Libertarians and anarcho-capitalists (I guess I'm a mixture of the two, but I prefer to just say libertarian) all have strong views on taxation. Some say that a low level of taxation is a necessary evil and that we should work towards making taxation as 'un-evil' as possible e.g. flat rate of income tax, flat sales tax, apportioned tax etc and also for the total amount of tax levied to be as low as possible. Others, generally of the anarcho-capitalist persuasion, believe that there should be no government at all and therefore no taxes whatsoever; that everything should be provided by the market.
The former would certainly work, and would be greatly preferable to the current situation of high, complicated and nonsensical taxes. However, I think proponents of the idea are wrong in saying that the evil of taxation is necessary. A better way can be found. The latter would not, as some might have you believe, result in some kind of disastrous break down of society. Not in the long run at least, and not at all if there was some kind of well managed transitionary period. However, whilst I don't object to the idea of a stateless society on principal, I do think mankind can find a still better way to live, without resorting to taxation. That, and the reality that the world is made up of states - to abolish our own would cause tremendous difficulties. I believe the best way to run our society is to indeed have a state and a government, but for the state to be denied the power of taxation.
How do you fund a government without taxation?
There are innumerable ways that an organisation can be funded and many more methods not yet conceived. When radio was first invented, for instance, nobody could think how to fund it. In Britain, the government decided that we could not do without radio and that the only way to fund it was to levy taxes which then went to pay for the newly formed British Broadcasting Corporation (which later changed its name to the British Biased Corporation, or "Al Beeb" in Arabic). In America, however, radio was broadcast for a long time funded entirely by voluntary donations. But then one day somebody had the enlightened idea of putting advertisements on the radio and having businesses pay for the service. Commercial radio was born. The market found a way to provide a good without using force to recoup the costs. For governments, one of the ways that would doubtless be used to provide funding, though by no means the only method, would be user-fees.
What is a user fee?
A user fee is when one party, in this case the government, offers a service, and expects some sort of payment in return for the provision of this service, should a second party wish to take up their offer and make use of the service. An example, would be the post office: you voluntarily choose to have your letter delivered, and before you can do so you must pay a fee. This fee pays for the delivery of the letter, but it would of course be acceptable for the government to put some of the revenue to work doing something else in addition: financing a national defence force for instance. The key here is that nobody is forced into doing anything. If you don't pay your fee, you don't get your service. No harm, no foul. Road tax is another good example - you only pay road tax if you want to use the roads. So why is tax different?
What is a tax?
A tax is when the government forces you to pay them money, regardless of whether you wish to consume any services that they may provide in return. Income tax is a good example: everyone is forced to pay income tax and this goes towards paying for things like the NHS, whether you want to use the NHS or not. The TV licence is another: I can never watch a BBC television channel or listen to a BBC radio station in my entire life, but I still have to pay a TVlicence just for the privilege of owning a television.
Isn't a user-fee a type of tax? We call road tax a tax...
Perhaps. Call the two things lemons and pumpkins if you like, it makes no matter to me. 'User-fee' and 'tax' are far more descriptive though. User-fees can be levied by the market, taxes cannot. Not legally anyway.
What about public-goods?
Public goods are goods (and services) that are both non-rivalrous and non-excludable. Wikipedia explains:
Many proponents of taxation argue that force is necessary to procure the revenue required to provide certain goods and services that a modern, civilised society cannot do without. This, they argue, is because of what is called the 'free-rider problem'. This is, essentially, when people make use of a good or service without paying for it. It is argued that this results either in the good not being provided at all, or in it being 'under provided'. The classic example of a public-good is a lighthouse.
Lighthouses are non-rivalrous because one ship seeing the beam does not diminish the amount of beam available to other ships. They are also non-excludable to a good degree. In truth, any good is excludable, true public goods do not exist. What we mean by non-excludable is that it is not economical to exclude people from consuming the good. With a lighthouse, we might be able to exclude people from using it with the use of warships or radio codes, but it would likely cost more than whatever revenue we would gain and thus be uneconomical.
Lighthouses are also very important, if it were not for lighthouses countless ships would be dashed to pieces and global trade would suffer dearly so we would very much like to have lighthouses provided, but how? Surely, since anybody can use a lighthouse whether they have paid for it or not, nobody will pay? Of course not! If I own a shipping company and I am losing ships upon the rocks, I will doubtless recognise the need for a lighthouse and thus provide one. Even if the cost is too great for a single shipping firm to bear, firms will work together to provide for their mutual benefit. A modern example of such collaborative provision might be security guards - hired, not by a single firm, but by all the firms in a parade of shops to provide them all with a measure of security. Shopping centers are another. But shipping companies need not be the only providers of lighthouses. Ports, too, rely upon the safe passage of ships for their income. If a ship sinks before it reaches port, or if ships stay away for fear of sinking, the port owners willreceive less business. Thus, it is in their interest to provide lighthouses to ensure the safe passage of ships to and from their port. There are many, many businesses that rely upon imports to survive - car showrooms for instance. Foreignfirms wishing to import goods also have something to gain from aiding in the provision of lighthouses.
Radio is another example: it's non-rivalrous and non-excludable, some might have you think that the only way to provide such a good is through taxation but for decades now we have known this to be bogus - advertising can provide it.
So you see that there are many public-goods which can easily be provided by the market, provided of course that consumers and firms are not overburdened with taxes, prevented from engaging in their desired act of provision by government legislation, or areout-competed by a tax-funded government monopoly or some such.
So what does government do?
There are some services that it would be wise to have governments provide. Diplomacy, is one. National defence another. The courts of law a third. There are others also, but I won't make an exhaustive list. Neither is there any reason why government should not provide other services -health care for instance, so long as it does so without the use of force. If the government can run a profitable health care business, without using force, then it can use the profits to fund its other, less profitable endeavours, such as the courts. There are other methods of funding too, and here we come back to user fees.
So how DO you fund a government without taxation?
If the government owns the roads, and you wish to use the roads, then the government can certainly charge you for this, just as a private airline charges you for using it's aeroplane or a private club may charge you to enter. This is a user-fee - the user pays a fee. Profits from such a scheme can then be ploughed back into other services such as national defence.
There are certainly other methods of creating revenue without taxation, fines and donations for instance. Too many ways to list, in truth and there will inevitably be new and exciting (for an economist at least) methods of providing services - human ingenuity, when allowed to flourish, knows no bounds.
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