Government Without Taxation

This was originally posted as a series on Live Oaks in May 2009. Comments have not been migrated.

Death and taxes, we are often told, are two inevitable facts of life. However, a crucial distinction exists between the two—death is a metaphysical fact, while taxes are a man-made fact. As such, death is in fact inevitable, but taxes are not. The metaphysical is absolute and immutable; the man-made is subject to the choices and actions of man.

Taxes—by which I mean the forced payment of monies to the government—are a violation of property rights. Taxes compel individuals to cede their property without their consent. Each individual has a moral right to act according to his own judgment, so long as he respects the mutual rights of others. Taxation, by using force, deprives individuals of their rights. In a free society, all interactions between individuals require the voluntary consent of all involved. This includes support for the government.

A common objection to government without taxation is that citizens will not voluntarily support legitimate government functions. This implies that government provides no value to the citizenry. Yet, citizens voluntarily pay for bread, automobiles, internet service, and countless other products and services. Individuals do so because they value these items.

The same is true of a proper government. Limited to its proper functions—the protection of individual rights—government would provide three services: the police, the courts, and the military. The police provide protection against criminals; the courts resolve disputes between individuals; the military provides protection against foreign threats. The protection of individual rights is a legitimate value, and ample evidence exists that individuals will voluntarily support government.

The costs associated with these functions are significantly less than that spent by the government on improper functions, such as welfare, health care, the regulation of business, and education. A government limited to the protection of individual rights would spend a fraction of the money that it spends today.

In this series of posts, I will indicate the approximate level of spending a proper government would require, as well as provide evidence that individuals will indeed provide voluntary support for government.

America is not yet ready for government without taxation. The ideas necessary to defend and implement such limited government are not dominant in our culture. Any attempt to implement such a policy would fall on deaf ears and be rejected. The battle for government without taxation is not a political battle, but a moral battle, and more fundamentally, an epistemological battle. In other words, without the proper moral and epistemological foundation, individual liberty cannot be achieved or sustained.

A culture in which reason and self-interest dominate would be significantly different from contemporary America. It would be a culture in which virtually everything would be different, from the most mundane to the most important. And because freedom unlocks creativity and opportunities, it is impossible to project precisely what such a culture would look like. We can however, make such projections in a more general sense.

Freed from the arbitrary constraints of government controls and regulations, the economy would invariably grow consistently. Historically, the contrast between command economies such as the Soviet Union and America provides ample evidence of this fact. Even in America such contrasts can be witnessed—cities such as Houston have stronger economies than cities with more regulations and controls.

In a free society, all property would be privately owned. This would eliminate issues such as the “tragedy of the commons”, the curriculum in our schools, and the continual political battles over “public property”. The recognition and protection of property rights would eliminate issues such as debates over land use, vehicle mileage standards, and the regulation of businesses.

In a free society there would be no restrictions on hiring practices—businesses and employees would be free to reach whatever agreements are mutually acceptable. Individuals would be free to offer their services to whomever chose to use them. There would be no impediments to employment.

Freed of the constraints of government, individuals would be able to innovate without restriction. New products and services would abound, as businesses sought to create new customers and retain old ones. The standard of living would consistently rise, while the cost of living would consistently fall.

The shrinking size of government would have commensurate economic benefits. The trillions of dollars consumed by government would become available for investment, further stimulating economic growth. The insidious confiscation of property through inflation would be impossible. The capricious and ever changing mandates of government would no longer impede long-term planning.

Achieving a free society is not an idle fantasy. It is not an issue that is “good in theory” but impractical—a theory that cannot be practiced is not a good theory. It is not an ideal that is impossible because of man’s nature—it is an ideal because of man’s nature. It is not an idea that worked two hundred years ago but won’t work in modern times—principles are not transient.

I hasten to add that the elimination of taxes is a goal for the very distant future. These posts do not mean to imply that we should be advocating the elimination of taxes today. This would be an impractical goal, and we would simply be dismissed as crackpots. However, there is value in understanding how government would be supported without coercive taxation. It is important for advocates of liberty to understand that voluntary support for government is not only moral, but also practical.

