The following essay is based on my chapter, “How to Create a Constitutional Federal Budget Without Income and Payroll Taxes,” in the forthcoming The Ethics and Philosophy of Taxation, edited by accounting professor and libertarian Rober W. McGee.
On July 4, 1776, the American colonists declared their independence from Great Britain. The 13 colonies asserted their right to secede from the British crown because of the grievances outlined by Thomas Jefferson in the Declaration of Independence. In a little more than a year--July 4th 2026--the American people will celebrate the 250th anniversary of the Founder’s unequivocal endorsement of natural rights as the foundation of a free society. However, the celebration will be bittersweet because the ideals of the American Revolution have not been fully realized. Statism is alive and well in America. In other words, the federal government has strayed markedly from both the Declaration’s principles and the authorized activities of the federal government according to Article I, Section 8 of the Constitution.
Although the Declaration focused on political independence, the only implied—and probably the most remembered and quoted phrase-- regarding the people’s financial independence is, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness (emphasis added). And “…to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.” In short, the people’s right to life and liberty can mean only one idea— a laissez faire economy.
Thomas Jefferson, in his first inaugural address, articulated one of the clearest assertions about “good government” consistent with the spirit of the Declaration.
“… a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government….” The right to life, liberty and the pursuit of happiness, has been interpreted differently over more than two centuries. For libertarians—anarcho capitalists or limited government advocates-- and conservative free market supporters, the natural right to liberty means a tax-free society or a minimal tax burden so that there is virtually no disruption to the market economy. Otherwise, a society would succumb to “legal plunder,” a term Frederic Bastiat popularized in his classic The Law, nearly three quarters of century after the Declaration was written.
According to Bastiat, legal plunder occurs when “the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.” The purpose of the law, according to Bastiat, is to protect private property, not redistribute income. More than one hundred years after Thomas Jefferson’s first inaugural address, another president, Calvin Coolidge, restated a limited government vision for America.
“Unfortunately the Federal Government has strayed far afield from its legitimate business. It has trespassed upon fields where there should be no trespass. If we could confine our Federal expenditures to the legitimate obligations and functions of the Federal Government a material reduction would be apparent. But far more important than this would be its effect upon the fabric of our constitutional form of government, which tends to be weakened and undermined by this encroachment.”
Coolidge’s perspective about taxes and spending was evident during his tenure in the White House--tax rates were lowered, and federal spending was reduced, policies that have been credited with being instrumental in igniting the boom better known as the Roaring Twenties.
While Coolidge’s fiscal policies was pro-growth, the Federal Reserve was inflating the supply of money and credit causing both the boom-bust cycle and an unsustainable stock market boom that ended in the 1929 Crash during his successor’s presidency. President Herbert Hoover’s interventionist policies did not prevent the stock market from declining nearly 90% by July 1932, and unemployment reached 25 percent at the depth of the Depression while the economy’ output declined by one third by the early 1930s.
After President Hoover lost his bid for a second term (1932) in a landslide to New York governor Franklin D. Roosevelt who campaigned on a fiscal conservative platform, FDR in effect continued Hoover’s interventionist polices. In short, the Hoover – FDR experiment in massive government intervention turned an inevitable economic downturn to correct the excesses of an easy money cycle into a decade’s long depression. Both Hoover and FDR viewed the federal government as the economy’s “manager,” and the assertion that Hoover was a champion of laissez faire economics was debunked by his actions. The myth of Hoover’s free-market policies is still prevalent among establishment economists and historians.
The Welfare-Warfare State
FDR’s New Deal interventionist policies laid the foundation for the massive welfare state we have today. For the past 90 plus years, Social Security, welfare benefits, unemployment assistance, Medicare, Medicaid, Obamacare, housing subsidies, food stamps, the Federal Reserve’s easy money policies, and other entitlements/redistribution policies have taken root in the country’s economic, political, and social culture.
The fiscal 2004 budget that ended on September 30 reveals the scale and scope of federal government spending and the tax burdens placed on American workers and businesses.
