Tax

• 1. Introduction

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  Around 3000 to 2800 BC, in the First Dynasty of the Old Kingdom of Egypt, the first known system of taxation took shape. The Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Some of the records that survive are granary receipts scratched onto limestone flakes and papyrus. A tax, at its core, is a mandatory financial charge imposed on a person or a legal entity by a government to support public spending. Yet that plain definition hides a sprawling argument that has run for five thousand years. Who should pay, and on what? Should the rich pay a higher share than the poor? Is a tax a fair price for civilization, or is it theft backed by force? What does it take to collect one, and what damage does collecting one do? Some call taxation the price of civilization. Others, such as libertarians, call it extortion through coercion. Both have been saying so for a very long time.

• 2. The Many Faces Of A Tax

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  Net profits from a business, net gains, and other income form the base of the income tax that many jurisdictions levy on individuals and corporations. Rates may climb with income through progressive brackets, or hold flat at a single percentage. Tax agencies often collect personal income tax on a pay-as-you-earn basis, then settle up after the tax year. Those who underpaid send a payment to the government, and those who overpaid receive a refund.

  Capital gain, the gain on the sale of an asset not held for sale in the ordinary course of business, is treated by most income-tax systems as part of taxable income. Because rates on capital gains are often much lower than on ordinary income, there is widespread controversy about how to define capital itself. Some jurisdictions tax gains differently depending on how long the asset was held.

  Value-added tax, known elsewhere as Goods and Services Tax, applies a sales-tax equivalent to every operation that creates value. Imagine sheet steel imported by a machine manufacturer who pays VAT on the purchase, builds a machine, and sells it onward. At each step a seller remits only the tax on the value it added, and the final retail customer, who can recover nothing, pays the full amount. In Canada, the federal version stands at 5%, with provinces layering their own provincial or harmonized sales taxes on top.

  A wealth tax falls on the total value of personal assets: bank deposits, real estate, pension holdings, businesses, and securities, with mortgages and loans deducted. Property taxes, by contrast, charge an annual amount on the estimated value of real estate. A land-value tax narrows the base further, taxing only the unimproved value of the land, which its proponents argue will not deter production or distort the market the way other taxes do.

• 3. Taxes That Shaped Behavior

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  For over 150 years from 1695, the government of England levied a window tax. The result is still visible on listed buildings whose owners bricked up windows to save money. A similar tax on hearths existed in France, with the same effect. Some principalities taxed windows, doors, or cabinets to curb the use of imported glass and hardware, and people hid their goods in armoires, hutches, and wardrobes to dodge the charge.

  Excise duties were first introduced into England in 1643, devised by the parliamentarian John Pym and approved by the Long Parliament. They began as charges on beer, ale, cider, cherry wine, and tobacco, with paper, soap, candles, malt, hops, and sweets added later. High excises on alcohol, tobacco, pornography, and marijuana are sometimes grouped together as sin taxes, used to discourage consumption. A carbon tax aims to reduce the release of carbon into the atmosphere by taxing fuels such as petrol, diesel, jet fuels, and natural gas.

  A poll tax, also called a per capita or capitation tax, levies a set amount on every individual. One of the earliest, a half-shekel per year from each adult Jew, appears in the Bible. Economists consider poll taxes efficient because people are presumed to be in fixed supply, so the tax causes no distortion. The history says otherwise. The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants' Revolt. Scotland was used to test a new poll tax, the Community Charge, in 1989, with England and Wales following in 1990, and the result was widespread refusal to pay and the unrest known as the Poll Tax Riots.

• 4. Empires Run On Revenue

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  Darius I the Great introduced a regulated and sustainable tax system in the Persian Empire around 500 BC, tailored to each Satrapy. At various times the empire held between 20 and 30 Satrapies, each assessed by its supposed productivity. Babylon was assessed the highest, owing 1,000 silver talents plus four months of food for the army. India, fabled for gold, was to supply gold dust worth 4,680 silver talents. Egypt, the granary of the empire, owed 120,000 measures of grain alongside 700 talents of silver.

  In the Roman Republic, taxes were collected from individuals at between 1% and 3% of their assessed property. Because collection was so difficult, the government auctioned the job each year. The winning tax farmers, called publicani, paid the revenue to the government in advance, then kept what they collected, essentially making a loan to the state on which they earned interest. The emperor Augustus later replaced this with a direct system, obliging each province to pay 1% tax on wealth and a flat rate on each adult, which brought regular census-taking.

  The Rosetta Stone was a tax concession issued by Ptolemy V in 196 BC. Written in three languages, it later led to the most famous decipherment in history, the cracking of hieroglyphics. In Hattusa, the capital of the Hittite Empire, grains were collected as tax and stored in silos as a display of the king's wealth. Islamic rulers imposed Zakat on Muslims and Jizya, a poll tax, on conquered non-Muslims, a practice that began in India in the 11th century.

