I was recently asked a very simple question. “Assume India’s total tax revenue is 100 in a year. If you are all-powerful in the government, how will you spend that 100?”
To answer that, we have to ask what should the government do? I take my cue from the classical liberals like John Stuart Mill and Adam Smith from the 18th century and from libertarians like Robert Nozick of the 20th century. The basic and only job of the government is to maintain order in society. In order to maintain order, it has to protect life, liberty and property. That creates the necessary condition for the creation of wealth and prosperity.
Smith wrote that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”
I would follow Smith’s insight. Government has to maintain peace. Administering peace is critically important. Which entails protecting the life and property of individuals from other individuals. It also means adjudicating property disputes. So it has to have a judiciary. There has to be a legislative body to create and maintain laws. And the government has to employ a police force to prevent crimes and to punish criminals when necessary. Finally, the government has to have armed forces to resist external threats.
The government, as described briefly above, is a “night watchman state” or a “protective state.” It watches over the people and all it produces is essentially protective services.
That government is not a “productive state” — meaning it does not produce other public or private goods and services. It does not concern itself with, say, the production of educational services, or medical services, or transportation services, or food, or cars, or housing, or any of the millions of goods and services that are useful to society. All those will be “brought about by the natural course of things.”
Still, producing protective services is not free. Therefore the resources needed for them have to be raised through taxes. How much should who pay is a question that needs to be decided through some mechanism. That’s where a “constitution” comes into play. A constitution is a set of rules that are unanimously agreed upon. The constitution then picks a mechanism that allocates who will pay how much for funding the government.
If I were the grand dictator of a country, first I would estimate how much it would cost to run the police, the courts, the military and the legislature. The size (and therefore the cost) of the legislature will not grow with scale but the size of the others will grow (but less than linearly.) So in all, the overhead of maintaining peace and order will be very minimal. Therefore, easy taxes will be sufficient to ensure peace and a tolerable administration of justice.
The rules and regulations that the legislators create will have to renewed after 5 years and entirely deleted in 10 years. The constitution will have to be thoroughly updated and must be ratified by 70 percent of the adult qualified population every 20 years.
I would guess that my percentage allocation would be 5 percent legislators, 15 percent courts, 25 percent police and 55 military.
How would I raise the needed taxes? First, no income tax, either personal or corporate. And no property tax. Second, a progressive graduated sales tax from 1 percent to 10 percent only on final goods and services. Third, a land value tax of 1 percent per year of the market value of the land. Total tax receipt must to be capped at 5 percent of GDP.
Please feel free to point out any function of the governments that you believe I have overlooked.
Atanu Dey : Life is a Random Draw 
Some questions and thoughts about what else need to be tax funded:
1. Is policing a broader term for regulators as well? TRAI/SEBI/IRDA are needed to enforce market-rules. They may need taxes for functioning.
2. Community-medicine/pandemic-management? It is a bit like medical policing. An untreated/unvaccinated small-pox person is a threat for the larger society.
3. Footpaths in my locality? Local roads can still be funded by vehicle taxes in an ideal world. Intercity roads are already getting justly funded by the users via toll booths in many places. But what about the people walking on footpaths? It is technically difficult to track them and charge them for footpath construction/maintenance. We may need taxes for footpaths for purely implementation reason.
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Makes sense that you hold views from the 18th and 19th century. There is no nuance here other than “state = bad”.
Most people eventually grow up after reading Ayn Rand in high school. It seems the author of this article never did.
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