Lecture 1.

Taxation - the Conce-t and thq Seience

l.Origins and historical developmentof taxes

2.Economic content of taxes
3.Functionsof taxation
: 4.The role of taxation in modern states
S.Theoriesabout stateregulationof the taxation system
z

P.grt1. Orieins.and Historical Develoomentof Taxes

Taxes form an element of the social existence.Human society is heterogeneousfor

natural and physiologicalreasons.Already in antiquity this madepeopleunite their efforts and
wealth for the purposeof respondingto natural disastersand external enemies,as well as in
order to build common towns, to supportthe peoplenot able to work and to provide for many
other social needs.Taxesconstitutean integral attributeof the state
Taxes becamea necessaryelement of the socio-economicrelations at the formation of
the state.The developmentand transformationof the state'sorganisationalforms were always
associatedwith a modification of the taxation system.In the periods of slavery, statesused
taxes in the form of natural chargesand duties (i.e. by collecting food, harvestitems, etc., of
personalobligations),but with the developmentof commodity-monetaryrelations,taxes took
a monetary form. Pfimary taxes were initially applied directly on wealth through land and
individual taxes. Secondarytaxes appearedlater, initially in the form of internal customs
charges,and with the developmentof commodity-monetaryrelations,in the form of excises,
which were paid by all the free individuals.
The first known systemof taxation was in Ancient Egypt around 3000 BC - 2800 BC in
the first dynasty of the Old Kingdom. Recordsfrom the tirne decumentthat the pharaohwould
conduct a biennial tour of the kingdom, collecting tax revenuesfrom the people,O[her records
are granary receipts on limestone flakes and papyrus.Early taxation is also describedin the
Bible. In Genesis(chapter47, verse24 - the New InternationalVersion), it states"But when the
crop comes in, give a tifth of it to Pharaoh.The other four-fifths you may keep as seedtor the
fields and as fqod for yourselvesand your householdsand your children." Josephwas telling the
peopleof Egypt how to divide their crop, providing a portion to the Pharaoh.A share(207o)of
the crop was the tax.
In Ancient Rome, during peacetimes there were no taxes,but in times of war, citizens
were subjectedto taxes applied in accordanceto their wealth. The tax rate (or the census)was
determinedonce in 5 years.In the IV-[I cenytdesB.Q.1he Roman statewas expanding,new
towns-colonies were being conquered a{d the taxation-'systemwas changing as well.
Community (local) taxes and duties were being introduced in the colonies. Rome was
becomingan empire.The main sourceof income for the Roman provinceswas the land tax;
on averageits rate constituted L/L0 of the revenuefrom the land area.Other taxation forms
were also used,for example,the tax on fruit treesor vine plants.In addition,chargeableto
taxationwerereal estate,live assets(hornedcattleand slaves),and othervaluables.
In additionto directtaxes,therewereindirectones,the most importantof which were:
-Transactionstaxes,usuallyat the rateof ITo
-Specialtaxeson slavetransactions of 47o,and
-Taxeson the releaseof slavesat the rate of 57oof their market price. I
Already in the Roman Empire taxes played not only a fiscal role, but also had the
function of stimulating economic development.At that time taxes alreadyhad a monetary
form, which forced the population to generatesurplusproduction for sale.This promotedthe
expansionof commodity-monetary relations,an intensificationof the divisionof labourand of
the urbanisationprocess.
 Many economic traditions of the Ancient Rome were adopted in the Byzantine Empire.
In the early Byzantine period of up to the end of the VII century, the empire had 21 types of
direct taxes,including:
. Land taxes
. Iirdividual duties
. Army maintenancetaxes
. Taxes on the purchaseof horses
. Recruit taxes, which releasedthe personpaying the tax from military obligations
. Chargeson the saleof merchandise(usuallyaround t0-L2.5Vo)
. Chargesfor issuedstatedocuments

In India, Islamic rulers imposed jizya starting in the llth century. It was abolishedby
Akbar.

