start hoarding consumer goods knowing they could sell them for a much higher value in the future.