Source: US Treasury Monthly Statement
Since the Hoover-FDR New Deal, members of Congress and presidents from both major political parties have failed to uphold their oaths to defend the Constitution by spending the public’s money without regard to the limits placed on their authority. Thus, the welfare-warfare state has been a bipartisan project.
A constitutional federal budget (CFB) would require phasing out Social Security, Medicare, and Medicaid. A CFB would abolish all Income Security programs, as well as the Departments of Education, Energy, Commerce, Agriculture, Transportation, Labor, Interior, Housing and Urban Development, Homeland Security, Health and Human Services. In addition, scores of agencies such as the Environmental Protection Agency, National Endowment for the Arts, National
Endowment for the Humanities, to name a few, would also be abolished. All foreign aid would be end and the Pentagon’s budget would be downsized to reflect the optimal defense needs to protect the American people from a military attack.
To achieve financial independence and a constitutional budget a cultural shift greater than the one that occurred that created the modern welfare state 90 years ago will be required. No easy task since entitlements are deeply embedded in the American psyche.
A financial independent America would not occur overnight. It could be accomplished relatively quickly with the “Grand Bargain.” Eliminating federal income and payroll taxes would be the first step moving the country toward personal financial independence. No more federal taxes on incomes, interest, dividends, and capital gains. The corporate income tax would also be abolished. The outlays for Social Security and Medicare would be reduced substantially because upper income and most middle-income beneficiaries would be better off under the Grand Bargain. The only remaining beneficiaries of Social Security and Medicare would be retirees who have insufficient savings to generate returns to be financial independent. Medical care would be restructured saving retirees and the public hundreds of billions of dollars as insurance would be used for its intended use—catastrophic losses.
Medicaid would be abolished and replaced with nonprofit medical centers such as the Neighborhood Health Clinic, which is funded solely by private contribution. This transition should take no more than five years to create enough nonprofit health centers throughout America.
In addition, Americans--the most charitable people in the world—would increase their support for charitable organizations that would provide more effective social services than the federal government
To pay for the transition the following fees would be imposed for the next five years.
- A five percent retail excise fee is estimated to raise $1 trillion based on current annual consumption of $20 trillion, which will fluctuate minimally over time. All retail purchases—including rent—would pay the fee. Retailers and property owners would send the fee to the US Treasury. The IRS effectively would be abolished.
- Businesses would pay a one percent excise fee on their revenue, which would raise approximately $300 billion, $200 billion less than they paid in fiscal 2024.
- A one percent excise fee on all asset purchases---real estate, stocks, bonds, etc. From various sources, the best estimate of the total amount raised by this one percent fee include: $500 billion from stock purchases, $52 billion from options trading, $83 billion from bond purchases, $15 billion from private real state purchases, $10 billion from commercial real estate transactions, and $3 billion from private equity in 2024. Private equity had a steep drop in 2024 from previous years. Private equity purchases should boom in an economy with no federal income tax. Thus, more revenue would be expected to be collected in future years. Purchasers of futures contract would pay $20 per contract generating approximately $200 billion in revenue.
The above fees would raise $2.2 trillion as of this writing, substantially less than the $4.9 trillion in taxes collected by the federal government in fiscal 2024. In addition, the federal government could exchange annually some of the $9 trillion in assets (not including land) for the current 1.1 trillion dollars of interest on the national debt ($36 trillion).
A CFB would spend no more than $2 trillion by eliminating all social welfare spending and reducing military expenditures to less than half of current outlays. The one trillion-dollar interest expense on the national debt would be the largest expenditure of federal government under this scenario.
The above roadmap is a starting point to begin a national discussion about federal spending, taxation, and financial independence. Creating a constitutional federal budget is a worthy goal that would virtually eliminate statism in America.
Murray Sabrin is a Mises Institute Associated Scholar and Emeritus Professor of Finance, Ramapo College of New Jersey. He is the author of six books, including a memoir that was published in 2022.
