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Financing a Free State

by John Martin • Oct 2, 2003

Because all forms of taxation are forms of theft, libertarians must be very careful to construct any financing proposals so that they can never provide too much revenue or abuse any people. Although no taxes are ideal, some are much more abusive and prone to excesses than others. To make a wise decision on what is preferred, one must first analyze all forms of taxation and revenue sources and then choose one or two that are the least oppressive. Of course, we must also identify those that are the most oppressive so we can put them on a fast track toward early repeal.

Let's begin with the pros and cons of current forms of government revenue sources – beginning with the worst and working toward the best:

• LICENSURE: Licensure is basically government "permission" to earn a living or perform some other routine activity upon the payment of a "fee" or other remuneration, and also in some cases, the following of certain regulations and meeting certain "qualifications." Although it consumes only relatively small amounts of people's wealth directly, it is highly invasive and limits the amount of free enterprise that can enter the economy.

  In a free libertarian society, one of the most sacrosanct rights is earning a living and enjoying the fruits of one's labor. The very thought of any form of licensure or regulation is anethema, and all forms of it should be repealed ASAP.

• PROPERTY TAXES: This is probably the oldest form of taxation and was implemented centuries before income, sales and other taxes were ever conceived. But being old and well-entrenched does not make it desirable. Property taxes mandate that people must pay "rent" to the state (or whatever government) just to keep and use their own private property. In other words, they deprive the property owners and users a portion of their own property. The value of a person's property does not necessarily relate to his income or ability to pay. Although some people can pay these taxes with little difficulty, others can suffer the loss of their homes, farms and other property through unemployment, medical emergencies, natural disasters or other hardships. During the great Depression in the 1930's, losses like these were routine even though the taxes were low.

  Property taxes are also invasive, although the invasiveness varies with the type of property being taxed. The most invasive are personal property taxes and taxes on so-called "business-personal property." These require that either the owners provide the government with inventories or allow the government to snoop into their private homes and businesses. The invasiveness is somewhat less on land, buildings and vehicles, but it is present nevertheless.

  Governments like property taxes because they are easy to enforce. If someone doesn't pay his tax, the government yanks his property out from under him and sells it. They are also "recession proof." When the economy turns down, sales and income tax collections fall with it, forcing government to downsize somewhat. But even though property values also fall, governments rarely adjust assessments downward to compensate.

  Property assessments can be arbitrary. Constitutions and civics books will say "fair market value." But what is going to prevent any government from stretching a property's market value towards its higher replacement value and taxing it accordingly?

  Furthermore, governments love to re-assess property. Re-assessments are now occurring more frequently than ever, sometimes as often as every year. Some of these re-assessments can be invasive. And the costs of the re-assessments (often inflated) are added to the property tax bills.

  Governments inflate property values in other ways. Cities routinely annex surrounding property (they have a particular affinity for businesses), often without the owners' consent and against their wishes. Once annexed, the cities impose their own property taxes (over and above existing state and county taxes) and also add numerous regulations and restrictions. They frequently provide "services" and "improvements" like water and sewer lines, street lights, etc. that the owners may neither need nor want and jack up the properties' assessments. The cities get tax windfalls, and the owners get screwed.

  A property tax variation endorsed by Henry George and others, is a tax on land only. The argument is that since land is natural and not the product of one's labor, it is a suitable item to tax. Nevertheless, even if none of the improvements are taxed, they are attached to the land and are therefore lost if the land is seized.

  A more sensible form of land taxation for a free state might be to exempt a person's first 160 acres (the size of a typical farm) as tax-free. This would help protect a person's home and other basic assets from seizure. To avoid any form of invasiveness to establish the land's taxable value, any remaining acreage could be taxed a fixed amount (about $1 or $2) per acre statewide, regardless of its value. But even this form of land taxation would not be desirable except, perhaps, in a special emergency where foreigners or corporations conspired to buy up large acreages in an effort to corrupt the government or deprive the free state citizens of available land. However, a more practical solution in a situation like this would be to simply prohibit massive investments and occupations by foreigners with idealologies hostile to a free state environment. If land ownership diversity diminishes too much and small numbers of people hoard too much land, a limit can be placed on how much land any person, family or corporation can own and occupy.

  Bottom line, no form of property tax is desirable in a free state.

• INCOME TAXES: Income taxes are much newer than property taxes. A first – if not the first – proponent of an income tax was Abraham Lincoln. He decreed that one be imposed upon the American people to finance the War of Northern Aggression. Fortunately, the Supreme Court declared that it was unconstitutional.

  Income taxes did not get a foothold in America until 1913, and state income taxes did not begin until the 1930's. Since then, they have grown from very modest rates on the richest people to complicated nightmares for everybody. We all know the horrors of income taxes – withholding, FICA, complex deductions, mountains of paperwork, and sometimes draconian enforcement.

