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How Would Government Be Funded in a Free Society?

From The Objective Standard, Vol. 7, No. 2.

Advocates of a fully free, laissez-faire society are likely familiar with the following scenario. You provide a clear, well-concretized explanation of what capitalism is and why it is moral, only to be met with a question that seemingly wipes out everything you just said: “But if physical force were legally forbidden, taxation would be out; so how would a rights-protecting government be financed?” The implication being: A truly free society might sound great in theory, but it’s impossible in practice.

In addressing this question, it is important to emphasize that the elimination of taxation is not the first but the last step on the road to a fully rights-respecting society.1 The first steps are to educate people about the moral propriety of freedom, to cut government spending on illegitimate programs, and to begin the process of limiting government to the protection of rights. But, here as everywhere, the moral is the practical, and we who advocate a rights-respecting society would do well to understand—and to be able to articulate—how the government in such a society would be funded.

Let’s begin by summarizing the nature of government, the reason we need it, and its legitimate functions and elements. Then we’ll turn to the question of how to fund it.

The Nature, Need, and Proper Functions of Government

A government is an institution with a monopoly on the use of physical force in a given geographic area. The government can legally use force, and no one else can—unless the government permits it. A government makes laws, enforces its laws, and punishes those who break its laws. This is true of all governments, proper and improper.

A proper government is one that protects rights by banning physical force from social relationships, and by using force only in retaliation and only against those who initiate its use.2 A proper government outlaws murder, rape, assault, fraud, extortion, and the like; prosecutes those it has reason to believe have committed crimes; punishes those found guilty of committing crimes; protects citizens from foreign aggressors; and settles rights-oriented disputes among citizens.

Why do we need such an institution? Why can’t we do without government? The answer, in brief, is that we cannot live and prosper if we constantly have to worry about being assaulted by criminals, being attacked by foreign aggressors, or coming to blows or worse with fellow citizens. Let’s elaborate briefly on each point.3

1. Some people don’t respect rights and will use force to get what they want.

Consider Ted Bundy, Bernie Madoff, Bill Ayers, the Mafia, the Ku Klux Klan, and company. If we want to live peaceful, productive, happy lives, warring with such goons is no way to do it. By delegating to a government the task of using retaliatory force against those who initiate force, we can go about living and loving our lives as we morally should. In the absence of a government, we would be constantly consumed with the problem of protecting ourselves from predators and nihilists, gangs of which would roam the cities and countryside seeking to rape, pillage, and plunder; and we would have to form militias or gangs ourselves in order to protect our lives, our property, our loved ones.

A rights-protecting government solves this problem by providing rights-protecting laws, police, courts, and prisons.

2. Foreign aggressors, rogue regimes, and terrorist groups can and do seek to coerce or kill us.

Consider the murderous regimes in Iran, Saudi Arabia, and North Korea; and terrorist groups such as al Qaeda, Hamas, and Hezbollah. When theocratic, fascist, socialist, or other evil regimes or groups threaten our lives or liberties, we need a means of eliminating the threats. A rights-protecting government, equipped with a capable military, serves that purpose. Without such a government, we would have to fend off foreign aggressors ourselves—which would require us to form militias and gangs—which, in turn, would cause the further problem of the threats that such gangs, unhindered by a government of laws, would pose to our rights.

A rights-protecting government solves this problem by providing an objectively controlled military, whose function is limited to dealing with foreign aggressors.

3. Rights disputes can and do arise among rational, honest, rights-respecting people.

Good people can and sometimes do disagree over business contracts, marriage contracts, property lines, rights-of-way, water supplies, and other matters pertaining to their rights—and sometimes they are unable to settle such disputes on their own. In the absence of a government with objectively defined laws and impartial courts, such disputes could and sometimes would turn violent.

A rights-protecting government solves this problem by providing an objective means of adjudication.

In sum, a government dedicated to the protection of rights enables us to live in relative safety from criminals and foreign aggressors, and to peacefully settle disputes concerning rights.

What would be the scope of such a government? And what would it consist of?

