Lecture 1

History and development of taxation

It is the economic and tax policy considerations that influence the structure of the tax legislation in
each country. Taxes are mandatory payments that taxpayers are obliged to pay to their countries’
budget. Taxes form the main source for public spendings and funds that governments use to fulfill
their obligations towards their nations. However, throughout the history the ways and mechanisms of
taxation that existed in many countries were dictated by the administrative considerations, i.e. the
states introduced taxes that were easily collectible. For example, because the borders and customs
control were more developed than internal control over the production, import duties were among the
earliest taxes in the history of various nations. It is also easier to identify, and consequently tax the
tangible, real property than other assets. Therefore, land taxes, as well as taxes in the form of the
part of products, domestic animals were also the earliest taxes. A head tax is even easier to
implement, so many ancient states practiced taxation in the form of tax per head.

EARLY TAXES

In Ancient Greece the cost of public activities was directly financed by the rich members of the
community. A person was assigned a liturgy which was a public office or duty. It was a compulsory
obligation and an honor. The holder of a liturgy was responsible not only for bearing the cost but also
for organizing the activity itself. There was no assessment for a specified payment. The assignment
involved a specific task and it was up to the person to decide how much to spend. The liturgies, which
originated in the financing of religious festivals, sports and theatrical entertainments, were later
extended to the provision of ships, maintenance of roads, supply of corn for the army etc.

Roman emperors followed the Hellenic practice and increased the range of the liturgies. Holders of
the various offices, for which there was competition, were expected to make donations and these
donations by passage of the time converted regular obligations. As the burden of the benefactions
grew, the appeal of the honours associated with them diminished.

The increased power of the state and the extension of its activities required regular and increasing
revenue. This was obtained by compulsory levies from which a system of taxation developed. One
of the early forms of taxation on which the Greek city-states and the Roman republic relied were
harbour taxes. Tariffs on imported products were an important source of revenue because of the
volume of foreign trade.

History of segregation of the types of taxpayers by their obligations also started forming in Ancient
Rome and Greece. E.g. in Greece free citizens had different tax obligations from slaves, and the tax
laws of the Roman Empire distinguished between nationals and residents of conquered territories.

By the time the Roman empire was established the bulk of the tax revenue came from property. For
a long time these taxes were confined to real property, especially to land, but later they were extended
to other assets. The provinces of the Roman Empire relied for their revenues mainly on head taxes
and land taxes. Initially, land taxes consisted of fixed liabilities regardless of the return from the land.
That was the case also in Persia and Egypt. At later stages of the history the land tax was modified
to correspond with the fertility of the land. Another form of such tax was collection of 10th of the
production as a tax in kind. Real estate transactions also were taxed in Roman Empire.

Early Roman forms of taxation also included consumption taxes, customs duties, and certain “direct”
taxes. The principal of these was the tributum, paid by citizens and usually levied as a head tax; later,
when additional revenue was required, the base of this tax was extended to real estate holdings. In
the time of Julius Caesar, a 1 percent general sales tax was introduced (centesima rerum venalium).
There also were some kinds of inheritance taxes in the Roman Empire. At a relatively early times this
tax in Rome amounted to 5 percent, later to 10 percent of the inherited assets. There also were some
exemptions, so, the close relatives of the deceased were exempted.

At the peak of its power the Byzantine Empire had a sophisticated system of taxation. It had been
developed by John the Cappadocian (sixth century AD), the imperial treasurer to Emperor Justinian.
Taxation was based on property. Taxes were paid per capita according to the wealth owned. Duties
were collected at the ports of the empire and taxes were levied on food, meat, corn oil, horses and
carriages. The vast revenue was required to wage wars, build magnificent churches and palaces and
to provide for the administration of a great empire.

For a long time in history many states did not have dedicated tax authorities and tax collection was
carried out by so called “tax collectors” or “tax farmers”, who were individuals contracted by the state
to collect the taxes, remit it to the treasury. They were receiving their shares of the proceeds as a
consideration for provided services. Under Caesar tax collection was delegated to civil servants.

In the Middle Ages many of these taxes, especially the direct levies, gave way to a variety of
obligatory services, i.e. instead of paying taxes people had to serve to the state for some time as
militia, military servicemen or civil personnel at state authorities.

The main forms of indirect taxes were transit duties (a charge on goods that pass through a particular
country) and market fees (payment for places at town markets). In the cities the concept developed
of a tax obligation applicable to all residents of the city. The burden of taxes on certain foods and
beverages was intended to be borne partly by consumers and partly by producers and tradesmen.