Part 2

For the first one hundred years America remained essentially true to the principles of the Founding Fathers. Government remained largely confined to its legitimate functions (though there were certainly many exceptions). In the late nineteenth century the Federal government began to abandon the founding principles and expand its reach into an ever growing portion of the economy and the lives of citizens.

The growth of government has generally been a gradual process, with occasional bursts. The most significant growth began with the New Deal in the 1930’s. This growth can be measured multiple ways—government expenditures, the volume of laws and regulations, and the number of individuals employed by government. By each measure, government has grown by a significant amount.

The growth in government is not confined to the federal level. Indeed, since World War II state and local government has grown at a more rapid rate than the federal government.

Even in a free society, some growth in government—in terms of expenditures and employees—is to be expected. A growing economy and an increasing population would increase the need for legitimate government services. However, the size of government today far exceeds what would be projected based on numbers from the nation’s first one hundred and forty years.

Government Expenditures

During the first sixty years of America’s history, federal outlays totaled $1.09 billion. This compares to an estimated $2.724 trillion (or $7.463 billion per day) for 2008. The consequences of inflation make comparing the actual outlays rather meaningless. Using constant dollars (I will use 2000) provides for a more meaningful comparison by eliminating the effects of inflation.

In constant 2000 dollars, federal outlays were $24.222 billion during the nation’s first sixty years. By 2007 outlays had increased to an estimated $2.223 billion, or $6.117 billion per day.

The ratio of government spending to gross domestic product (GDP) provides a measure that includes economic expansion. That is, this ratio allows us to measure the size of government in comparison to the overall economic activity for a given period. This provides us with an objective measure of the size of government in terms of spending.

From 1789 to 1849, federal expenditures averaged 2.5% of the GDP. During the latter half of the nineteenth century, this figure averaged 3.8%, primarily due to the Civil War. Until Roosevelt’s New Deal, federal spending remained below 10% of the GDP. With the New Deal government spending, as a ratio of GDP, began to rise. Federal spending continued to rise until the 1990’s, when it subsided slightly. In 2007, federal spending was approximately 18.4% of the GDP. As a percentage of GDP the federal government’s expenditures have grown more than sevenfold since America’s founding.

Government Employees
As government has grown and assumed greater control over the economy and the lives of individuals, an increasing number of bureaucrats and other government agents are needed for enforcement purposes.

In 1962 2.84 million people were employed in the military. That number had decreased to 1.478 million in 2003, which accounts for the decrease in the number employed by the federal government. Subtracting those in the military, employment by the federal government increased from 2.42 million in 1962 to 2.732 million in 2003, an increase of 12.8%.

While the number of citizens per federal employee rose from 36 to 69.1, the corresponding number for state and local employees decreased from 1 employee per 27.6 citizens to 15.5. Both spending and the number employed by state and local governments have increased substantially since 1962. By both measures, the size of state and local government has nearly doubled during a forty-one year period.

The primary cause for the expansion government employees is the growing areas of the economy and our lives that are regulated, and thus require enforcement on the federal, state, and local levels. In other words, as governments control over our lives and the economy has expanded, more individuals are required to issue permits, monitor activities, check forms, and in general, insure that the citizenry is staying in line and meeting the mandates of government.

Functions and Expenditures

The increase in federal spending is the result of the government expanding its powers beyond its legitimate functions. This spending takes two primary forms—payments to state and local governments, and payments to individuals. Payments to state and local governments are generally for infrastructure, such as roads and bridges.

From 1940 to 2007 the percentage of GDP sent to state and local governments has increased by more than three times. Payments to individual have increased even more dramatically, and now account for more than 60% of the federal government’s outlays.

Federal outlays to individuals are primarily for entitlement programs, such as Medicare and other health programs, Social Security, and income security. Those functions alone accounted for an estimated $1.585 trillion in 2007.

The Volume of Regulations

In 1970 the Code of Federal Regulations contained 54,834 pages. In 1998 it contained 134,723 pages. Between 1996 and 1999 15,286 new regulations were enacted. There is absolutely no shortage of federal regulations, despite the proclamations of pundits and politicians to the contrary.

In addition to restricting the freedom of individuals through proscription and prescription, these regulations enact a staggering cost on individuals and the economy. The estimated cost of these regulations is more than $1 trillion per year. State and local regulations add another $340 billion in costs. In total, the cost of meeting these various regulations costs each person more than $4,600 per year, and the total grows every year as more regulations are enacted.

