Law Without Taxation: Contract Law

When most people are exposed to the idea of a society organized without taxation, they often jump to the conclusion that the services provided by government would no longer exist. After it is proposed that these services would still exist, but they would be provided by voluntary organizations, they assume only problems and chaos could ensue. Warlords, crooked arbitration, justice for only the rich… surely these are unavoidable consequences of a society without taxation!

These voluntarily organized services would not only exist, but they would do so with more order and efficiency than their coercively funded[1] alternatives. There would be even stronger checks and balances than the beloved U.S. system of government adored by so many people.

  • How do we get there?

One objection to a society completely free of institutionalized coercion is that after the fall of the current system, it will be a war of all against all. Warlords and criminal gangs will take over as society tries to reorganize itself. This objection fails to acknowledge how Voluntaryists advocate the establishment of a voluntary society in the first place. The objection assumes that we will go from a society organized by taxation to voluntary over night through some sort of violent event. Most Voluntaryists recognize that the only practical way to achieve their ideal society is through education and persuasion.

The reason why our advocated means to achieving this society are important to understand is because if it is arrived at through a peaceful process, then there is no reason to assume there has been any change in the demand for law and order amongst the general population. Yes, if the system were to be violently overthrown without any sort of ideological direction, then there would likely be a power vacuum filled by the first charismatic and powerful person who promises prosperity. But if society changes peacefully due to a change in people’s beliefs, then any potential tyrants would lack the necessary support of the general public.

  • Utopian?

Some may object at this point on the basis that education and persuasion on a scale of this magnitude is utopian. How could it be possible to change the minds of so many on a subject that is so ingrained in our history and culture? One need only to look at history for the answer.

To quote Robert Higgs[2] :

“Slavery existed for thousands of years, in all sorts of societies and all parts of the world. To imagine human social life without it required an extraordinary effort. Yet, from time to time, eccentrics emerged to oppose it, most of them arguing that slavery is a moral monstrosity and therefore people should get rid of it. Such advocates generally elicited reactions that ranged from gentle amusement to harsh scorn and violent assault.

In retrospect, however, these reasons seem shabby—more rationalizations than reasons. They now appear to nearly everyone to be, if not utterly specious, then shaky or, at best, unpersuasive, notwithstanding an occasional grain of truth. No one now dredges up these ideas or their corollaries to support a proposal for reestablishing slavery. Although vestiges of slavery exist in northern Africa and a few other places, the idea that slavery is a defensible social institution is defunct. Reasons that once, not so long ago, seemed to provide compelling grounds for opposing the abolition of slavery now pack no intellectual punch.”

I think it is safe to say that the original slave abolitionists were scoffed at by the general public for holding such obviously utopian views. Somehow, institutionalized slavery in the western world was abolished. Other movements that seemed utopian by common knowledge standards but ended up becoming a reality include: The American Revolution, the idea of democracies or republics, violence against women being generally unacceptable, etc.

It is my contention that not only is the idea of an organized society free from taxation possible, but it is the natural next step. When I said institutionalized slavery was abolished, what I was referring to is the kind of slavery where the victims were 100% slaves. Right now we are enslaved to the extent that we are forced to pay taxes. Being forced to give up the product of our labor is slavery, even if it is only a percentage of it. I don’t see any reason to think going the last step is utopian when we have made it this far. Going the last inch in a mile journey seems like a very realizable goal.

One last objection raised on this point is: “But this has never been done before!”. We will ignore the fact that there are historical examples of every single function of an orderly society being provided without taxation. There are examples even today. There have been fully developed civilized societies organized by totally voluntary means. Voluntarily organized dispute resolution is only beginning to re-emerge. But that is a topic for another work. For now, let’s assume this is a new idea that has never been tried. To that the reply is, so what? If societies had never advanced goals on the grounds “but it has never be done before”, then we would still be living like primitive man. Do you want to form a republic? Well, we can’t even attempt it because it has never been done before. Do you want to abolish slavery? We can’t do that either because it has never been done before. This objection fails to show why we should not pursue new methods of organization.

