A brief history of taxation

It was Benjamin Franklin, the US Founding Father and statesman, who famously said that in this world nothing is certain except death and taxes. He was speaking over 200 years ago yet the adage is as true today as it was then. This article shows how governments since ancient times have raised taxes in times of war or emergency.

Taxation has its historical roots in the first years of record-keeping: the earliest signs are recorded on clay tablets found in Sumeria in southern Mesopotamia, part of modern-day Iraq. Tax records there date from around 3300 BC. Archaeology confirms that Egypt employed one of the first tax systems: between 3000 and 2800 BC, Egyptian pharaohs employed collectors or scribes to impose levies on a range of goods and produce, such as cooking oil. Tax was collected twice a year and provided revenue primarily to fund government activity, to support the head of state and to finance the conduct 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 civilisations 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 labour 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 18^th century, the intelligentsia began to discuss the purpose of government. Industrialisation 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.

Uprisings abroad, such as the American War of Independence, were triggered by dissatisfaction with colonial unfairness in targeting taxes. The mantra ‘no taxation without representation’ bedevilled the British government, which believed that colonists should pay substantial duties on goods and assets in return for protection by the governing power. Once the British were ousted, as a reward both for citizens’ contribution to expelling their enemy and a nod towards promoting liberty and freedoms, the new federal government introduced a more equitable and fairer tax system. Notably, it included no federal income tax. This lasted until the US Civil War, when the tax was introduced to pay the debts incurred by the internal strife.

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 defence 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. 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 from the Second World War.

More kinds of income or asset began to be taxed. Inheritance taxes have been introduced (and cancelled and reintroduced). Capital gains tax 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 favoured lower income taxes, preferring the use of VAT on goods and services. ‘New Labour’, having ditched a left-wing agenda, was keen to promote favourable 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 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.

Richard Willis is a research professor at the University of Sussex