The “Correct” Size of Government
While it is difficult to say with absolute precision what the “correct” size of government should be, it is quite easy to say that it should be substantially smaller. We can however, use historical numbers to give some indication of what federal government expenditures “should” be.

If we use the percent of GDP spent by the federal government in 1910, federal spending in 2007 would be approximately $325 billion, or a little more than 15% of the government’s actual spending for the year.

It is within this context that we can discuss government without taxation–the money required to operate a proper government is far less than that spent today.

Part 3

The Police

According to the Bureau of Labor Statistics, there were approximately 1,022,000 security guards working in the United States in 2003. This is about the same as the number of police. Americans spend approximately $60 billion per year on security alarms, security guards, and other security services. Clearly, Americans are voluntarily willing to spend money in order to protect their property and persons. And this money is spent in addition to the taxes paid for the provision of police. These are private, voluntary payments for the express purpose of protecting the rights of individuals and businesses.

In addition to these direct expenditures for security, many individuals and businesses also contribute money to support police departments. For example, the 100 Club in Houston raises money to support police officers and to provide financial assistance to the families of officers killed in the line of duty. Since 1953 the 100 Club of Houston has spent more than $28 million on special equipment, financial aid, and other disbursements to police officers and their families. Other 100 Clubs in Arizona, Buffalo, San Antonio, Minnesota, California, Maryland, and more than one-hundred communities across the nation have raised millions of dollars to support police officers, firefighters, and their families during times of tragedy.

Private, non-profit foundations in exist in more than two dozen American cities for the purpose of raising funds to support local police departments. The Houston Police Foundation (HPF) was founded in 2005 and raised more than $1 million in its first year. It uses donations by individuals and businesses to “fund special programs, officer safety, training, equipment, and new technology — none of which would be feasible under the City budget.” The New York City Police Foundation was established in 1971 to “to strengthen the services of the New York City Police Department and to improve public safety in New York City.” The organization has invested more than $81 million in projects for the police department. The Los Angeles Police Foundation has awarded ore than $3 million in grants to that city’s police department.

In Huntington, West Virginia individuals and businesses donated almost $200,000 to the police department for the purchase of motorcycles, police dogs, and other equipment. In Milwaukee, private donations in one neighborhood raised $176,000 to help the police pay for overtime and street cameras, which resulted in a 4% decline in crime in that neighborhood.[4]

These examples, and many like them, demonstrate that individuals do voluntarily pay for police protection. These contributions by citizens allow the police to purchase equipment, pay for overtime, and provide greater protection to a community.

In a free society, in which crimes are properly defined as acts of force, the laws enforced by the police would be substantially reduced. Voluntary actions such as prostitution and drugs would be legal, and the police would not be spending precious resources monitoring the voluntary actions of adults. This would significantly reduce the money and time required to enforce the law.

The Military

Just as it is a value to be protected from domestic criminals, it is a value to be protected from foreign threats. If a street thug is a threat to lives and property of individuals, terrorists and other enemies of America are equal threats. And just as Americans voluntarily pay to support the police, they also voluntarily pay to support the military.

Perhaps the best known organization providing support for American troops is the United Services Organization (USO). Founded during World War II, the USO provides “care packages”, phone cards, and entertainment for American troops stationed abroad. Charities such as the Fisher House Foundation, the Intrepid Fallen Heroes Fund, and National Military Family Association raise millions of dollars to provide equipment, financial aid, education, and other assistance to soldiers and their families. Many businesses have donated equipment to troops stationed overseas. For example, efi Sports Medicine, a San Diego-based exercise equipment manufacturer, donated more than 150 of its Total Gym machines to troops stationed in Iraq and Afghanistan.

A rational foreign policy would significantly reduce the military budget. While military strategy might dictate the need for American soldiers to be stationed in other nations, our military would not shoulder the entire burden of defending other nations. Nor would it be used for “peace keeping”, food distribution, or nation building. It would be used to kill and destroy enemies of America.