  • Dispute Resolution

If tax funded dispute resolution were abolished, there is no reason to assume that people’s desire for peaceful coexistence would disappear. In short, it will be provided because there is a very strong demand for it and plenty of willing people to provide it. So what would dispute resolution look like in a society free of taxation?

Conflicts would be dealt with by voluntarily funded courts and arbitration. Before exchanges are made, the parties will contractually agree to the terms of arbitration in the case of conflict. If there is a conflict between two people who have not made any prior agreements, or even one of the persons made no prior agreement, the case will still be taken to a court or arbitrator.

The party being accused of a crime would be sent a notice saying they are being charged with a crime, but would not be forced to defend themselves in court. They are more likely to have a favorable decision on their part if they provide a defense. It would be in their best interest to show up, but since they are not yet criminals, no force would be used against them.

If the contract assigns a single court to dispute resolution, then this court’s decision is final since the decision was agreed to be binding by both parties. If the two parties contractually agree to be represented by their own separate arbitrators, then the two arbitrators will make a decision. If they agree, then there is obviously no problem. In cases where they have different opinions, the case would be taken to a reputable third-party court or arbitrator. The court or arbitrator that would settle disputes between other courts and arbitrators would probably be agreed upon prior to any disagreements by the respective original agencies.

Why would the courts and arbitrators make prior agreements in cases of disputes? They would do so because of the consumers demand to have peaceful and non-chaotic dispute resolution. If any court or arbitrator had unnecessarily complicated conflict resolution processes, then they would lose business to the more efficient providers.

  • What if people refuse to agree to any contracts or dispute resolution processes? 

There would be many incentives for people to make contractual agreements. People would want some sort of reassurance that you are trustworthy before they are willing to hire you or make serious exchanges. People will be more hesitant to interact with someone who refuses to decrease the chance of any possible future conflict. Anyone who refuses to provide any reassurance would only be interacted with on minor, if any, exchanges.
Of course people would be free to interact with risky individuals if they wished, but since no one else is involuntarily involved, there is no problem.

  • What about people who disagree on “the law” ?

This problem can be anticipated by consumers. People don’t want confusing and unpredictable laws. Why are ATM machines standardized even though different people produce them, and different banks issue debit cards? Why are DVD players standardized to accept the same size disc, even though the movies are from different studios and the DVD players are made by different manufacturer? The reason why is because people prefer standardization. Any ATM or DVD player that accepted different sized cards or discs than the standard would quickly go out of business.

From the Enterprise of Law, Justice Without the State by Bruce L. Benson:

Laws for members of a community may be relatively restrictive, but the laws that apply to outsiders will have to be moderated if the community is to survive. Sheed concluded that while laws will not be uniform, there is a strong tendency for them to standardize in the treatment of violence and commerce “due to considerations of transactions costs and the costs of maintaining a stock of knowledge of other laws. Differences would exist only in those areas where the demand for non-standard enforcement over-rides the economies of standardization. These areas would consist largely of enforcement demands based on moral and religious conviction.”

The vast majority of people agree on laws in regards to violence and theft, so naturally laws will standardize around these widely held agreements. In short, people who think rape and murder should be lawful will find themselves in isolated communities (which will probably self-destruct).

Precisely because some people have different ideas of law and justice is a great reason to oppose the territorial monopolies on law, which imposes the same views on everyone. Instead of people self-governing in their own communities, you have everyone trying to gain control of the State in attempt to either impose their view or defend it. This struggle to gain control of the single producer of law is what creates a true war of all against all.

  • What happens to convicted criminals?

For minor crimes, convicted criminals would be sentenced by the courts to pay restitution. The exact amount of restitution is impossible to predict, but I think we can assume it would be enough to discourage crime. If someone stole $10, and all they had to do was pay back $10, there is little incentive to not steal if the most you will have to do is give back the property you took. So I think in general, the successful courts would be the ones who had punishments that consumers felt were fitting. The criminal might have to pay the $10 back to the victim plus more for the inconvenience, pay court fees, etc. Insurance would also play an important role in a society without taxation, so it is also likely that the criminals insurance rates would go up since he has shown to be aggressive, thus more risky to insure.

