No discussion of government is complete without talking about the base of its power, taxation. Taxation is the means by which a government funds itself. It forcibly takes money from its citizens and spends it on its own ends.
Objectivists generally consider taxation to be just another form of theft, but at a scope larger than any known to man. That people who claim to represent us are doing the taxation doesn't change the nature of it. The fact that the money is demanded, with the threat of violence lurking in the background, means it is not voluntary.
One of the issues with taxation is the people spending it may have a very different opinion about how much money is needed to do their job "right" than the people who have to pay for it. When the people spending the money also get to decide how much they get to spend, it's a really perverse incentive that leads to greater and greater taxation.
Taxation is always one of the big question marks as far as the government goes. How does one fund a government without taxation? It's a difficult problem. Rounding up criminals off the street or protecting the nation from invasions are things everyone benefits from. You've got a possibility that people will not pay for it since they'll just get it for free. Is that a problem? If there's enough money anyway, it might be okay, even though it seems unfair.
Most people don't really believe that voluntary contributions to the government will work. People would have to be pretty enlightened to see the need for the government and dig into their own wallets to help out. The usual criticism of the voluntary contributions is that people aren't smart enough to do it, even if their lives are at stake. It's something that can be argued, but most Objectivists assume that the culture will have to advance a bit before we can shrink government down to the level where we can get rid of taxation entirely.
There are other possibilities for government funding. Since government are needed to enforce contract laws, businesses could require a government approval for any contracts, which requires a small fee for registering the contract. These contract fees could bring in a bit of revenue for the government, and are legitimately connected to the purpose of the government.
There are plenty of other ideas thrown around. Government lotteries bring in lots of money, but only because they outlaw competition. The US government has a huge amount of resources (national forests, etc), that it could sell off and run on just the interest. There could be fees charged for other services besides contracts. Or you could have to pay in order to participate in the government itself (i.e., voting).
There are also some Objectivists who argue that taxation may actually be morally legitimate. The reasoning is that morality deals with choices. If there is in fact is no way of funding a government without taxation, and government is necessary, then the taxation can't be considered immoral. If there is no choice, it can't be immoral. There's no such thing as a necessary evil.
The reasoning is correct, if they could prove that taxation is in fact necessary. Although there are questions about the likelihood of any particular means of government financing, that's a far cry from proving any of it impossible. And the burden of proof rests on those who would claim the need to steal from us, a burden they haven't come close to meeting.