A national defense will receive it’s money when a nation initiates force against us, ie, the offending nation will be responsible for the costs once we kick their ass. Really, it’s a good thing if national defense can only receive voluntary contributions from it’s citizens. It’s a final check on government abuse. If our government is waging war for reasons other than retaliation, it’s going to stop receiving the funding it would usually get.
As for your point about public institutions granting special privileges in favor of funding.. well, this all assumes that there aren’t plenty of donors to chose from.
If there is no comprehensive and properly funded law enforcement, then bribes, chicanery, threats, assassinations, conspiracy, and patronage are more than capable of assuring that there will not be plenty of donors to choose from.
As for the national defense, I don’t think the same problem with corruption would occur, but I’d be concerned about the Army’s ability to be effective on just donations. Ultimately, I guess I’d have to say that my rights should not depend on the will of my countrymen to fight for them. This is an extension of the idea that my rights don’t depend on the desire of my neighbors to recognize them (ie, if they want to steal from me). Perhaps that’s a fallacy, but it still presents two alternatives.
One: we are all individually responsible for the protection of our rights, and may choose to combine forces with like-minded neighbors with whom we trade, but they may choose at any time to abandon me and my rights to barbarians if it is too costly to them and I can’t alone afford it.
Two: rights are incontrovertible, and they are collectively recognized and protected. It is important to think of these as individual rights, and not some other false kind.
It seems that option 1) is more appropriate. After all, imagine a scenario: what if there are powerful barbarians to the south; these men are very costly to fight off. Presumably, there is a choice to live in South or North. Why should the North be forced to pay for the South men lifestyle, when they intentionally expose themselves to that harm and cost? Protection and force are commodities subject to laws of scarcity and commerce like anything else. We don’t (well we do, but we shouldn’t) pay a whole lot of money to rescue idiots who intentionally expose themselves to the ravaging forces of the wilderness (avalanche, blizzard etc.). They must assume the cost of their choices.
Now a more complicated scenario. Assume all I say here is true. It is the American civil war: if the North and South split, the two republics won’t be able to afford collectively to preserve their geopolitical posture, and will both someday be overrun by Spanish, Russian, and British tyranny (and there are no slaves somehow). Collectively, their wealth and manpower can afford to ‘keep the flame of freedom alive’. Does the North have a right to conquer and ‘loot’ the south, if the purpose of that looting (or forcing them into the fold for taxation) is the very survival of rights. Well, no, because then the rights are purchased according to a contradictory premise. But I think this scenario frames the issue more closely.
Now, the right answer to the barbarian scenario has a historical precedent in the militia. The south men would properly have to fund their own defense. The north would be involved only when the conflict threatened the polity as a whole, or if their interests coincided (colonizing the wild west).
What I am concluding from this thought experiment is a hybrid system. States may coercively tax for law enforcement purposes (absolutely necessary), and presumably for defense purposes (national guard) since the scale is small enough that all defense is a public commodity. The federal government may not coercively tax since its scope does not include law enforcement - and when it does a collaboration between states who have secured funding would suffice. The federal government’s defensive scope is also very broad. It will raise the funds it needs for the actions it needs when a sufficient number of people consent to and fund the action. It can use: donations from the states (hard pressed to fund law enforcement and militia already), donations from individuals (publicly documented), and theoretically bonds (if you anticipate reparations).
What a state should be, and how the federal system is organized, are then very important. It would really be a confederation with a few beefier powers (feds can strike down trade barriers for interstate commerce, send Marshalls if minority groups are persecuted in one region or another).