One also begins to see more clearly the nature of the political principles that have to be accepted and advocated, as part of the battle for man’s intellectual Renaissance.
(December 1963)
15. Government Financing in a Free Society
by Ayn Rand
“What would be the proper method of financing the government in a fully free society?”
This question is usually asked in connection with the Objectivist principle that the government of a free society may not initiate the use of physical force and may use force only in retaliation against those who initiate its use. Since the imposition of taxes does represent an initiation of force, how, it is asked, would the government of a free country raise the money needed to finance its proper services?
In a fully free society, taxation—or, to be exact, payment for governmental services—would be voluntary. Since the proper services of a government—the police, the armed forces, the law courts—are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.
The question of how to implement the principle of voluntary government financing—how to determine the best means of applying it in practice—is a very complex one and belongs to the field of the philosophy of law. The task of political philosophy is only to establish the nature of the principle and to demonstrate that it is practicable. The choice of a specific method of implementation is more than premature today—since the principle will be practicable only in a fully free society, a society whose government has been constitutionally reduced to its proper, basic functions. (For a discussion of these functions, see Chapter 14.)
There are many possible methods of voluntary government financing. A government lottery, which has been used in some European countries, is one such method. There are others.
As an illustration (and only as an illustration), consider the following possibility. One of the most vitally needed services, which only a government can render, is the protection of contractual agreements among citizens. Suppose that the government were to protect—i.e., to recognize as legally valid and enforceable—only those contracts which had been insured by the payment, to the government, of a premium in the amount of a legally fixed percentage of the sums involved in the contractual transaction. Such an insurance would not be compulsory; there would be no legal penalty imposed on those who did not choose to take it—they would be free to make verbal agreements or to sign uninsured contracts, if they so wished. The only consequence would be that such agreements or contracts would not be legally enforceable; if they were broken, the injured party would not be able to seek redress in a court of law.
All credit transactions are contractual agreements. A credit transaction is any exchange which involves a passage of time between the payment and the receipt of goods or services. This includes the vast majority of economic transactions in a complex industrial society. Only a very small part of the gigantic network of credit transactions ever ends up in court, but the entire network is made possible by the existence of the courts, and would collapse overnight without that protection. This is a government service which people need, use, rely upon and should pay for. Yet, today, this service is provided gratuitously and amounts, in effect, to a subsidy.
When one considers the magnitude of the wealth involved in credit transactions, one can see that the percentage required to pay for such governmental insurance would be infinitesimal—much smaller than that paid for other types of insurance—yet it would be sufficient to finance all the other functions of a proper government. (If necessary, that percentage could be legally increased in time of war; or other, but similar, methods of raising money could be established for clearly defined wartime needs.)
This particular “plan” is mentioned here only as an illustration of a possible method of approach to the problem—not as a definitive answer nor as a program to advocate at present. The legal and technical difficulties involved are enormous: they include such questions as the need of an ironclad constitutional provision to prevent the government from dictating the content of private contracts (an issue which exists today and needs much more objective definitions)—the need of objective standards (or safeguards) for establishing the amount of the premiums, which cannot be left to the arbitrary discretion of the government, etc.
Any program of voluntary government financing is the last, not the first, step on the road to a free society—the last, not the first, reform to advocate. It would work only when the basic principles and institutions of a free society have been established. It would not work today.
Men would pay voluntarily for insurance protecting their contracts. But they would not pay voluntarily for insurance against the danger of aggression by Cambodia. Nor would the plywood manufacturers of Wisconsin and their workers pay voluntarily for insurance to assist the development of the plywood industry of Japan which would put them out of business.
A program of voluntary government financing would be amply sufficient to pay for the legitimate functions of a proper government. It would not be sufficient to provide unearned support for the entire globe. But no type of taxation is sufficient for that—only the suicide of a great country might be and then only temporarily.
Just as the growth of controls, taxes and “government obligations” in this country was not accomplished overnight—so the process of liberation cannot be accomplished overnight. A process of liberation would be much more rapid than the process of enslavement had been, since the facts of reality would be its ally. But still, a gradual process is required—and any program of voluntary government financing has to be regarded as a goal for a distant future.
What the advocates of a fully free society have to know, at present, is only the principle by which that goal can be achieved.
The principle of voluntary government financing rests on the following premises: that the government is not the owner of the citizens’ income and, therefore, cannot hold a blank check on that income—that the nature of the proper governmental services must be constitutionally defined and delimited, leaving the government no power to enlarge the scope of its services at its own arbitrary discretion. Consequently, the principle of voluntary government financing regards the government as the servant, not the ruler, of the citizens—as an agent who must be paid for his services, not as a benefactor whose services are gratuitous, who dispenses something for nothing.
This last, along with the notion of compulsory taxation, is a remnant of the time when the government was regarded as the omnipotent ruler of the citizens. An absolute monarch, who owned the work, income, property and lives of his subjects, had to be an unpaid “benefactor,” protector and dispenser of favors. Such a monarch would have considered it demeaning to be paid for his services—just as the atavistic mentalities of his descendants-in-spirit (the remnants of Europe’s ancient feudal aristocracy, and the modern welfare statists) still consider an earned, commercial income as demeaning and as morally inferior to an unearned one which is acquired by mooching or looting, by charitable donations or governmental force.
When a government, be it a monarch or a “democratic” parliament, is regarded as a provider of gratuitous services, it is only a question of time before it begins to enlarge its services and the sphere of the gratuitous (today, this process is called the growth of “the public sector of the economy”) until it becomes, and has to become, the instrument of pressure-group warfare—of economic groups looting one another.
The premise to check (and to challenge) in this context is the primordial notion that any governmental services (even the legitimate ones) should be given to the citizens gratuitously. In order fully to translate into practice the American concept of the government as a servant of the citizens, one has to regard the government as a paid servant. Then, on that basis, one can proceed to devise the appropriate means of tying government revenues directly to the government services rendered.
It may be observed, in the example given above, that the cost of such voluntary government financing would be automatically proportionate to the scale of an individual’s economic activity; those on the lowest economic levels (who seldom, if ever, engage in credit transactions) would be virtually exempt—though they would still enjoy the benefits of legal protection, such as that offered by the armed forces, by the police and by the courts dealing with criminal offenses. These benefits may be regarded as a bonus to the men of lesser economic ability, made possible by the men of greater economic ability—without any sacrifice of the latter to the former.
It is in their own interests that the men of greater ability have to pay for the maintenance of armed forces, for the protection of their country against invasion; their expenses are not increased by the fact that a marginal part of the population is unable to contribute to these costs. Economically, that marginal group is nonexistent as far as the costs of war are concerned. The same is true of the costs of maintaining a police force: it is in their own interests that the abler men have to pay for the apprehension of criminals, regardless of whether the specific victim of a given crime is rich or poor.