Quite a few records of governmenttax collection in Europe since at leastthe 17th century
are still available today. But taxation levels are hard to compare to the size and flow of the
economy since production numbers are not as readily available. Government expendituresand
revenue in France during the 17th century went from about 24.30 million livres in 1600-10 to
about L26.86miltion livres in years1650-1659 to about LL7.99million livres in years1700-17I0
when governmentdebt had reached 1.6 billion livres. In 1780-L789it reached42L50 million
livres. Taxation as a percentageof production of final goods may have reached I5To - 207o
during the 17th century in placeslike France,the Netherlands,and Scandinavia.During the war-
filled years of the eighteenth and early nineteenth century, tax rates in Europe increased
dramatically as war became more expensive and governmentsbeoame more centralizedand
adept at gathering taxes. This increasewas greatestin England, Peter Mathias and Patrick
O'Brien found that the tax burden increasedby 85Voover this period- Another study confirmed
this nurnber,finding that per capita tax revenueshad grown almost six fold over the eighteenth
century, but that steady economic growth had made the real burden on each individual only
double over this period before the industrial revolution. Average tax rates were higher in Britain
than Francethe yearsbefore the FrenchRevolution, twice in per capita income comparison,but
they were mostly placed on internationaltrade.In France,taxes were lower but the burden was
mainly on landowners,individuals, and internaltradeand thus createdfar more resentment.
The Russian financial system started to develop a little later. The unification of the
Ancient RussianStatebeganonly at the end of the IX century.The main sourcesof income in
the sovereign'streasurywere the tributes.In essencetheseconstitutedinitially a sporadic,but
later a more systematic direct tax. Indirect taxation existed in the form of sales and court
charges.Transit dues called "mit" were collectedfor the transferof goods through mountain
gaps, shipment dues were char$ed for transporting goods over rivers, "hotel" dues were
charged for the right to own warehousesand the "retail" tax was required for the right to
organisemarket events.
The taxation-system changed its form and improved under the influence of class
conflicts. Its regressivecharacter,conditionedby the preponderanceof indirect taxesstartedto
change in the 20'h century in direct conformity with the transition to progressiveincome
taxation. The taxation systemof the 20thcentury,as a result of the effort( rnadein the finance
scienceand practiceis distributing the taxationburdenmore uniformly than ever in the history
of taxation.
In general,the taxation systemis a complex and effective mechanismfor the regulation
of economic conditions; it is a flexible instrument, which influences the profitability of
various ownershipforms, and the effectivenessof national economiesin the conditionsof the
current sciencedevelopmentand of economicglobalisation.However, the taxationpolicy of
the state(which is defined as the manoeuvringof the ratesand types of taxes)is subjectto the
lag effect, in contrast to the banking-monetary policy, Which is causedby the fact that any
changeof the tax rate must take the form of a legal document.

\i Part 2. The Economic Content of Taxation

Taxes are a defined as mandatory paymentsof the contributors to the budget and to the
extra-budgetary funds in the amount determinedby law and within the stipulated deadlines.
Taxes representthe monetary relations of the state with corporations and individuals regards
to the redistribution of the national income and the mobilisation of financial resourcesto the
budgetary and non-bud getary funds of the state. Taxes became a necessaryelement of the
socio-ecorromic relations at the moment of the state formation. The development and
transformation of the organisational forms of the state were always associated with a
modification of the taxation system, which dependson the development level of the state's
democratic forms.
The economic essenceof the state was addressedfor the first time in the work of D.
Ricardo, who wrote "Taxes form the shareof the produce and work of the country, which is
transferred to the government,and ultimately they are always paid from the capital or income
of the country."
Funds provided by taxation have been used by states and their functional equivalents
throughout history to carry out many functions.Some of theseinclude expenditureson war, the
enforcement of law and public order, protection of property, ecQnomic infrastructure (roads,
legal tender,enforcementof contracts,etc.), public works, social engineering,and the operation
of government itself. Governmentsalso use taxes to fund welfare and public services.These
services can include education systems, health care: systems, pensions for the elderly,
unemployment benefits, and public transportation.Energy, water and waste management
systemsare also common public utilities. Colonial and modernizing stateshave also used cash
taxesto draw or force reluctantsubsistenceproducersinto casheconomies.
Govemmentsuse different ki and varv the tax istribute
burden amons individuals or classesof lation involv
or to redistribute resourcesbetw ividuals or classesin the
Historically. the nobility Werg supported by taxes on the poor; modern social security systems
are intende uooort t the disabled.or the retired bv taxes on those who are still
working. In addition, taxes are applied to fund foreign and military aid, to influence the
macroeconornicperformanceof the economy (the government'sstrategyfor doing this is called
its fiscal policy - see also tax exernption),or to modify patternsof consumptionor employment
within an economy,by making someclassesof transactionmore or lessattractive.