What if the criminal refuses to pay restitution? First, their insurance company would pay the victim. Then the criminal would owe his insurance company the restitution that was paid to the victim, and the insurance rates would go up. How much money the criminal owed and how long he refused to pay would determine the course of action from here. For a small owed sum, his rates would slowly continue to rise and interest could be added to the debt. At any point the criminal could pay off his restitution, fees, etc. and be back in good standing.

If the debt got bad enough, then eventually the insurance company would drop him, and he would become the type of untrustworthy person described earlier. He would in effect become an outlaw. The first thing this would do is make him virtually unemployable. People might scoff at this, but consider for a moment how hard it is in our current society to get a job with a criminal record. Without dispute resolution provided through taxation, people would put even more importance on things like reputation and criminal records.

So what about the really dangerous and aggressive people? First of all, they would obviously face the same consequences as our petty criminals described earlier. But surely if someone is violent and aggressive, they might try to impose their will on you. So refusing to interact with them will not suffice. What would happen is they would be physically prevented from entering virtually everyone’s homes, streets, businesses, etc. In effect, they would be ostracized to the point of banishment. With no job, they would not be able to pay their heat, electricity, and water bills. They would have no money for food or water. Even if they had money under their mattress, they would be prohibited from going into a store for food. They would have no means to obtain the necessary goods to sustain their life.

Why would they be prohibited from going into grocery stores? Because any store catering to aggressive, violent, and dangerous individuals would lose business very quickly. They would also find it hard to insure their store if they knowingly subject themselves to unnecessary risk. The same principles would to apply for roads, etc.

  • How would people be protected from the violent criminals?

Just because defense services are not paid through taxation does not mean they will not exist. Voluntarily funded police services will be provided for the purpose of defense. They will be provided by insurance agencies, road producers, neighborhood associations, malls, etc. It is almost like asking how Disney Land would protect people without taxation. Well, they already do! They have defense provided for all of their customers. Why? Because a safe business is a profitable business. Of course not everywhere is like Disney Land, but you can see that these services are provided. Any road or business absent of any protection will lose business to the safer alternatives.

Individuals might also want personal protection, which will be provided if there is a market for it. What I think is more likely is that neighborhoods and communities will collectively provide or pay for protection since it would be more economically feasible for most people.

Not only would defense services exist, they would also be more efficient.

Would there be prisons?

This would probably differ from community to community, or area to area. It would depend on the values and norms of the consumers. People who felt strongly one way or the other about this would choose to live in communities where their beliefs are commonly shared. If we implemented this system without anyone moving from physical location, most communities would probably have prisons. It is deeply ingrained in our culture. I don’t see them going anywhere anytime soon. Given that, I think if this society formed the way I explained earlier, then there is a strong chance that ostracism would completely replace prison.

With that said, any prisons that did exist in our tax-free society would be much better and more humane than what we currently have. “Private” prisons that you are likely thinking of now are not market phenomenon. They are funded through taxation which means they don’t face market pressure. Because they are paid through taxation, they have no incentive to please the consumer. They get paid regardless of how good of a product they produce. Prisons would be radically different if funded through voluntary means (insurance agencies, courts, etc.). Any prison that mistreats inmates would lose prisoners to the better alternatives.

  • What about the poor?

Would the poor be able to afford defense? It is important to understand that the current tax based system is especially bad for the poor. To start, because the police are paid regardless of whether or not they are serving the consumer, it is common for them to avoid especially poor neighborhoods due to the high crime rates. The poor are paying a high price for police protection, yet this does not mean they actually get any protection provided.

The police have little incentive to patrol dangerous and poor neighborhoods. They still get paid, even if a neighborhood stays particularly crime ridden. Not only do they not suffer from not preventing crimes, they actually have incentives to allow crime! What could these incentives be? The more crime there is, the bigger budget the police department gets. Contrast this to the incentives facing people who have to receive their income voluntarily. The incentives are the complete opposite. Non-tax funded police would be much more concerned with prevention. It would be their top priority. For if they fail to protect an area, they lose money. Instead of giving a failing service more money, the money will go to a more efficient provider.

