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The question of how a minarchist or libertarian government ought to tax its citizens is often raised. These questions come from two sides; on the one hand, anarcho-capitalists who want to show that minarchist states ultimately rest on coercive taxation; on the other hand, social democrats who want to show that libertarian government cannot be adequately funded.

I believe that the challenges of libertarian taxation can be addressed by returning to the minarchist notions of what services government ought provide, and tying them to forms of taxation.

1. Contract taxation
The first role of the libertarian state is to uphold voluntary contracts. This necessitates a functional judicial system including an enforcement arm. In order to provide a source of government revenue for this purpose, citizens could be charged a percentage on the value of any contracts entered into in exchange for the right to have the government enforce the contract at law.

For sales contracts such as retail transactions, the contract tax would equate to a sales tax. But the tax could be applied to other contracts as well, such as a public relations contract between a company and an agency, or an employment contract between an employer and an employee. The tax could be paid by either party to the transaction, or shared between the two, at their preference (or as mandated by law).

Assume the tax is set at 10%. A purchase of $100 of groceries at Wal-Mart would then have a $10 tax. An employment contract for $100,000 per year would have a $10,000 contract tax.

Voluntary Nature: However, the contract tax would be voluntary. Contracting parties who felt secure in a handshake agreement would not have to pay the tax. For instance, if I agreed to mow your lawn in exchange for your collection of old books, and we simply wanted to make this a gentlemen's agreement, we needn't register it and pay the tax on it. But if the agreement went into default, neither of us would be entitled to the benefit of the court system for its enforcement. Of course, the vast majority of retail transactions with reputable businesses and business-to-business transactions would seek the assurance of legal enforcement, and fund the government with their taxation. But because it is voluntary, the system would not create a black market or impose an undue hardship on barter transactions, small claims, and so on.

Not Regressive: The contract tax can be made non-regressive by giving each individual a personal deduction against contract tax paid during the year. For instance, each citizen might have a $5,000 personal deduction, with the ability to file for a refund against contract tax paid.

2. Property Taxation
The second principal role of the minarchist state is to protect life and property from crimes and torts. This leads us to the idea of an annual property tax based on the total value of all property held by the citizen. Among property held should be the citizen's life, which can be assigned a dollar value. (For instance, the US Department of Transportation values each human life at $3,000,000.) For the system to be fair, the value of a human life must be assigned a relatively high number, with a relatively low tax rate.

For instance, consider the idea that each citizen must pay a 0.1% annual property tax based on property held, with a value for their life set at $3,000,000, or $3,000. Citizens within a broad range of middle class wealth (with a net worth fewer than one million dollars) will be paying within approximately the same range. The very affluent multimillionaires will pay more, but the marginal cost of gaining wealth will never be so large as to discourage capital accumulation. As those with more property have more at stake and risk losing more, it is equitable that they be asked to pay more.

Like the contract tax, the property tax can be voluntary. An individual who opts not to pay property tax would find his person and property outside the protection of the laws, what in the Middle Ages was literally called an "outlaw". If beaten or robbed, he has no recourse to government, having opted out of the protection of its laws.

The property tax would apply towards property held by Americans offshore and expatriates leaving abroad, if they wish to avail themselves of the protections of American law. Paying the property tax might also be required to be eligible to take advantage of the contract tax, as every contract would involve an issue of property or self.

Would it Work?
Assume a government budget of $2 Trillion dollars annually. While less than our current exorbitant budget, this is roughly on par with the start of the Bush Years, and certainly more than a minarchist state would need.

In a nation of 400 million, the US has 115 million households and 138 million taxpayers. The average household spends $3,409 per month, making monthly household consumer spending $392, 035, 000, 000 or $392 trillion or $4.7 trillion annually. The US GDP is $14.7 trillion. Let's assume that *all* consumer spending is exempted from the contract tax, i.e. only businesses opt in. This leaves $10 trillion.

A flat 20% contract tax would generate $2 trillion annually. If the tax rate is set at 15%, $1.5T is collected, leaving $0.5T to be collected from property taxes. If we assume that only current taxpayers pay taxes, this would mean a property tax burden of $3,623 per tax payer.

This simple math suggests that this approach is more than capable of sustaining government.