A nation'stax systemis often a reflectionof its communal valuesor the valuesof thosein
powei. To createa systemof taxation, a nation must make choicesregardingthe distribution of
the tax burden-who will pay taxes and how much they will pay- and how the taxescollected
witl be spent.In democraticnations where the public elects those in chargeof establishingthe
tax systern,these choicesreflect the type of community that the public wishes to.create. In
countries where the public does not have a significant amount of influence over the system of
'
taxation,that systemmay be more of a reflectionon the valuesof thosein power.

The resourcecollectedfrom the public throughtaxation is alwaysgreaterthan the amount

which can be usedby the government.The differenceis called compliancecost, and includesfor
example the labour cost and other expensesincurred in complying with tax laws and rules. The
collection of a tax in order to spendit on a specifiedpurpose,for examplecollectinga tax on
alcohol to pay directly for alcoholism rehabilitationcentres, is called hypothecation.This
practice is often disliked by finance ministers,since it reducestheir freedom of action. Some
economictheoristsconsiderthe conceptto be intellectuallydishonestsince(in realit]) money is
fungible.Furthermore,it often happensthat taxesor excisesinitially leviedto fund somespecific
government programs are then later diverted to the government general fund. In sorne cases,
such taxes are collected in fundamentally inefficient ways, for example highway tolls.
!

Somei economists,especially neo-classicaleconomists,argue that all taxation creates

market distortion and results in economic inefficiency. They have therefore soughtto identify the
kind of tax system that would minimize this distortion. Also, one of every government'smost
fundamental duties is to administer possessionand use of land in the geographicareaover which
it is sovereigp,and it is consideredeconomically efficient for governmentto recoverfor public
purposesthe additional value it create-sby providing this unique service.

Since governments also resolve commercial disputes, especially in countries with

'or value addedtax.
cofilmon law, similar argumentsare sometimesused to justify a salestax
Others (e.g. libertarians) arguo that most or all forms of taxes are immoral due to their
involuntary (and therefore eventually coercive/violent) nature.The most extreme anti-tax view is
anarcho-capitalism,in which the provision of all social servicesshould be voluntarily bought by
the person(s)using them.
Russianeconomistsalso made a certain contribution to the developmentof the taxation
theory. Among them, N. I. Turguenevmentionedthe following: "Taxes are the gssenc
the means for the achievementof the goal of society or the state.i.e. of the gQalthat people
assqme for society." Sokolov wrote: "Taxe.s should be understood as the compulsory
e statefrom coroorationsand individuals in order to provide
for its costs. without offering the tax-payera correspondingequivalent." Which meansthat
the state collects with the help.of taxes meansfor the formation of a centralisedstatefund
necessaryfor the fulfilment of the statefunctions.
Taxation theory constitutesa part of the finance science.Taxation plays a role in the
process of redistribution of the new value, is involved in the processof reproduction,and
constitutesa specific form of productionrelations. The sourceof taxationis the newly created
value, i.e. the national income. The sourceof tax paymentsis the value addedof the product
and a fraction of the value of the necessaryproduct.
Taxation, as a particular type of production relation, constitutesa specific economic
category with stable internal features, development patterns and forms of manifestation.
However, taxation is not just an economicbut also a financial category.Taxation has general
traits pertaining to all the financial relations, but at the same time, it has its own defining
featuresand functions,which differentiatetaxationfrom the entirety of financial relations.
Part 3. The Functions of Taxation

