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The currency in my wallet has the words “federal reserve note” on it. To me that implies that what I call money is actually a liability of the government. So when I pay taxes, isn’t that act actually an extinguishment of that portion of the US debt? But I think the government deposits that payment into a bank account and classifies the receipt as cash. In effect is the government “grossing up” its balance sheet? Shouldn’t the receipt more properly be recorded as a reduction of the government’s liabilities rather than as an asset?

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The cash in your wallet is a liability of the Federal Reserve. If you pay your taxes with it, it goes into an account at the Fed owned by the Treasury (the so-called TGA account). So then you have an asset of the Treasury which is a liability of the Fed. Indeed you could mentally consolidate them to zero, since they are both parts of the Federal Government. In practice these are kept separate since the Treasury will need the tax collections to spend into the economy.

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  • $\begingroup$ Worth noting: If you mentally consolidate these entities, the chain of logic leads you to a set of ideas known as Modern Monetary Theory. $\endgroup$
    – user253751
    Apr 21, 2023 at 13:01

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