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Ayn Rand’s Tax Scheme

By Taylor Marvin

At Democracy in America, Will Wilkinson takes the movie version of Atlas Shrugged’s release as an opportunity to examine one of Ayn Rand’s core ideas of governance: that government should not be funded by forced taxation, but involuntary donation. In Rand’s words:

“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.”

Wilkinson finds this ridiculous from the standpoint of a collective action problem. In this system no citizen has an incentive to actually donate money to the government; even though everyone benefits from government services like law enforcement and judicial services, individuals would rather not pay and let their neighbors foot the bill for the government services free-riders can’t be excluded from. Similarly, even honest citizens have an incentive to not pay — if an individual rationally expects the large majority of the population to not voluntarily pay for government services then they have good reason to suspect that the total sum of donations isn’t enough to fund a bare-minimum of public services, giving them further reason not to pay. In game theory terms all players, that is everyone in society, has an incentive to defect and in equilibrium no one pays. That’s why forced taxation is the only feasible scheme to reliably fund public goods. Formal taxation seems to date back to the ancient Egyptian Old Kingdom era, making it one of the oldest social institutions in organized human society, and in its 5,000 year history few human societies have found workable alternatives. For Rand’s voluntary system to work human psychology needs to be fundamentally different. It isn’t a question of altruism, but rather rationality. In a world populated by rational, self-motivated actors — that is, the individuals Rand celebrates — a donation-funded government isn’t possible.

However, let’s pretend that universal human psychology didn’t make donation-funded public services impossible. What would be in the maximum possible size of the government? From the Giving USA Foundation, total US charitable donations in 2008 amounted to $307.65, billion, or 2.2% of GDP, a percent that’s fairly constant over time. For comparison, total federal spending in 2008 amounted to $2.9 trillion, or roughly 23% or GDP. Similarly, federal spending as percent of GDP has remained fairly constant over time, fluctuating between about 20 and 26% of GDP in the last 30 years:

Image by Wikimedia user Farcaster.

Image by Wikimedia user Farcaster.

Assuming adopting a donation-funded government shifted all US charitable giving from NGOs and other non-profits to the federal government, federal government spending would have to shrink by roughly 90%. This reduction does not include state and local spending, a significant amount. For comparison, $305 billion budget would be enough to fund less than half of US defense spending, and nothing else:

2010 US Federal spending. Data source: CBO.

2010 US Federal spending. Data source: CBO.

All other government services- Social Security, medical entitlements, social and educational spending, national parks, and infrastructure spending- would not be fundable at anywhere near their present requirements under this system. Of course, this makes a lot of assumptions. Charitable giving could easily rise in the absence of taxes, but it’s equally likely that the federal government would be much less effective at attracting charity than private non-profits are today.

However, it’s worth remembering that many libertarians like Rand have dramatically lower expectations of government than most people- in their eyes, a 90% reduction in government services would not necessarily be a bad thing. To a libertarian in the mold of Rand the government’s role should be restricted to providing courts, law enforcement, and a military only sufficient for territorial defense. It’s possible a $305 billion dollar budget would be sufficient for this. US military spending could easily fall by 80% if its only role was defending the US homeland, and law enforcement and judicial expenses are insignificant when compared to total government spending. However, it’s unlikely that very many Americans would like to live in the country Rand envisions. Entitlement spending like Social Security, Medicare and Medicaid have been a part of the American social contract for generations. Before the advent of Social Security most American seniors not lucky enough to be wealthy lived in poverty, and many died from preventable medical conditions they couldn’t afford to treat. If the federal budget was reduced to $305 billion, living standards for vulnerable Americans like the poor and elderly would fall precipitously. While many Americans support the idea of vastly lower taxes in the abstract, it’s doubtful that they’re willing to accept a reality where a significant portion of the elderly starve.

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One Comment Post a comment
  1. I long to see that free society where taxation will be purely on a voluntary basis. As much as a donation funded government might significantly cut down on federal government spending such a situation in my opinion can only work on paper and it would be a mammoth task to implement given people’s current mindsets.

    July 14, 2011

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