Part 4

The purpose of the courts is to resolve disputes between individuals, whether criminal or civil in nature. In criminal cases, the courts determine the guilt or innocence of an accused criminal and the punishment of the guilty. In civil cases, the courts arbitrate a resolution in a dispute—for example, a breach of contract.

In any semi-free country criminals are a small percentage of the population. In a free society, the number of criminal cases would be substantially less than today. Voluntary actions—such as prostitution and drugs—would not be crimes, and the absence of these cases would greatly reduce the case load on the criminal courts.

While their conviction and punishment of actual criminals is important, resolving contractual disputes is a much larger and significant role. Long-term interactions between individuals depend upon the cooperation of those involved, and such relationships are typically codified in a contract—a written agreement identifying the responsibilities of each party. A unilateral breach of that agreement can have significant consequences on the other parties. Those consequences can be devastating to the plans and actions of those parties.

A breach of contract is a form of force—it is the intentional withholding of property or services. For example, if a contract calls for the delivery of certain materials by a specific date, the failure to do so deprives the purchaser of property that is rightfully his. His plans—the actions dependent upon those materials—cannot be taken.

Resolving such disputes—identifying the victim and the appropriate penalties—is the primary function of the courts. This is a legitimate and important value to individuals. Without the courts, each individual would be required to enforce the contract, and he would likely meet armed resistance. The result would be gang warfare.

The benefits of resolving disputes should be obvious. It allows the parties to recover damages. If a long-term relationship is involved, such as between labor and management, it allows the parties to clarify their respective responsibilities. Individuals recognize the value provided by dispute resolution, and they willingly pay for that service.

In recent decades, alternative dispute resolution (ADR) services, such as mediation and arbitration have gained popularity as efficient and inexpensive methods for resolving disputes. Many contracts now mandate ADR as the means for resolving any disputes arising from the contract.

Arbitration allows all parties to present their case in an informal setting. The arbiter—often an expert in the particular issues in question—issues a binding ruling after considering the facts of the case. Mediation involves a third-party who tries to find an acceptable compromise between the parties in dispute. Upon acceptance by all parties, that agreement becomes binding. Many courts are now requiring mediation prior to trial for cases involving lesser dollar amounts.

ADR can be utilized in many different ways. The Better Business Bureau offers ADR services to its members and consumers. The parties to a dispute can select a mutually acceptable third-party to arbitrate or mediate, such as an attorney, a retired judge, or an industry expert. The parties can agree to use an ADR service, such as those offered by the American Arbitration Association or other private companies.

While ADR is usually performed outside the auspices of the courts, the rulings of arbiters and the agreements reached through mediation are generally enforceable in court. Because of its informal nature, ADR simply offers a faster, less expensive means for resolving disputes versus litigation.

Judicial Arbitration and Mediation Services (JAMS), and the American Arbitration Association provide a high volume of services to primarily corporate clients. For example, in 1992 JAMS generated revenues of 25 million dollars and handled roughly 12,500 cases. In the same year the American Arbitration Association handled 60,000 cases.

As with the police and military, individuals recognize the need for the courts, and they will voluntarily pay for those services.

Part 5

Lotteries

Lotteries have long been used by governments to raise revenues. Forty-four states and the District of Columbia have lotteries. According to the North American Association of State and Provincial Lotteries, state lotteries generated revenues of nearly $18 billion (after expenses) in 2008. Lotteries are played voluntarily, and thus represent a non-coercive method for government to raise money.

Opponents of state-run lotteries argue that they are a form of regressive taxation—that the poor are more likely to play lotteries. Whether this is true or not is irrelevant—individuals should be free to act on their own judgment, even when others think that their judgment is poor. Another common argument against state-run lotteries is that they promote gambling. Again, the truth of this claim is irrelevant, as individuals should be free to act on their own judgment.

In a free society, private lotteries would be permitted (they are generally prohibited now), and consequently, governments would have competition for lottery money.

Selling Assets

In a free society, virtually all property would be privately owned. Government would not own parks, or forests, or museums, or large tracts of undeveloped land. Government would only own the few parcels needed to house the police, the courts, and the military.

The federal government is the largest property owner in the nation. Indeed, in many western states and Alaska the federal government owns more than 40% of the land. Selling this land would raise hundreds of billions of dollars, if not trillions of dollars.