The competition will also lower the price. Think of all of the things the poor can currently afford. Computers, cars, high-definition television, cell phones, etc. They are affordable because there is a mass market and competition. The police are currently monopolized, which means they face no competition, which means they can keep prices high. Where the market is allowed to function, prices continually fall. The prices of government provided police continue to rise, even though the quality of service does not, or even declines.

For many poor people, the protection will be provided by apartment complexes or street providers. Because it would follow that if someone is that poor, they probably don’t own their own house. If they own their own house, it is probably in a neighborhood which provides defense.

Because of zoning laws, in many places it is illegal to have a business in apartment complexes. This means poor people have to pay more for travel expenses to reach goods. But what is interesting to point out here is that if people were allowed to cater to poor people, say in the basement of a low-income apartment complex, it is likely that security would be provided for free by a business owner. Instead of herding poor people into tax funded and crime ridden apartment complexes, there would be more people competing for their business. One of the goods offered to entice poor people into your apartment complex might be security. This is just an idea worth considering.

Society as a whole would be much more productive and wealthy without taxes. Without taxes, poor people’s paychecks would be bigger. They would receive more services per dollar spent on the market as opposed to the same services provided by taxation.

Any people who happen to still be poor in the extremely wealthy economy will either be provided defense for free from defense providers or from charity. People right now give a huge amount of money to charity, even though a lot of their earnings are stolen through taxation. People would be even more generous with charity if taxation were abolished. 

Around 60% to 75% of every dollar that is taxed for welfare[3] goes to pay bureaucrats and overhead. Voluntary charity provides more services per dollar than the same services provided by taxation.

It is important to remember that everyone who owns a business, road, apartment, etc. will be providing security. So it is very unlikely that poor people will go without defense. One thing for certain is that they will definitely get more defense than they do now.

The same basic analysis can apply to the court system. Tax funded courts are clogged and expensive. If there were a mass market for arbitrators and courts, the increased supply would greatly reduce prices.

  • What about corrupt market defense services?

First it is important to understand defense providers would have no special protection when it comes to them committing criminal acts. If a crooked cop is found to be guilty of a crime, he will have no special immunities. This alone is a very strong incentive to refrain from criminal activity.

What if a defense agency tries to extort people? What if they turn into criminals? They would be dealt the same as any other criminal gang. The non-criminal defense providers would put a stop to their attack. Wouldn’t this mean constant battles? As explained earlier, there are many incentives for resolving disputes peacefully.

It is also worth noting that aggression is very expensive. When governments wage wars, they are not paying for the costs. They force the costs onto the taxpayers. What would happen if a voluntarily funded provider tried to raise money to become aggressive? Without taxation to fund conflicts, there is less incentive to engage in one. Customers would not pay for the enormous price increases when there would be cheaper and more civil alternatives. The costs will be immediately and very apparent (unlike the hidden costs masked by inflation and debt funding etc. of current wars), and it would require the bulk of the population of a given area to agree with such aggression in order for the agency to voluntarily receive sufficient funds. If the bulk of a population in a given area is willing to fund such non-defensive violence, then the bulk of the population in this given area are aggressive maniacs and no social ‘system’ could possibly manage to prevent violence.

People would refuse to do business with any defense agency who refused transparency. Since we can foresee possible problems, we could include in the contract mandatory weapon and arms audits, inspections, inventory checks, etc. If an agency violates the terms in the contract, they would quickly lose reputation and go out of business.

We also have to ask, how does a business grow in the first place? How does a defense provider become successful? In a voluntary market we can assume that a defense provider would become successful by satisfying consumer demands. We can also assume that the owners of the company are probably good businessmen and entrepreneurs. Is it likely for a person to be a successful businessman but also be out of their mind?

  • What about greedy courts? Won’t justice be sold to the highest bidder?

First, it must be pointed out that the current system is already greatly favored towards wealthy people. The rich are able to control and influence government courts, yet the institution itself is still respected. The public in general overwhelmingly respect the government courts, even though it is almost universally acknowledged that corruption and bias towards the wealthy exists. The courts still have the respect of the public even when there is blatant corruption or bad decisions.

