Currently, the federal government is spending about 23 percent of GDP, and so you are probably thinking it is impossible to have a world where the federal government only spends 3.5 percent of GDP. However, up until World War I (before the income tax), the federal government only spent about 2.5 percent of GDP. In the 1920s, it was spending less than 4.5 percent of GDP.
The fact is the United States could have a radically smaller government — which would not require a federal income tax or some big replacement tax — without taking away the social safety net or gutting defense. Existing entitlement programs, including Social Security and Medicare, could be replaced by true, fully funded insurance programs following the Chilean model as roughly 30 other countries have done (the payroll tax would still be required to support these programs). Farm subsidies and other forms of corporate welfare would have to be abolished, and the United States would need to give up its role as a global policeman and concentrate on protecting the homeland. …
A smaller government, without income taxes, would mean much higher economic growth and job creation — and thus would allow a perpetually small deficit, with the profits from the Fed being used to fund part of the government. A government that grows at a slower rate than the private economy and with an annual deficit less than the rate of GDP, is a prescription for long-run economic prosperity.