Prison Factories
Pennsylvania Correctional Industries (PCI) is a program that employs inmates at fifteen state prisons while they serve their sentences. Inmates produce garments, soaps and degreasers, and forms for state government. Inmates received credits for their work, which can be spent at the prison commissary or applied towards fines and restitution. Director Tony Miller told an interviewer that “some inmates, after serving their time and being released, have written letters of thanks for the skills they learned through their PCI jobs that helped them get jobs when they left prison.”  For the fiscal year that ended in June 2007, PCI made $1 million in profit on $34 million in gross sales. The California Prison Industry Authority generates annual sales of more than $150 million from silk-screened clothing, fine-ground optics, and paper products.

Supreme Court Justice Warren Burger was a vocal proponent of “factories with fences”, as he called them. His efforts in the 1980’s and 1990’s led to the expansion of Federal Prison Industries, which produces furniture, textiles, electronics, and other items.

Critics of prison factories argue that they have an unfair competitive advantage over private sector industries. While inmates are paid substantially less than private sector workers, prison factories are less efficient and must contend with significantly higher security costs. As Robert Q. Millan, a former member of FPI’s Board of Directors, once said:

As a former banker, I am well aware of the operations of a variety of businesses. In private sector business, it is of primary importance to eliminate all inefficiencies possible in order to maximize profit. I could not recommend to my former bank, or any bank, that it make loans to a business that was controlled by the conflicting mandates and had the inherent inefficiencies that handicap FPI.

In 1995 FPI had gross sales of $459 million. Fifty-percent of the money earned by inmates was used to pay fines, restitution, and child support. Without a prison job, these payments would not be possible. During its more than sixty year history, FPI has been self-sustaining, and indeed, it has turned over more than $80 million to the federal treasury.

While the primary purpose of prison is punishment of criminals, prison factories provide opportunities for inmates to learn job skills, which does reduce recidivism. Inmates should be provided with the bare necessities, and any amenities they wish to enjoy while in prison should be purchased with money earned in prison. Those who work should enjoy a better standard of living, just as it is outside of prison. Prison factories also provide inmates with the means to make restitution to their victims.

Part 6

The Freeloader Issue

A common objection to voluntary support for government is that some individuals will not pay. Such individuals will still receive the benefits of the police, the courts, and the military, but will contribute nothing financially. This is the so-called “freeloader issue” or “free rider problem”.

The fact that some individuals will not voluntarily support government is hardly an argument against government without taxation. All it demonstrates is that some individuals will be freeloaders.

The number of individuals who will freeload is irrelevant. We have already seen that millions of Americans voluntarily pay to protect their rights and their property. They will continue to do so whether others contribute or not. In other words, individuals pay to protect their rights because it is in their self-interest, and this fact does not change simply because others do not recognize that their self-interest includes supporting legitimate government functions. Those with the most to lose—e.g., businesses and the wealthy—will not subject themselves to anarchy merely because a neighbor refuses to contribute to the police department.

In addition, it is in the self-interest of all citizens to protect the rights of all citizens. A threat to the rights of one individual is a threat to the rights of all.

But the fundamental answer to the freeloader issue lies in morality. Morally, each individual has a right to act according to his own judgment, so long as he respects the mutual rights of others. This precludes the use of force, even when that compulsion would be used in an individual’s “self-interest”. Each individual has a moral right to choose for himself what constitutes his self-interest, and others have no right to compel him to act otherwise. To compel an individual to act in his “self-interest” is a contradiction.

It is important to remember that the culture would be much, much different if the idea of government without taxation could be a reality. Rational self-interest would be more widely accepted and individuals would understand that their self-interest includes voluntary support for legitimate government functions.

Conclusion

As we have seen, the legitimate functions of government provide necessary and substantive values to individuals—that is, the protection of individual rights. And we have also seen that individuals will voluntarily pay for these values, just as they voluntarily pay for bread, gasoline, and internet service. Even in a culture in which taxation and regulations rob citizens of a significant percentage of their income, individuals and businesses continue to voluntarily pay to protect their rights.

The time is too soon to actively advocate government without taxation as a political goal. However, it is not too soon to demonstrate that, not only is government without taxation moral, it is also practical.

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