The functions of taxes area manifestationof their essence;they area meansto represent
the characteristicsof taxes.The functionsof taxationillustrateits socialpurposeof the galue-
traseddistribution and redistributionof income.
Each of the functions fulfilled by the taxation instrument is a manifestation,of an
internal feature,an indicator or trait or this economiccategory. -
While the main function of taxationis to providerevenue.it alsohasimportantsubsidiary
functionsand is one of the ways in which the governmenteffectsits policies.The first of theseis
to reducethe inequalityof incomes.This has been achieved- and is still being maintained- by
income tax and capital transfer tax, thesetaxes are progressive.The amount people pay is in
accordancewith what they can afford, so that a personwith a high income pays more income tax
than one who earns less and, in addition, account is taken of their financial responsibilities.
Consequently,if two individuals receive the same amount in wages bul one is single and the
other is married and hastwo children, the single personwill pay more incometax. This systemis
operatedby giving allowancesand relievesagainstincome. Income tax and capital transfertax
(which replacedestateduty) have, therefore,been the main causesof the more equal distribution
wealth, particularly sincethe end of the SecondWorld War II
 The second subsidiary function of taxation is to Control the level of economic activity.
Selective employment tax fell into this category, since it encouragedeconomy in the use of
labour in thb service and construction industries. The repayment of the tax, together with
additional sums to manufacturing; industries in the development areas,was an added incentive
firms to move to those areasand therefore stimulated economic activity in them.
Similarly, a substantial increasein corporation tax could causefirms to limit their plans
for development and expansion, while a reduction in the rate charged would encouragefirms to
adopt an expansionistpolicy.
Taxation's third subsidiary function is to influence production and consumption. The
imposition of a tax when goods are bought, or exciseduty on certain goods,can reducethe total
consumptionof them. The imposition of tariffs on imported goods,will discouragepeople from
buying them and stimulatethe salesof home-producedgoods;This was one of the measuresused
at.theend of the 1960sto help to correctthe balanceof payments.
More detail the functions of taxations can be presentedas follows: Taxation theory
usually determinefive main functions of taxes: fiscal, redistributbr!, regulating,controlling,
and promoting.
1) The main function of taxation rs the fiscal one. It is through fiscality that taxes play
their role in the formation of the state budget necessaryfor the realisation of national and
holistic stateprogrammes.The fiscal function providesfor the achievementof the'main social
goal of taxation-the formation of the state's financial resourcesnecessaryfor executingthe
role of the latter (defence,social,environmentalprotection,etc.)
- ,2) The allocation function of taxation expressestheir essenceas a specialcentralised
instrument of allocation relations and consists of the social income redistribution among
various groups of cittzens:from wealthy to deprived ones, which ultimately provides for the
assuranceof the social stability of the population.
3) The resulatom function of taxation was initiated as soon as the statestartedto take
active part in the economic set-upof the society.This function is aimed at achievingspecific
goals of the taxation policy through the taxation mechanism.Taxation regulationentails three
sub-functions:
a. The stimulatins sub-function is aimed at the development of special socio-
economic processes,and is implemented through a system of allowances,exemptionsand
preference affangements.The legislation in force stipulatesthe stimulation of a number of
taxpayercategoriessuch as the ownersof small enterprises,the agriculturalproducers,capital
investors,or charities
b. The destimulatine sub-functioninhibits some socio-economicprocessesthrough
the conscious exaggerationof the taxation burden.As a rule, the effect of this sub-functionis
related to the introduction of excessivetax rates. These are, for example, the protectionist
measuresof the state,aimed at supportinglocal producersthrough prohibitive import custom
duties. It is important to keep in mind, nevertheless,that taxation relations, as any other
relations,must replicatecontinuously.Taxes must be collectedtoday, tomorrowand always.
This is why the utilization of the destimulatingsub-functionshouldnot lead to the weakening
of the taxation basis, to suppression,or even to liquidation of the tax source.Such an
exaggerationmay resultin a situationwheretherewill be no income/processes to be taxed.
c. The replication (reqenerstionl function is explained as follows: by taxing the
utilisation of natural resources,roads, rnineral and primary resources,the state uses these
proceedsin order to regenetatethe exploitedresources.
4) The controlling function of taxation-through taxation, the state controls the
financial-economic activity of juridical and natural persons. This also contributes to
controlling the sourcesof income and the directionsof spending.