Taxation explained by Mattick Jnr

"Government-financed production does not produce profit. This is hard to grasp, not only because it violates a basic presupposition of the past seventy-five years of economic policy, but because a company that sells goods to the state, as when Boeing provides bombers for the Air Force, does receive a profit, and usually a good one, on its investment. But the money paid to Boeing represents a deduction from the profit produced by the economy as a whole. For the government has no money of its own; it pays with tax money or with borrowed funds that will eventually have to be repaid out of taxes.

Tax money appears to be paid by everyone. But despite the appearance that business is undertaxed, only business actually pays taxes. To understand this, think of the total income produced in a year as the money available for all social purposes. Some of this money must go to replace producers’ goods used up in the previous year; some must go as wages to buy consumer goods so that the labor force can reproduce itself; the rest appears as profit, interest, rent—and taxes. The money workers actually get is their “after tax” income; from this perspective, tax increases on employee income are just a way of lowering wages. The money deducted from paychecks, as well as from dividends, capital gains, and other forms of business income, could appear as business profits—which, let us remember, is basically the money generated by workers’ activity that they do not receive as wages—if it didn’t flow through paychecks (or other income) into government coffers. So when the government buys goods or services from a corporation (or simpler yet, hands agribusiness a subsidy or a bank a bailout) it is just giving a portion of its cut of profits back to business, collecting it from all and giving it to some. The money paid to Boeing has simply been redistributed by the state from other businesses to the aircraft producer.

This is why government spending cannot solve the problem of depression, though it can alleviate the suffering it causes, at least in the short run, by providing jobs or money to those out of work, or create infrastructure useful for future profitable production. The problem of depression—insufficient profits for business expansion—can only be solved by the depression itself (aided, perhaps, by a large-scale war), which increases profitability by lowering capital and labor costs, increasing productivity through technological advances, and concentrating capital ownership in larger, more efficient units...

...if the whole financial system fell away, and money ceased to be the power source turning the wheels of production, the whole productive apparatus of society — machines, raw materials, and above all working people — would still be there, along with the human needs it can be made to serve. The fewer years of suffering and confusion it takes for people to figure this out, the better."

http://www.brooklynrail.org/2009/04/express/what-is-to-be-done