  Needless to say, no form of income or occupational tax should ever be tolerated in a free state.

• SALES AND USE TAXES: Sales taxes are much simpler than income taxes. And since they tax consumption rather than production, they are less disruptive to the economy.

  Nevertheless, general sales taxes have serious disadvantages. They should never be imposed on basic essentials. Food, heating oil, utilities, services, medicine, vehicles, used items, and sales between individuals should never be taxed.

  Even a sales tax on only luxuries at a rate of only 5% might generate more revenue than a free state can legitimately use. Therefore any widespread form of a sales or use tax should be considered undesirable.

• MOTOR FUEL TAX: In a free state, huge money pits like government-run education, housing, medical care, public assistance, and numerous similar programs would be eliminated. The one relatively large program remaining would be the construction and maintenence of roads and bridges. The way to do this is with a user fee. But things like toll booths and tracking devices impose serious problems ranging from traffic jams to privacy invasions – not to mention high costs and inefficiency.

  The best and fairest form of user fee is what we already have in every state – a motor fuel tax – earmarked exclusively for roads and bridges. It is simple. It is easy to implement and collect. It is fair. The big trucks and gas guzzlers that impact the roads the most pay proportionally more fuel tax.

  All roads remain absolutely free to use at all times without checkpoints, roadblocks, privacy invasions and other impositions.

  The only adjustment needed here is to streamline expenditures, eliminate waste and unnecessary projects, and ensure that fuel tax rates remain low.

• "SIN" TAXES: These are sales taxes on strictly nonessential things that are considered harmful or frivolous by large numbers of people. These include tobacco, whiskey, gambling, prostitution, recreational drugs, and similar items.

  Since sin taxes are not nearly as unpopular as most others, their rates are often much higher. In many cases they are so high they promote lucrative black markets that act as a limit on the revenue governments can collect. A limited number of sin taxes might be tolerable in a free state. But rates should be kept low – certainly not above 10%.

• A STATE LOTTERY: The beauty of a state lottery is that it is strictly voluntary. It requires absolutely no expenditure for enforcement except to enforce honesty in its own ranks. Neal Boortz calls it "a tax on stupid people." Certain "Christian" types claim that it rips off poor people. But the bottom line is that it is totally voluntary, and regardless of how stupid or poor a person might be, he is better off buying tickets voluntarily than being forced to pay any tax he cannot afford.

  A state lottery will not generate a great deal of revenue. In every state, a lottery has a built-in limit. This is a desirable feature for a free state as it will provide a limit on government growth. With the exception of roads and bridges, a state lottery might provide all the revenue a state needs to provide the remaining essential services like law enforcement and courts (remember, illegitimate victimless law enforcement and imprisonment will be ended).

• VOLUNTARY CONTRIBUTIONS: If anybody has doubts that voluntary contributions could never adequately fund a free government, he should drive around the countryside and look at the multitudes of new churches that are mushrooming everywhere. Many of these churches are ugly but are still expensive. Some churches have programs that are not popular with many people. Nevertheless, people generously fund them – voluntarily.

  If people are willing to fund churches, there is no reason they would not be willing to voluntarily fund government. In fact, a mere look at the excesses seen in some churches is prima facie evidence that some people might be inclined to over-fund necessary government.

  Obviously voluntary funding would not be able to finance today's government behemoths. This, of course, makes voluntary funding a useful limit on government growth. But even with voluntary funding, some checks and balances must be put in place.

  A Constitutional limit should be set so that no government will be over-funded (in addition, of course, to spending limits and the absolute prohibition of debt). Any surplus funds that accumulate shall be placed in a special account and remain untouchable until it either reaches $50 per capita or 10 years pass, whichever is sooner, whereupon it is refunded in equal amounts to every adult citizen.

  The funding must be structured so that it is totally anonymous. Nobody should be ostracized for not contributing his "fair share," or even if he contributes nothing. This is necessary to protect the people's freedom of choice and to ensure the natural limits of voluntary funding. In addition, nobody should get "credit" for financing any part of government or program. Otherwise people in high places can be bribed into doing special favors for generous donors.

CONCLUSION: The most important thing to consider when financing a free state is not providing "enough" revenue, but to make sure the sources of revenue are sufficiently limited so that government cannot grow out of control. If one must err in his calculation of revenue, it is far safer to fall on the low side with inadequate funding than to estimate too high and risk a runaway government.

All forms of revenue should have strict limits regarding amounts and rates. They should not be allowed to increase. One must always remember that it is the nature of government to grow. It is an uphill climb to downsize government or even to keep it in check. But it must be done if a free state is to remain free.

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