• 5. Who Really Pays

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  Law establishes from whom a tax is collected, but the marketplace decides who actually bears the burden. A tax on employment paid by employers will, in the long run, fall on the employee. The greatest share of any tax burden tends to land on the most inelastic factor, the part of a transaction least affected by a change in price. A tax on wages in a town may, over time, fall on the property-owners in that area.

  Suppose a product sells for $1.00 and a $0.50 tax is imposed by law on the seller. If demand is elastic, the seller absorbs more of it, perhaps dropping the price to $0.70 so the buyer pays $1.20 in total. In that case the buyer carries $0.20 of the tax and the seller carries the remaining $0.30. The split depends entirely on the elasticities of supply and demand.

  Adam Smith, in The Wealth of Nations, set out four marks of a good tax. It should be proportionate to ability to pay, certain rather than arbitrary, payable at convenient times and ways, and cheap to administer and collect. He noted that private incomes come in three types, rent, profit, and wages, and that a tax aimed at one will often fall on persons very different from those intended. A 2019 study found that tax cuts for low-income groups did the most for employment growth, while cuts for the wealthiest top 10% had only a small impact.

• 6. The Cost Of Collecting

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  Germany runs one of the most complicated taxation systems in the world, and three-quarters of the world's taxation literature refers to it. Under that system there are 118 laws, 185 forms, and 96,000 regulations, with 3.7 billion euros spent to collect the income tax. In the United States, the IRS maintains about 1,177 forms and instructions, and as of the 1st of February 2010 the Internal Revenue Code ran to 3.8 million words.

  Most taxes carry side effects that reduce economic welfare, either by forcing unproductive compliance labor or by distorting incentives. The introduction of a tax into a competitive market causes deadweight loss, making fewer transactions occur and leaving the parties less well off. Payments made for tax advice are essentially deadweight costs, because they add no wealth to the economy. A land-value tax avoids this, because it falls on a good in completely inelastic supply and does not punish owners for improving their land.

  Arthur Pigou wrote in his 1920 book The Economics of Welfare that a tax could increase efficiency when a good carries a negative externality. By taxing goods that impose societal costs, such as greenhouse gases, polluting fuels, alcohol, or traffic congestion, a government can raise revenue while pushing the market to account for harms it would otherwise ignore. This kind of levy is now called a Pigovian tax.

• 7. Taxing The Developing World

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  Following Nicolas Kaldor's research, public finance in developing countries is tied closely to state capacity and financial development. As states grow stronger, the pattern of taxation shifts, with income tax gaining importance over trade taxes. Tilly's argument holds that state capacity evolves in response to war, which pushes states to raise taxes and tighten their grip. The introduction of income tax in Britain came from the Napoleonic War in 1798, and the United States first introduced income tax during the Civil War.

  Tax revenue as a share of GDP varies widely around a global average of 19%. High-income countries average around 22%, middle-income countries 18%, and low-income countries 14%. Denmark sits at the top among high-income countries at 47%, while Kuwait registers just 0.8%, reflecting its strong oil revenues. Across Africa, aid is worth less than 10% of collected taxes, though in a quarter of African countries Overseas Development Assistance still exceeds tax collection.

  Africa carries the highest total tax rates borne by business, at 57.4% of profit on average, down from 70% since 2004, partly thanks to the introduction of VAT. Rebuilding after conflict can produce real gains. Liberia expanded its tax take from 10.6% of GDP in 2003 to 21.3% in 2011, and Mozambique rose from 10.5% in 1994 to around 17.7% in 2011. The Doing Business survey, comparing 176 countries, found the easiest places to pay taxes in the Middle East, with the UAE first, followed by Qatar and Saudi Arabia.

• 8. The Argument That Never Ends

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  Oliver Wendell Holmes Jr. is paraphrased as saying that taxes are the price of civilization, and that line captures the case for taxation as a whole. Most political philosophies justify taxes as funding activities necessary and beneficial to society, and progressive taxation as a way to narrow economic inequality. In a democracy, the slogan of the American Revolution, No taxation without representation, implied that society itself decides how its taxes are arranged.

  Traditional conservatives justify paying tax as part of a citizen's general duty to obey the law and support established institutions. Their position is captured in the adage of public finance, An old tax is a good tax, paired with the premise that no one should be excused from paying, lest they come to believe that government is costless. Social democrats, as argued by Anthony Crosland, favor higher taxation to fund universal health care, education, and welfare, treating the power to tax income from capital as central to the case for a mixed economy.

  American libertarians push the other way, recommending a minimal level of taxation to maximize the protection of liberty, and some denounce taxation entirely as theft. The Council of Europe places the power to levy taxes within the hard core of public authority prerogatives. Following the European Court of Human Rights decision in Ferrazzini, tax matters fall outside the civil rights and obligations guaranteed under Article 6(1) of the European Convention on Human Rights, marking taxation as a sovereign function of the state rather than a private transaction.