Benjamin Franklin, a US Founding Father and statesman, famously stated that only death and taxes are certain in this world. He was speaking nearly 200 years ago, but the proverb still holds true today. This article explains how governments have raised taxes in times of war or emergency from ancient times.
Taxation has its historical roots in the early years of record-keeping: the oldest evidence are written on clay tablets discovered in Sumeria, which is now part of modern-day Iraq. There are tax records dating back to roughly 3300 BC. Egypt had one of the first tax systems, according to archaeology: between 3000 and 2800 BC, Egyptian pharaohs used collectors or scribes to levy levies on a variety of items and produce, such as cooking oil. The tax was collected twice a year and supplied revenue largely for government operations, the support of the head of state, and the financing of wars.
Ancient Greece and Rome are often cited, too, among the earliest regimes attempting to raise taxes in an effort to generate funds for government expenditure. Greek city states imposed taxes on commodities when wars were fought or when there was an emergency, but (where some form of democracy applied) usually direct taxation only applied to the part of the population entitled to vote. In times of peace, the state governors sometimes paid back revenue no longer required for military conflict.
In ancient Rome, the second Caesar, Augustus, acclaimed for his ability as a strategist and financial expert, introduced a wealth tax on Roman citizens. Under later emperors the reliance on taxes ebbed and flowed: there was always some expense involved in defending the empire’s borders but additional funding might be needed for military campaigns (against invaders, or, for example, when Claudius decided to conquer Britain). International trade and the imposition of tariffs on imports were crucial and tended to produce a steady source of income, even more than the taxes paid by Roman citizens.
Direct taxes in India were introduced some centuries before 300 BC, and tax advisers, drawing on the acclaimed texts Manu Smriti and Arthasastra, guided kings and rulers on how best to shape and formulate policy. Ancient Chinese civilizations rank high on the list of regimes contributing to the development of tax. Around 600 BC levies on property were imposed: 10 percent of cultivated land ended up in emperors’ possession. Governments used these resources to pay, for example, for imperial palaces, the Great Wall, and the emperors’ armies.
In the Dark Ages, after the Roman Empire collapsed in Europe, Europe returned to less sophisticated tax systems that varied from kingdom to kingdom. Karl Marx saw the feudal network as he understood it as muddled and uncoordinated, taking a toll on the development of European economies. Feudal taxation was highly indirect: large classes were expected to give their labor and its fruits to the overlord and monarchs occasionally brought in levies to cover military engagements (or extravagance), which were resented by the populace. These were generally on assets, like the famous Window Tax introduced under William and Mary and only repealed 150 years later.
By the 18th century, the intelligentsia began to discuss the purpose of government. Industrialization led to calls for political and economic reform and for the tax system to tackle the accompanying expansion and growth: rich merchants reaped extensive profits from colonies in Africa, Asia, and elsewhere. In Europe, income tax was introduced in the eighteenth century, as in ancient times, to cover foreign wars. Monarchs’ ruthless demands on their taxpayers sometimes led to revolutions.
Dissatisfaction with colonial inequity in taxation sparked uprisings around the world, including the American War of Independence. The motto ‘no taxation without representation’ plagued the British government, which thought that colonies should pay significant levies on commodities and assets in exchange for protection from the ruling power.
After the British were defeated, the new federal government instituted a more equal and fairer tax structure as a prize for residents’ contributions to the defeat of their enemy and as a nod towards encouraging liberty and freedoms. Notably, it did not include any federal income tax. This continued until the American Civil War, when the levy was implemented to pay the debts accrued as a result of internal fighting.
Some grievances felt by the American Founding Fathers were shared in Britain. Many British taxpayers also argued that the enforcement of taxes, especially income taxes, was an infringement of individual liberties. More often than not, tax on a country’s citizens is borne out of necessity, regardless of the tax’s efficacy or whether defense through military means is justified or not. The British legislators argued that income taxation would only be a temporary measure, so credit should be given to the government in power that abolished income tax in 1816.
Tax increases often determine the fate of politicians. Though in 1841 (the beginning of the ‘Hungry Forties’) Sir Robert Peel fought a general election with a commitment not to reintroduce income tax, he went back on his word in his government’s Budget a year later. Although Peel’s government lasted until the repeal of the Corn Laws in 1846, the introduction of this unpopular (and ‘un-Tory’) tax was a factor in its downfall and the splitting of the Tory party.
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The British involvement in the Crimean War between 1853 and 1856 was another campaign that prompted a hike in duties. Lord Aberdeen’s government argued that the fiscal increases would be for the short term only, but in fact they continued after hostilities and action in the Crimea came to an end.
In the early part of the twentieth century, approximately one million people in Britain were subjected to income tax. Lloyd George raised tax rates in his People’s Budget of 1909. These Liberal social policies provided a foundation for the Welfare State (the same budget introduced a limited state old-age pension) but public expenditure grew considerably during the First World War, the Great Depression and the Second World War.
