Since government is fundamentally un-productive – in other words it does not produce anything of value or increase the value of anything such that it can depend upon its operation being profitably sustained by consumers who will voluntarily purchase its services based on their own sense of value of those services – in order to get the revenues necessary to operate the machinery of government, taxes are imposed.

However, taxes do not magically “create” revenue or added value.  The revenue  to government that is collected through taxes can only come from the marketplace by siphoning off added value. 

For example, consider a widget which costs $1.00 to make and distribute.  Participants in the allocation cycle (producer and distributors) find that the most that a consumer will be willing to pay for the widget is $2.00.   In other words, the consumer’s valuation of the widget is $1.00 more than what the costs of production.

This $1.00 of profit makes its way back through the allocation cycle.  The original investor and producer, excited about the $1.00 of profit he can earn from each widget produced and sold, immediately invests more in order to expand his production, finding ways to produce more widgets faster and more efficiently, so as to reduce his costs of production and thus increase his margin of profit.

In addition, other investors and potential producers, observing the proven profitability of widgets, also seek to invest in widget production capacity.  With a $1.00 margin of proven profit potential, some producers choose to forego alternative productive projects with only a 75-cent profit margin per unit.

As more and more widgets come into the market and more efficient (and less expensive) methods of production are developed, competition arises among various producers of widgets, who each begin to offer widgets for sale at a price lower than the other producers. 

Supplies of widgets increase, and prices fall.