Free Cities offer a wide variety of benefits to their residents-customers. In all freed markets, both the buyer and the seller of a given service enter an economic relationship voluntarily and both sides (at least before the transaction) believe they will benefit from the relationship. Otherwise, why would they freely consent to the transaction? While the benefits of Free Cities range from providing a secure community to work and live to finding a place to live that is simply less political, one of the most important freedoms that Free Cities offer is freedom from overbearing income taxation. The following is, of course, not tax advice but rather a general article on the benefits that Free Cities might offer to their residents. The points explained below are best applicable to the most far-reaching Free Cities model — the Free Private City.
Currently, the two major income taxation schemes in the world are residential taxation (or taxation of individuals that are citizens and/or residents of a given country) and territorial taxation (a tax imposed on economic activity happening within the physical jurisdiction). While, from the standpoint of an expat or a liberty-minded person, the territorial tax scheme may have its benefits, it is far from optimal and presents an opportunity for Free Cities to improve the relationship between residents and the governance structure.
Regardless of the type of tax scheme, any taxation will require enforcement. The enforcement will consist of a number of aspects but some of the more important features include:
- a complex tax code,
- ‘voluntary’ compliance with filing tax forms and other reporting requirements,
- a bureaucratic organization to review and decide to accept or reject the filing and associated tax payments, and finally
- an enforcement arm in the case that the ‘voluntary’ compliance does not meet the standards imposed on the resident.
The details might differ with each jurisdiction, but these characteristics are a clear affront to personal liberty. Free Cities can help alleviate this and move to a more genuinely voluntary relationship between residents and payment for the governance and infrastructure that comes with living in a community.
Tax codes are extremely complex and can frequently be vague and require the help of a lawyer and/or accountant. By contrast, the tax code of a Free City would be much simpler. While Free Cities can ultimately choose the tax system of their choice, the leading option in the mind of practitioners developing Free Cities is actually to impose no tax at all but rather to have a fee-for-service model. Instead of imposing tax at unilateral and arbitrary rates, a Free City would enter into a contract with each of its residents. If a resident wants to access and use the resources and facilities of the city, they must have a contract with the City Operator. A list of fees paid by the resident and services provided to them would be part of that contract.
The payment of all basic governance services could be as simple as covering a single fee of, say, $2000-5000 per year. On the other hand, City Operators might also provide a more detailed fee schedule in which they charge, for example, $1,000/year in infrastructure and maintenance costs, $500/year in dispute resolution costs, $1000/year in security fees and $500/year in insurance fees. In total: $3000/year. Of course, even this is a very simplified example and real-world fee schedules could look very similar to the fee schedules of insurance contracts.
Of course, most hard-working people making an honest wage would be happy to substitute their income tax bill each year for a fee-for-service in the range of $2000-5000. This lower ‘tax’ bill would result in more money in the pockets of the resident to be used to improve one’s quality of life or invest in a new business. While these monetary benefits are very real, one of the underrated and arguably most important advantages this system provides to the resident is the psychological benefit of avoiding the tax system altogether. No longer does the resident need to be aware of or pay attention to ongoing political dialogue about tax rates and brackets. No longer does the resident need to pay attention to the tax code and try to decipher the gray areas. No longer is the resident forced to fill in complex and tedious tax forms only to tell the government what they think they owe the government. Even after submitting the bill, one cannot be sure they have done it correctly and regardless of whether it is correct or not, one can be audited by the tax authorities and be forced to try to prove their innocence. Finally, no longer does the resident need to hire accountants and lawyers on their own dime to determine their tax bill. While these services are valuable in the current market, these are wasted resources in a free society. Smart and hard-working people should be working to create value rather than report to tax authorities.
The ability to avoid this stressful and time-consuming act of reporting and filing is equally likely to benefit the resident’s quality of life by providing peace of mind. Not having this stress would lead to a more happy, healthy, and functional life and would allow the resident to take calculated risks in other aspects of their life, such as starting a new business. No longer could the arbitrarily applied power of the tax authorities threaten the life of the resident.
From the point of view of the City Operator, the simple fee-for-service model is also much easier to enforce and administer. Having a contract with each resident which outlines specific fees makes it very clear exactly what is owed at what time. This is much easier to review, document, and collect than requesting citizens to perform arduous and complex tax calculations ‘voluntarily’. This ease of administration leads to a much lower headcount, much less uncertainty, and much less need for multiple layers of review. Administration becomes a managerial task to be accomplished efficiently rather than an exploding bureaucratic process (see the recently hired 87,000 new IRS agents, for example).
Finally, enforcement becomes much easier. Fees are easily identifiable and much lower than the average tax bill. Therefore, they are less likely to be gamed by the resident. In addition, City Operators may disallow anyone from entering the city if they violate the rules and do not pay their fees. Enforcement then becomes easier and less physically violent without sacrificing compliance rates, which would doubtless be higher than the current taxation schemes used around the world.
To conclude by reiterating my initial message, Free Cities have a lot to offer the world but one of the most important benefits comes in the form of better tax/fee systems that are voluntarily agreed to, lower, and simpler to calculate, pay, and administer, giving residents another bit of freedom in their economic and personal lives.
This blog post is an amended version of an article originally published in Escape Artist Insiders Magazine in October 2022. Visit their website for more articles, information and advice on becoming an expat or digital nomad.