A rights-protecting government would comprise only the police, the courts, the military, and any corollary or auxiliary branches or departments necessary to their proper function4—such as a legislature to establish rights-protecting laws, a budget department to determine how much money the government needs and to issue financial reports, and a treasury to receive and allocate funds. There would be no “entitlement” programs (e.g., Medicare, Medicaid, Social Security), no Department of Education, no government-run schools, no Environmental Protection Agency, no Occupational Safety and Health Administration, no Food and Drug Administration, no Federal Deposit Insurance Corporation, no Antitrust Division, no Internal Revenue Service, or the like. In short, there would be no programs, departments, or agencies that in any way initiate force against individuals or businesses. Accordingly, the scope of a rights-protecting government would be a small fraction of that of the U.S. government today.

Bearing in mind all of the foregoing, we can begin to answer the question: How would a properly limited government be funded?5

Government Financing in a Rights-Respecting Society

Ample evidence indicates that individuals and corporations would voluntarily support a rights-protecting government simply on the grounds that they value their lives, liberties, property, and pursuit of happiness. To see the evidence, first consider some goods and services for which people are willing to pay.

People voluntarily purchase homeowners insurance, renters insurance, auto insurance, flood insurance, health insurance, life insurance, even pet insurance. People also purchase security systems and smoke detectors, hire bodyguards, pay for themselves and their children to take self-defense classes, purchase firearms, and so on. Similarly, businessmen and corporations purchase liability insurance, directors and officers insurance, key employee insurance, and the like. They also purchase extremely sophisticated security systems; hire security guards; employ legal counsels, law firms, and arbitrators; and pay for countless other precautions to enable them to remain in business, retain their property, and make more money.

Why are people and businesses willing to pay for such things? Because they value their lives, they value their homes, they value their properties, their health, their loved ones, their businesses, their employees, their profits, their happiness. Consequently, rational people also value the political condition on which their pursuit and protection of all such values depend—namely: freedom.

To value something is, as Ayn Rand pointed out, to act to gain or keep it.6

The question, “Will people voluntarily pay to support a rights-protecting government?” is the question, “Do people value the protection of their rights to life, liberty, property, and the pursuit of happiness?” Given that people do voluntarily pay to augment their general security, rational people would voluntarily pay to establish and maintain their general security—if it were not already covered. If they were not being forced to pay for a government, rational people would pay to establish and maintain a rights-protecting government because such a government makes possible their unfettered pursuit and enjoyment of all their other values.

Who has the most to lose if there are no police, no courts, no military? The wealthy do—at least in terms of property. By definition, they have the most stuff. And most wealthy people became wealthy because they are intelligent, forward thinking, and hard working. Such people generally have no trouble seeing the value of protecting their property and ensuring their freedom. They don’t want to lose their hard-earned wealth or their luxurious lifestyles. They don’t want to be at the mercy of thugs, gangs, rogue regimes, or terrorist groups. Nor do they want to find themselves in heated disputes with no peaceful means of adjudication. If wealthy people were not already forced to pay for a government that protects their rights in some respects and violates their rights in other respects, they would, by and large, happily support a government that simply protects rights.

And the wealthy would not be alone in supporting such a government. Rational and able people of lesser means would support it as well. Because a rights-protecting government is a requirement of a civilized society—a society in which people live as human beings rather than as masters and slaves or as Hatfields and McCoys—people who want to live as civilized human beings would, for the most part, voluntarily contribute to support such a government—again, if they were not being forced to support some other kind of government.

Granted, not everyone would. There will always be people who refuse to recognize that government is necessary to civilized society—just as there will always be people who refuse to recognize that socialism and theocracy are evil, and that crack and heroin are bad for your health. But the existence of such people does not alter the fact that rational people recognize the need for a rights-protecting government. Given the option of voluntarily supporting a rights-protecting government or suffering the consequences of anarchy or worse, many—if not most—people would make the rational choice.7

Free Riders

As to the so-called problem of free riders (i.e., those who wouldn’t financially support the government and thus would “ride for free”), this is not really a problem. To begin with, observe that there are two kinds of free riders: rational and irrational—or moral and immoral. We’ll consider them in turn.

A person who does not financially support the government is not necessarily irrational or immoral. The question is: Why does he not support the government? Is the person in question a student who is struggling to pay his way through college? If so, there is nothing wrong with him refraining from supporting the government until he graduates and starts earning enough money to contribute. Is the person in question someone whose capacities are such that even when he tries his hardest in life he can barely cover his own basic living expenses? If so, it would be morally wrong for him to send money to the government, because sending money would constitute a sacrifice. Is the person in question starting a business that is still in the red? If so, and depending on his broader financial situation, it might be a sacrifice for him to send money to the government at this time. And so on. People in such circumstances may “ride for free,” so to speak, but there is nothing wrong with such free riding.

