Designing A New Nation – Part 3 – Taxes
This is the third installment in the ongoing series in which I design a purely hypothetical, small government, libertarian nation called Ascendia. Please read parts one and two if you have not yet before reading this article so that you’re up to speed.
Today, I will explain how taxes would work in a nation based on individual freedom, peace, and free markets.
As discussed in prior installments, Ascendia would be a minarchist libertarian nation, not an anarcho-capitalist nation. Most people, being politically illiterate, think these two are the same, when they are not.
In an anarcho-capitalist “nation,” there is essentially no government. Everything is run by groups, individuals, organizations/guilds, and companies.
In a libertarian nation like Ascendia (as well as libertarianish societies like the USA prior to 1913, and certainly prior to the American Civil War) there is a government, but it’s somewhat weak (in terms of internal issues, not militarily) and doesn’t do very much other than provide some cash and pomp to a small number of elites (which, as I explained back in part two, is literally unavoidable). The federal government is especially weak, but the local governments (in the case of Ascendia, the cities) are much stronger, and can enact any laws they wish based on democratic vote of the local citizens in those cities.
Therefore, this small government needs to be funded somehow. That means, among other things, taxes.
(Much of what I’m about to say is directly lifted from an article I already wrote on this blog titled How Taxes Would Work In A Free Society.)
In Ascendia, at the federal level at least, there would be no income taxes, no payroll taxes, no capital gains taxes, no corporate taxes, no property taxes, and no estate taxes. These taxes all involve theft, i.e. the forcible taking of money from innocent citizens by threat of force. If our goal was socialism, then these kinds of taxes would be fine, but we can’t have any government theft in a free country.
In addition, like prosperous nations such as Hong Kong and Singapore, there would also be no import tariffs of any kind. Ascendia would be a small nation, so free trade would be essential to its economic prosperity. (I realize there are times where some level of protectionism is a good idea, but that more applies to larger nations with vast amounts of natural resources.)
There would be only one tax that is levied at the federal level in Ascendia: a flat 4% national sales tax. Here are the details:
- The tax would be 4% across the board, applied to everything equally.
- This tax would only be applied at the point of consumption; business-to-business transactions would not be taxed, only business-to-consumer.
- There would be no exemptions or exclusions from this tax. Literally everything purchased at the consumer level would be taxed, including groceries, houses, cars, alcohol, everything. Most governments using a sales tax exempt things like groceries. No. Doing that creates a huge mess, because then you have various companies lobbying the government on what exactly a “necessary” grocery item is. Should you tax Twinkies? Are they “necessary” like ground beef? And so on. To avoid all this crap, everything is taxed, nothing is exempt, no favoritism, no exceptions.
- There would be no possible way to deduct or write off this tax for a consumer. The only way he/she could avoid this tax (a little) is by starting a small business. There would be a few laws/protections regarding preventing tax fraud, i.e. people starting businesses that just sit there and never make a profit just to avoid paying the sales tax, but Ascendia would understand there is tax fraud in every society and there is no perfect way to prevent this 100%.
If we assume a population of around 6 million people in Ascendia, which is similar to the size of Singapore, we can also assume a similar level of consumer spending in Singapore (if not much better) due to the fact that Singapore is one of the top two freest nations in the world. Average consumer spending in Singapore is around $109 billion per year[*]. A 4% tax on that means the tiny federal government would get around $4.3 billion per year in revenue.
$4.3 billion per year is more than enough to support a constitutionally-bound small federal government for 6 million people. Since the federal government would never give any money to the free cities, never give money, lend money, or bail out companies or banks, and never give any money to any citizens for any reasons, the federal government only needs to fund itself.
A second source of federal government funding would be voluntary donations. Similar to Ancient Greece, the government would encourage voluntary donations to the government. People who donated would be honored with special plaques and other such accolades, hopefully creating an environment where more people would be willing to donate to the government just like a charity. The government could encourage more donations by being more transparent with budgets and expenses, and so on.
Via the national sales tax and donations, the federal government would pay for:
- Federal government administration.
- External security, meaning things like the military, CIA, and border security. There would be no internal police, and no FBI. (Police would be a city function, not a federal one.)
- Federal infrastructure (roads and bridges located outside any city or private property).
- Three or four other minor functions.
That’s it! Literally everything else would be taken care of by the local city governments or the free market.
Things like police protection, non-privately-owned roads, jails, and courts would be paid for by each individual city or town. These free cities would be able to levy taxes in any way they wished. However, they would be forbidden to charge any Ascendian citizen any form of property tax or capital gains tax (since those two taxes are a direct violation of basic property rights). Moreover, they would be heavily encouraged by the federal government to avoid using any income, payroll, corporate, or estate taxes, but would be allowed to do so if they really wanted.
Instead, those cities wishing to charge a tax (and some wouldn’t charge any) would be encouraged to utilize sales taxes, poll/head taxes (for those cities allowing local elections), excise taxes, or tolls and usage fees.
One variation on the usage fee is a concept I’ve called the city bill. The city you lived in would send you a bill once a month. On that bill, it would itemize all the local services the city was responsible for maintaining that you were using. A city in Ascendia might have a monthly bill that looks something like this:
Police Protection: $22.24
Government-Owned Roads/Bridges: $9.73
Local Parks: $4.32
Sanitation Services: $2.42
Total Due: $50.44
Fire protection and ambulance services wouldn’t be on there, since those functions would be covered by insurance companies. Education wouldn’t be on there since that would be more than adequately handled by local religious organizations, nonprofits, and the free market. Sanitation services might not even be on there, since that could easily be handled by the free market as well (and actually is in many states in the US).
You could also remove certain items from your city bill, essentially opting out of particular services. For example, you could opt out of your local library. You, nor anyone else in your household, could then not use the library for any reason, but you wouldn’t be charged for it any more. The same would apply to parks and the like. With today’s technology, this would be easy to do.
You probably could not opt out of things like police protection, but every city would make their own judgements about that, based on the will of their local voters. (Again, this is assuming the city was a democracy. As I explained in prior installments, each city could form any type of government it wanted, democracy or otherwise.)
Attached to the bill would be a monthly budget of exactly how much money your city was collecting in taxes, and how much it was spending, and on where. It would be as transparent as possible.
If you didn’t like what you were being charged for, or what your city was spending its money on, and your voting (if any) didn’t cut it, then you’d move to a different city. All cities and towns would have their budgets published online so you could pick out the exact city you’d like the best. Cities would compete against each other for the best lifestyle for the lowest cost. Poorly-run cities would suffer and people would leave those areas, and well-run and transparent cities would thrive, which is the way freedom is supposed to work.
You’d pay your city bill just like you’d pay your electric bill. No one would be putting a gun to your head and pulling money out of your paycheck without your permission, nor forcing you to file a tax return, nor forcing you to pay taxes on something you purchased that you already paid taxes for.
What if you didn’t pay your city bill? It would be the same as if you didn’t pay any utility bill like your electric bill. You’d get several nasty warnings, then you wouldn’t be allowed to drive on roads, then you’d get sued or worse. You’d better pay your city bill, or you’d be in big trouble, again, just like any other utility bill.
This is just one example. Many cities could try many different ways of raising funds for their local city governments. Cities would be encouraged to experiment with different systems.
That about wraps it up for taxes. In part four of this series, I will address the military and foreign policy. Coming soon.