It is precisely the respectable and legitimate image the government courts hold on the general public that allows corruption and bias towards the wealthy. The view of the government courts as a sacred institution is precisely why those who wish to abuse power are attracted to it. That is not to say that everyone in the U.S. justice system has bad intentions, but rather that the institution itself will inevitably attract the few people in society who do have a lust for power.

Market courts would have no such automatic respect from the public. Any social order ultimately rests upon the support of the majority of the population. Unlike the government courts, there would be no decades of indoctrination dedicated to convincing the populace of the legitimacy of market courts. Without an automatic and near universal respect, any corruption or favor towards the wealthy would quickly turn the bulk of the population against the rogue court. The court would lose respect, and no other reputable court or the people in general would take their decisions as in any way binding. Society as whole would view the courts as the criminals that they are. There would be no illusion of legitimacy in the eyes of the public.

There is more to be said about this, but for the sake of making this not too long to read, I will end it here. Check out the resources at the bottom for even more detailed analysis of this objection as well as the others previously mentioned. Here is a good summary by Rothbard that should get anyone interested on the right track. From For a New Liberty:

“What of the court which favors its own wealthy client in trouble? In the first place, any such favoritism will be highly unlikely, given the rewards and sanctions of the free market economy. The very life of the court, the very livelihood of a judge, will depend on his reputation for integrity, fair-mindedness, objectivity, and the quest for truth in every case. This is his “brand name.” Should word of any venality leak out, he will immediately lose clients and the courts will no longer have customers; for even those clients who may be criminally inclined will scarcely sponsor a court whose decisions are no longer taken seriously by the rest of society, or who themselves may well be in jail for dishonest and fraudulent dealings. If, for example, Joe Zilch is accused of a crime or breach of contract, and he goes to a “court” headed by his brother-in-law, no one, least of all other, honest courts will take this “court’s” decision seriously. It will no longer be considered a “court” in the eyes of anyone but Joe Zilch and his family.

Contrast this built-in corrective mechanism to the present day government courts. Judges are appointed or elected for long terms, up to life, and they are accorded a monopoly of decision-making in their particular area. It is almost impossible, except in cases of gross corruption, to do anything about venal decisions of judges. Their power to make and to enforce their decisions continues unchecked year after year. Their salaries continue to be paid, furnished under coercion by the hapless taxpayer. But in the totally free society, any suspicion of a judge or court will cause their customers to melt away and their “decisions” to be ignored. This is a far more efficient system of keeping judges honest than the mechanism of government.

Furthermore, the temptation for venality and bias would be far less for another reason: business firms in the free market earn their keep, not from wealthy customers, but from a mass market by consumers. Macy’s earns its income from the mass of the population, not from a few wealthy customers. The same is true of Metropolitan Life Insurance today, and the same would be true of any “Metropolitan” court system tomorrow. It would be folly indeed for the courts to risk the loss of favor by the bulk of its customers for the favors of a few wealthy clients. But contrast the present system, where judges, like all other politicians, may be beholden to wealthy contributors who finance the campaigns of their political parties.”

Why advocate this system? If you oppose theft, you should oppose a system reliant on taxes. Taxation is theft, purely and simply. Not only should you oppose it because of it relies on theft, but also because everything provided by taxation can be provided more efficiently by voluntary organization.

Keep in mind that this is a very basic introduction. It was designed to give you a basic idea of how a society could function without taxation. It is by no means comprehensive. I take no credit for coming up with any of the ideas here. I tried to take important points from great works and put it into something digestible for a wide audience.

