Musings on Taxation

I posted a version of this post in answer to a question about the "Fair Tax" on Dr. Hurd's blog. The questioner asked whether voluntary taxation is feasible. If not, is the Fair Tax a good alternative?

A cultural sea-change must occur first that will make limited government politically feasible. Then, voluntary financing of government could emerge. It is a worthy topic to consider now, but it is a backburner topic given that it will be many decades before it could even be attempted.

Regarding the idea of a Fair Tax, it is a contradiction in terms. No tax is fair because it involves the forcible taking of one person's property to give to another. Moreover, a more efficient or "fair" form of taxation (if it were possible) will not make government smaller. Quite the opposite is likely. It will be viewed simply as another source of revenue by government officials. Currently, there is no federal consumption or sales tax. Impose one as the Fair Tax would do, and the other taxes will not go away. Government will simply have obtained a new method of extracting money from us, with the result that they will find it easier to spend more of our money.

Government will get bigger, not smaller. I think it is important to resist any new mechanism of taxation. If our current system of income taxation is inefficient, great. That inefficiency in collecting taxes will limit the size of government. I would rather government were truly limited on a principled basis. Until that is possible, even a crude check on government from an inefficient form of taxation is desirable.

Getting back to the idea of voluntary financing of government (I hesitate to use the word "taxation" since it implies coercion), there are two important points to remember:

(1) A small government that focuses on protecting our rights -- i.e., the police, the courts, the jails and the military, and nothing else -- would be very small indeed. Even in today's messed up world where our military and prison systems are unnecessarily large, all of these functions probably consume under 5% of GDP. If we had no irrational laws such as the drug laws that account for more than half of our prison population, and if we had an assertive defense that vanquished our enemies instead of appeased them in endless, expensive wars, these expenditures in a laissez faire society would be much less. I suspect that all of this apparatus of government would consume less than 2% of GDP. This is a very tractable amount to be voluntarily financed by Americans.

(2) Without coercive taxation, destructive regulations, and the theft of our incomes for welfare payments, Americans in the future will be far, far wealthier than they are today. Just as today's technological achievements, such as antibiotics, the internet and jet travel, would be barely believable science fiction to an American of the 19th century, America of the laissez faire capitalist future would be even more highly unimaginable science fiction to Americans today. (Note that all of the achievements I mentioned happened despite a high level of government intervention in the economy. Imagine the unleashing of human ingenuity that would occur if government stayed out of the economy.)

Financing the essential functions of government for such wealthy people of the future would be an afterthought that Americans would voluntarily and easily do, without any sacrifice to themselves.

Finally, I will add a third point. Voluntary financing of government does not necessarily or exclusively mean donations of money to government. Most, if not all, of the expenses of government could be financed through the payment of fees for certain services where that would be practical. In particular, I could imagine a fee paid if parties to a contract want government to stand behind it with their enforcement powers. For example, if you sign a contract to buy a house and you want access to the courts for enforcement, you pay a 2% fee on the transaction. This is a voluntary payment for an essential government service. This principle can be extended to cover many other activities and functions of government.

Also, in a free, entrepreneurial society, imagine the ingenuity that could be applied to solving the problem of financing the (small) government. One idea I particularly like is corporate or individual sponsorship of pieces of government. Sponsor a jail, and you get to name it. Better yet, sponsor a battleship or a missile and you get to put your name on it. Heck, if I knew our missiles would be used to defeat the Muslim terrorists, I would love to have my name on that missile (assuming I could afford it!). I would be a good Dr. Strangelove. I would not be on the missile, but my name would be, as it arced across the sky on its way to Tehran or a terrorist training camp...

Okay, enough dreaming for now, but today's dreams are the beginnings of tomorrow's reality.