As to those who could afford non-sacrificially to support a rights-protecting government but chose not to on grounds such as, “I don’t need to contribute because all you suckers will contribute, and I’ll have my rights protected for free”—bear in mind two important facts.

First, as irrational as such a free rider is for ignoring obvious causal connections and the basic principle of justice that he could have learned from The Little Red Hen, his refusal to contribute does not violate anyone’s rights. As long as no one is forced to contribute to the government (and that’s the context we’re assuming here), no one’s rights are violated by someone else’s refusal to contribute.

Second, those who choose to support a rights-protecting government are not committing a sacrifice by indirectly protecting the rights of free riders, so long as the value the contributors receive—that is, the protection of their own rights plus all the benefits that flow from a rights-respecting society—is of equal or greater value to them than the funds they contribute.

In sum, in a free society, the existence of free riders is not a problem because (1) no one is forced to support them, and (2) everyone who non-sacrificially supports a rights-protecting government is acting in his own best interest.

That said, irrational free riders would not fare well in a free society. Rational people generally have contempt for irrational people. Rational people would shun and ostracize them (would you have them to dinner?), and the marketplace would be equally just. Rational businessmen generally prefer to do business with rational people. They prefer to partner with, contract with, trade with, golf with, hire, and promote people who think logically, embrace principles, and act accordingly. Given an alternative, rational businessmen will generally choose not to do business with irrational businessmen.

On this latter point, a simple mechanism inherent in a system of voluntary government contributions would make large-scale free riding particularly expensive for those who attempt it. That mechanism is a receipt for funds contributed.

Government Support Receipts

Under a system of voluntary financing, the government’s budget department would periodically (perhaps annually) issue reports specifying how much money the government needs to fund its proper functions. Private individuals and watchdog agencies would scrutinize these numbers in great detail and offer their own related reports and analyses, as they do today when the government issues a budget.

Upon reading the reports and analyses, individuals, businesses, and corporations would scrutinize the numbers, do the math, and determine, all things considered, how much money they reasonably think they should contribute. Socially acceptable standards would likely arise, but individuals and companies would be free to abide by or ignore them. Everyone would be free to act on his own judgment, with respect to his own values and his own context. For instance, an individual who barely uses the court system might decide that his contributions should reflect this fact. A large corporation that uses the court system heavily and regularly might tailor its contributions accordingly. Everyone would decide for himself whether to contribute and, if so, how much.

When an individual, business, or corporation contributed funds to the government, the government would issue a receipt—call it a Government Support Receipt (GSR).8

GSRs would have profound value in the marketplace. Those who held them would have evidence that they financially support a rights-protecting government and thus a civilized society. Those who did not hold GSRs would have no such evidence. Consider what this would mean.

Suppose McDonald’s wanted to establish a long-term contract with a beef supplier. Would McDonald’s care whether the supplier was a rights-supporting, government-contributing corporation? Would McDonald’s care whether the supplier contributed a contextually reasonable amount of money to ensure the continuation of rule of law, civilized society, and protection of contracts? The smart money says that McDonald’s would care and that, given the existence of alternative suppliers, the company would choose to work with a vendor other than the free rider. (McDonald’s might even put a clause in its contracts stipulating that its suppliers must contribute some percentage of their annual sales to support the rights-protecting government.) But even if McDonald’s didn’t care and opted to do business with the free-riding supplier, McDonald’s would face the problem that a great many of its customers and potential customers would care—and that Burger King, Wendy’s, Carl’s, and the like might see a golden, patriotic advertising angle in the mix. Similar examples can be multiplied end over end.

In a free society, large corporations would generally see great value not only in holding GSRs, but also in holding very large ones and making that fact known. Rational patriotism sells.9

GSRs would not likely come into play on small transactions, say, when someone purchases a cup of coffee at Starbucks. But they would certainly come into play on many major corporate transactions, and they might well come into play on lesser transactions, such as employment contracts, vacation rental agreements, and the like.

Rational people and rational businessmen care about the protection of rights, and, by and large, they act in accordance with that concern—both in their personal lives and in the marketplace. In a fully free society, GSRs would be in high demand, and irrational free riders would discover that “riding for free” costs them much more than supporting the government would.