The massive financial burden for taxpayers was partly offset (in Britain) by the government taking out huge loans but also pushing taxes much higher. In 1944 ‘pay-as-you-earn’ (PAYE) was welcomed, at first, allowing income tax to be deducted from wages by the employer, with employees receiving their pay net (and so, no longer having to make their own arrangements to pay their taxes). PAYE remains a legacy of the Second World War.
More kinds of income or assets began to be taxed. Inheritance taxes have been introduced (and canceled and reintroduced). Capital gains tax was first applied in 1965 and is payable when certain assets are sold or passed on. In the same year, corporation tax for businesses was set at 40 percent, having previously been payable at the same rate as income tax.
Another important landmark was the introduction of value-added tax (VAT). This tax was the invention of the French stalwart Maurice Lauré in 1954 and was welcomed by politicians in Europe. VAT is an indirect tax, as it is collected by companies on sales they make, who in turn pass the proceeds on to the government.
In the UK taxes began to be tweaked yearly and the Conservative and Labour parties each had their own strategy for raising money. Margaret Thatcher’s administration from 1979 favored lower income taxes, preferring the use of VAT on goods and services. ‘New Labour’, having ditched a left-wing agenda, was keen to promote favorable market conditions for free enterprise and they too sought to lower income tax, but taxes that were both indirect and regressive, such as National Insurance contributions and VAT, bore heavily down on the economy when the Great Crash came in 2008.
The UK’s tax policies have been dramatically affected by the pandemic. In 2018/19, the Treasury was happy to announce that the net increase in government debt had been ‘kept down’ to £22.1bn over the previous year. But the spread of the coronavirus has required a massive increase in public expenditure which has to be paid for in future years, encouraging calls for a wealth tax. Richard Partington, a financial correspondent at the Guardian newspaper, argued in December 2020 that a one-off wealth tax on millionaire households could raise as much as £260bn.
The response to the recommendation has been mixed. The Institute for Fiscal Studies (which generally aligns with the Conservatives) prefers adjustments to the existing tax system, on the grounds that more fairness would be achieved. Boris Johnson, the prime minister, doubts whether a wealth tax is desirable, on ideological grounds.
Tax codes and personal allowances are also being re-examined by economists and politicians, not just because of the pandemic but also as a result of the UK’s departure from the European Union. The abolition of VAT has been suggested but, as with the proposal for a wealth tax, it is unlikely that the present government would make such a drastic change to fund public finances.
Purposes of Taxation
During the 19th century, the prevalent idea was that taxes should serve mainly to finance the government. In earlier times, and again today, governments have utilized taxation for other than merely fiscal purposes. One useful way to view the purpose of taxation, attributable to American economist Richard A. Musgrave, is to distinguish between objectives of resource allocation, income redistribution, and economic stability. (Economic growth or development and international competitiveness are sometimes listed as separate goals, but they can generally be subsumed under the other three.)
In the absence of a strong reason for interference, such as the need to reduce pollution, the first objective, resource allocation, is furthered if tax policy does not interfere with market-determined allocations. The second objective, income redistribution, is meant to lessen inequalities in the distribution of income and wealth. The objective of stabilization—implemented through tax policy, government expenditure policy, monetary policy, and debt management—is that of maintaining high employment and price stability.
There are likely to be conflicts among these three objectives. For example, resource allocation might require changes in the level or composition (or both) of taxes, but those changes might bear heavily on low-income families—thus upsetting redistributive goals. As another example, taxes that are highly redistributive may conflict with the efficient allocation of resources required to achieve the goal of economic neutrality.
In modern economies, taxes are the most important source of governmental revenue. Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited—i.e., they are generally not paid in exchange for some specific thing, such as a particular public service, the sale of public property, or the issuance of public debt. While taxes are presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any specific benefit received.
There are, however, important exceptions: payroll taxes, for example, are commonly levied on labor income in order to finance retirement benefits, medical payments, and other social security programs—all of which are likely to benefit the taxpayer. Because of the likely link between taxes paid and benefits received, payroll taxes are sometimes called “contributions” (as in the United States).
Nevertheless, payments are commonly compulsory, and the link to benefits is sometimes quite weak. Another example of a tax that is linked to benefits received, if only loosely, is the use of taxes on motor fuels to finance the construction and maintenance of roads and highways, whose services can be enjoyed only by consuming taxed motor fuels.
In the literature of public finance, taxes have been classified in various ways according to who pays for them, who bears the ultimate burden of them, the extent to which the burden can be shifted, and various other criteria. Taxes are most commonly classified as either direct or indirect, an example of the former type being the income tax and of the latter the sales tax. There is much disagreement among economists as to the criteria for distinguishing between direct and indirect taxes, and it is unclear into which category certain taxes, such as corporate income tax or property tax, should fall. It is usually said that a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.
