Funding Freedom

Imagine a nation with no taxes, no inflation, low unemployment, and general prosperity. Imagine that the nation still managed to afford a modern military, an adequate police force, and an effective court system. Sounds impossible? Actually it is entirely possible and I will tell you exactly how it can be done.

I'm sure you are wondering where all the government's money is going to come from. There are two main sources. The first source is explained in an elegant proposal by Ayn Rand. The government will charge a fee for the enforcement of contracts, perhaps a small percentage of the value being ensured by the contract. This is not a tax because it is not imposed on anyone. People will still be free to create contracts without paying any fees, but the court system will not hear contract violation cases unless the fees were paid. This could generate an appreciable amount of money. For example, every time you use a credit card that is a contract to pay the credit card company at a later time.

One may be concerned that the government would choose to charge high fees for contracts, which would bring us back to a situation like that of today. But there is no absolute need for contracts because there are alternatives. Credit card companies might purchase private insurance against card-holder default rather than paying for enforced contracts. Or people may stop using credit cards altogether if they became too expensive. When enough people choose to stop paying for enforced contracts, the government's revenue will go down. This is because the government is competing in a free market for the service of ensuring people keep their word. The government has a monopoly on the use of force to ensure that people keep their word, but there are many other competing ways to accomplish the same thing, so the monopoly poses no threat. This means that the government will make the most money if it charges the market price for its service, which corresponds to how much people value that service.

It is hard to estimate exactly how much money the market would determine this service is worth. It may very well be the case that this is not enough to fund a modern government. One possibility is that the rest would be collected by voluntary donations. It works for tipping waiters, so why can't it work for a government? It probably could work, at least for a while. The problem is that it creates a collective action problem and its success is culturally dependent. Even if it works for several generations, there may come a period where it becomes fashionable to “stick it to the man” by not paying your share. It would be preferable to avoid potential disaster due to cultural fluctuations.

Fortunately there is a reliable second source of revenue for the government: the government can simply print more money. Usually when the government prints money people get upset because it causes an “inflation tax,” whereby the value of their money decreases. It is true that printing money will cause an inflationary pressure, but it does not have to be a tax. It is only a tax if it actually robs people of the value of their money. It is possible to print exactly enough money to create zero net inflation by counteracting the natural deflationary pressure caused by economic growth. Based on the conclusions in the article Understanding Inflation, this deflationary pressure can be approximated by the change in the inflation adjusted GDP, which has averaged around 3% over the past few decades. Also based on the same article, the inflationary pressure due to printing new money is proportional to the percentage change in the money supply. This means that increasing the money supply by roughly 3% per year would result in zero net inflation. That amounts to about $300 Billion a year in today's money.

This is a small fraction of the current federal tax revenue of $2,640 Billion. However, when supplemented by the contract enforcement fees and a reduction in government expenses, it is certainly possible. Having a fair and fixed system for generating government revenue will have incredible consequences. Probably the most important is that it respects men's rights to their own property, unlike forced taxation systems. Additionally it will boost the economy by leaving money in the hands of its owners who will know best how to spend it. This follows from a simple, but crucial concept noted by economist Milton Friedman: People spending their own money on themselves will be more careful than people spending someone else's money on someone else. In this case, being careful means finding more effective ways to use the money and hence improving overall efficiency.

Another benefit of a limited budget is that the military will be answerable to the people. The fixed revenues will be enough to maintain a modern military, but not enough to wage never-ending offensive wars. That would require the voluntary donation of the people, which means extensive war would only take place with a substantial backing by the public. Offensive wars would be much harder to initiate than in the current system that absurdly permits war by the whim of the chief executive. It is unlikely that there would be problems getting funding and recruits to support a truly defensive war-people will not stand by quietly as an evil aggressor kills their friends and family.

People will inevitably ask: What about the poor and disabled? It is commonly believed that the repeal of welfare legislation will leave many people in unbearable conditions. This is tenuous at best. First of all, a lot of welfare money is going to people who don't really need it. Senior citizens with a house and two cars are getting their hearing aids subsidized and college students living with their parents are collecting unemployment. We can altogether eliminate this form of welfare. Secondly, many people who do really need support can reasonably obtain it from family and friends. In the past it was more common for children to support their parents in their old age, but that custom has faded from our culture to be replaced by the custom of forced taxation. Third, those who truly need support and cannot obtain it from family and friends can appeal to private charities. Private organizations tend to operate more efficiently than government ones, and people will be more inclined to donate if they haven't already been forced to do so on tax day. Can you imagine seeing in your city the homeless fighting for their lives in front of a soup kitchen that is about to run out of food? If that happened it would be in the news and donations would flow into the soup kitchen because most people can't bear to see that. And if nobody had the money to donate, then taxing them wouldn't fix the problem either. The bottom line is if you think the poor deserve more money, then you are absolutely entitled to donate as much of your money as you see fit, but you don't have the right to steal money from others.

This system of government funding, and the libertarian principles behind it, represent the best hope for a free society that I can think of. It respects property rights, eliminates inflation, encourages economic progress, discourages offensive war, prevents overgrowth of government, and does so in a stable and reliable way. If you can think of any rational reason why this shouldn't be our primary political goal, please let me know.

Acknowledgements: Many of the ideas in this article come from Milton Friedman's "Free To Choose" and Ayn Rand's "The Virtue of Selfishness".