A government supports its legitimate activities under capitalism through voluntary financing methods.
The costs of a proper government — with an army (engaged only in self-defense and not imperialism), a court system, and a police force — are very small, and easily paid for by voluntary financing methods, such as insurance on contracts.
Similar methods are used by nonprofit agencies, like churches, to raise billions of dollars.
Comments Ayn Rand on “Government Financing in a Free Society”:
Any program of voluntary government financing has to be regarded as a goal for a distant future. What the advocates of a fully free society have to know, at present, is only the principle by which that goal can be achieved.
The principle of voluntary government financing rests on the following premises: that the government is not the owner of the citizens’ income and, therefore, cannot hold a blank check on that income—that the nature of the proper governmental services must be constitutionally defined and delimited, leaving the government no power to enlarge the scope of its services at its own arbitrary discretion. Consequently, the principle of voluntary government financing regards the government as the servant, not the ruler, of the citizens—as an agent who must be paid for his services, not as a benefactor whose services are gratuitous, who dispenses something for nothing. [The Virtue of Selfishness]
In today’s mixed economies, the removal of taxation would be the last step to implement in the transition to a free capitalist society. Only if one wants to turn government into an engine to support the welfare state do voluntary financing methods fail to work.
Most people (not all) would voluntarily give 5 to 10% of their income to support a government that protects rights. Almost no one would voluntarily give 50% to 90% of their income to support a mixed economy/welfare state, which is why the government must threaten the use of force to confiscate wealth via taxation.
Who would want to voluntarily pay for that? Perhaps a few people would, but they are the ones who think that they will get to be holding the leash.