The amounts of money that individuals and corporations would need to contribute in order to support a proper, rights-protecting government would be so small (especially compared to what they are forced to pay in taxes today)—and the cost of being an irrational free rider would be so great—that few people or corporations would be so irrational as to miscalculate. Some would. But their irrationality simply wouldn’t be a problem for anyone but themselves.

It is a contradiction to hold that although people value their lives, their homes, their health, their safety, their children, and so on enough to pay to augment the security and protection of these things, they nevertheless wouldn’t choose to help fund the kind of government that makes possible the general security and protection of all such values. Although some people tenaciously embrace this contradiction, the contradiction remains a contradiction.

If people were not forced to support a government, rational people would voluntarily contribute to support a rights-protecting government. Evidence in support of this fact—evidence in the form of the kinds of observations and integrations presented above—abounds.

In light of the foregoing, we can see that the last step toward a fully free, rights-respecting society is an easy one. So let us redouble our efforts on the first and more difficult steps. Let us increase our efforts to educate people, to cut government spending, and to limit government to the protection of rights. And let us make these efforts matters of personal pride and rational patriotism as well.

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1See Ayn Rand, “Government Financing in a Free Society,” in The Virtue of Selfishness (New York: Signet, 1964), p. 137.

2See Ayn Rand, “What Is Capitalism?” in Capitalism: The Unknown Ideal (New York: Signet, 1967), p. 19.

3The following is not a full argument for why we need a government, but rather a brief summary for our present purpose. For fleshed-out arguments on the nature and need of government, see Ayn Rand’s essay “The Nature of Government,” in The Virtue of Selfishness; and my book Loving Life: The Morality of Self-Interest and the Facts that Support It (Richmond: Glen Allen Press, 2002), especially chapter 7, “A Civilized Society: The Necessary Conditions.”

4See Ayn Rand, “The Nature of Government,” in The Virtue of Selfishness, p. 131.

5In her essay “Government Financing in a Free Society,” Ayn Rand suggested two possible means by which a government could be funded: (1) The government could hold a lottery, and (2) the government could charge a fee to insure contracts. These approaches would generate revenue, but the first would entail government involvement in the economy, which is not ideal; and the second would leave those who chose not to insure their contracts through the government no recourse in the event of a contract dispute—which would lead to violence and feuds. Importantly, Rand stressed that these ideas were mere possibilities, not definitive answers to the question at hand.

6Ayn Rand, “The Objectivist Ethics,” in The Virtue of Selfishness, p. 16.

7To be sure, if enough people in a given society put all logic aside and refused to fund a rights-protecting government, then they simply wouldn’t have one. There is nothing in the fabric of the universe that says people must have a rights-protecting government. It’s a choice. If not enough people in a given society chose to fund such a government, then that society would have some other kind of government—whether theocratic, socialist, fascist, some mixture thereof, or some mixture including elements of freedom (as we have in the United States today). Alternatively, they might have anarchy for a spell. But in the absence of a government, gangs would form and war with each other until some gang gained enough power to crush the others and become the de facto government. So, in any event, if not enough people in a given society choose to support a rights-protecting government, then that society would eventually have a rights-violating government.

Anarchists and others who oppose a rights-protecting government would not have to support it. Nor could the government force them to act against their will—as long as their will did not involve initiating force against anyone. If they did initiate force against people or businesses or the government (or if they threatened to do so or appeared to have done so), then they could not rationally claim a right to be free from retaliatory force by the government. The right of self-defense is a corollary of the right to life, and individuals have a right to delegate their right of self-defense to a government. If someone claims a “right” to freedom from retaliatory force, the government is morally justified in ignoring the claim.

As to claims made by some that they have a “right” to establish competing governments, no, they don’t—at least not insofar as the existing government is an essentially rights-protecting one. A form of the principle of “coming to the nuisance” applies here—but, rather than coming to a nuisance, one is coming to a blessing. Call it “coming to the rights-protecting government.” If a rights-protecting government already exists and governs a certain geographic area, then no one has a right to start a new government in that area, because the existing legitimate government was there first. If a government is or becomes an essentially rights-violating government, then revolution may be in order. As Thomas Jefferson put it in the Declaration of Independence: “Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”

8GSRs could be paper or electronic.

9As to the concern that a corporation might try to purchase favors from the government, in a free society, (a) this would be illegal, and (b) the government wouldn’t have any favors to dole out. If a government representative were caught taking money from a corporation in exchange for some promised political favor, both the representative and the corporation would be prosecuted.