[1] Taxation is Theft: A Response to Criticisms http://wesker1982.wordpress.com/2012/04/16/taxation-is-theft/

[2] Why We Couldn’t Abolish Slavery Then and Can’t Abolish Government Now by Robert Higgs http://www.independent.org/newsroom/article.asp?id=2589

[3] The Cost Of Public Income Distribution and Private Charity by James Rolph Edwards http://mises.org/journals/jls/21_2/21_2_1.pdf

For a great introduction video, see The Market For Security by Robert P. Murphy:   http://www.youtube.com/watch?v=V0_Jd_MzGCw

For more on common objections see:

What About Criminal Courts? Won’t The Rich Take Over? http://www.youtube.com/watch?v=Bqo7XMkbtEk

Won’t Gangs Battle Or The Rich Rule? http://www.youtube.com/watch?v=RpCy0gmWMCM

Wouldn’t Warlords Take Over? http://mises.org/daily/1855

What About Warring Defense Providers? http://www.youtube.com/watch?v=spVl493wZUU

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9 Responses to Law Without Taxation: Contract Law

  1. Amazing post, I really do love it. I was curious about how these services (specifically courts) would be provided in an AnCap society. The only thing in here that I am not 100% sure about is your statement that “People would be even more generous with charity if taxation were abolished.” I would argue that a large majority of charity is due to taxes. I don’t see a source on this, and so I’m curious why you say that people would likely donate more. Obviously, having more money allows them to have more disposable income, but would any of that really go to charity?

    • Thanks!

      In regards to charity, I think that many people, me included, don’t donate to charity for the basic fact that were are already forced to give to charity. When such a large portion of your income is taxed, it is essentially forced charity, which means less people voluntarily give it. Charity by definition can’t really be due to taxes, if the charity is taxed, then it is not really charity. Charity must be voluntary. I think many people underestimate just how much charity is currently given. People are generous, even though much of their income is stolen. I think it would follow that people would be even more generous if they were allowed to keep more of their income. And some people simply can’t afford charity because of taxes, even if they were willing.

      Not only would people be more likely because they have more money, but I think there would be more of a sense of “need”. As of now, I think even people who have the disposable income for charity think “well, the poor people are being taken care of by the taxes, so it is not really needed”. It is likely that there would be much more of a sense of “urgency” if people did not put the responsibility on the government. I mean, it is almost guaranteed that when you talk to people about a voluntary society, one of the first questions is about the poor. I know it is not exactly scientific, but it seems like concern about the poor is universal. People put much of the responsibility on government, but without those programs, I think the void would be filled.

      The paper I linked at the bottom on Income Redistribution and Charity provides a lot of information on private charity. According to this http://fundingchangeconsulting.com/wordpress/wp-content/uploads/2010/02/Philanthropy-in-the-United-States.updated.pdf , over $300 billion in private charity was given in 2009. This one http://www.cato.org/pubs/policy_report/cpr-18n6-1.html says in 1996 “Volunteer work and cash donations combined bring American charitable contributions to more than $300 billion per year, not counting the countless dollars and time given informally to family members, neighbors, and others outside the formal charity system.”

      I tried not to make the post too economics heavy, but there is also a lot to be said about how significantly harmful the government squandering capital is to the poor. The amount of jobs lost due to wasted resources is huge. The list goes on, so I guess I will stop rambling now.

      • Sorry, by large majority due to taxes, I meant to imply donations due to tax deductions. I do understand your arguments here and have to agree. I have voluntarily donated money, time, and other things (blood) just because. And I often buy lunch/breakfast for friends who are unable, just so that I can enjoy their presence at lunch.

        The more I see and read on An-Cap the more I like it. A while back I started a blog spreading the good word (http://freedomfiends.org/). I had no idea that what I was talking about was An-Cap, but looking back, that’s what I want. I haven’t continued posting on that site, but some of the comments on the FCC post are priceless. Maybe I will get writing again.

    • Scott says:

      Private charities would work much more efficiently than government charities, so they would likely be able to do more good with less capital. Also, if people weren’t paying taxes and thinking of it as charity, I think they’d be more inclined to help out the less fortunate. But most importantly, privatization of the economy (including no welfare) would cause people to gravitate toward more productive private businesses to work. This would increase the overall productivity and wealth of the entire community. When wealth increases, poverty decreases.

      The government helps to keep the citizens poor by reducing productivity of the entire economy,

  2. Pingback: Contract Law and Daily Living | Tanner Cartwright's Blog

  3. this was a great morning read

  4. Steve Bodner says:

    read this 7/15/2013

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