During the later Middle Ages some German and Italian cities introduced several direct taxes: head
taxes for the poor and net-worth taxes or, occasionally, crude income taxes for the rich. The income
tax was administered through self-assessment and an oath taken before a civic commission. Taxes
on land and on houses gradually increased.

Taxes have been a major subject of political controversy throughout history, even before they started
playing notable role in the national revenue. A famous case of tax conflict was the rebellion of the
American colonies against Great Britain, when the colonists refused to pay taxes imposed by a
Parliament because they did not have voice or representatives in that Parliament. That is the source
of the slogan “No taxation without representation.” Another instance is the French Revolution of 1789,
in which the inequitable distribution of the tax burden and gradually increasing of taxes to cover the
expenses of the ruling family were among the major factors.

Wars have strongly influenced taxes just like taxes have influenced revolutions. Many taxes, notably
the income tax (first introduced in Great Britain in 1799) and the turnover or purchase tax (Germany,
1918; Great Britain, 1940), began as “temporary” war measures, i.e. to finance military expenses.
Similarly, the withholding method of income tax collection began as a wartime innovation in France,
the USA, and Great Britain. World War II converted the income taxes of many countries from upper-
class taxes to mass taxes.
It is hardly necessary to mention the role that tax policies play in peacetime politics, where the
influence of powerful, well-organized pressure groups is great. Arguments for tax reform, particularly
in the area of income taxes, are perennially at issue in the domestic politics of many countries.
Modern trends
The development of taxation in recent times can be summarized by the following general statements,
although allowance must be made for considerable national differences: The authority of the
sovereign to levy taxes in a more or less arbitrary fashion has been lost, and the power to tax now
generally resides in parliamentary bodies. The level of most taxes has risen substantially and so has
the ratio of tax revenues to the national income. Taxes today are collected in money, not in goods.
Tax farming—the collection of taxes by outside contractors—has been abolished, and taxes are
instead assessed and collected by civil servants. (On the other hand, as a means of overcoming the
inefficiencies of government agencies, tax collection has from time to time been contracted to
intermediaries, i.e. banks in some less-developed countries. In addition, some countries are
outsourcing the administration of customs duties.)
There has also been a reduction in reliance on customs duties and excises. Many countries
increasingly rely on sales taxes and other general consumption taxes. An important late 20th-century
development was the replacement of turnover taxes with value-added taxes. Taxes on the privilege
of doing business and on real property lost ground, although they have persisted as important
revenue sources for local communities. The absolute and relative weight of direct personal taxation
has been growing in most of the developed countries, and increasing attention has been focused on
VAT and payroll taxes. At the end of the 20th century the development of electronic commerce and
digital economy created serious challenges for the administration of VAT, income taxes, and sales
taxes. The problems of tax administration were compounded by the anonymity of buyers and sellers,
the possibility of conducting business from offshore tax havens, the fact that tax authorities cannot
monitor the flow of digitized products or intellectual property, and the spate of untraceable money
flows.

Income taxation (of individuals and of corporations), payroll taxes, general sales taxes, and (in some
countries) property taxes bring in the greatest amounts of revenue in modern tax systems. The
income tax has ceased to be a “rich man’s” tax; it is now paid by the general populace, and in several
countries it is joined by a tax on net worth. The emphasis on the ability-to-pay principle and on the
redistribution of wealth—which led to graduated rates and high top marginal income tax rates—
appears to have peaked, having been replaced by greater concern for the economic distortions and
disincentives caused by high tax rates. A good deal of fiscal centralization occurred through much of
the 20th century, as reflected in the kinds of taxes levied by central governments. They now control
the most important taxes (from a revenue-producing point of view): income and corporation taxes,
payroll taxes, and value-added taxes. Yet, in the last decade of the 20th century, many countries
experienced a greater decentralization of government and a consequent devolution of taxing powers
to subnational governments. Proponents of decentralization argue that it can contribute to greater
fiscal autonomy and responsibility, because it involves states and municipalities in the broader
processes of tax policy; merely allowing lower-level governments to share in the tax revenues of
central governments does not foster such autonomy.

Although it is difficult to make general distinctions between developed and less-developed countries,
it is possible to detect some patterns in their relative reliance on various types of taxes. For example,
developed countries usually rely more on individual income taxes and less on corporate income taxes
than less-developed countries do. In developing countries, reliance on income taxes, especially on
corporate income taxes, generally increases as the level of income rises. In addition, a relatively high
percentage of the total tax revenue of industrialized countries comes from domestic consumption
taxes, especially the value-added tax (rather than the simpler turnover tax). Social security taxes—
commonly collected as payroll taxes—are much more important in developed countries and the
more-affluent developing countries than in the poorest countries, reflecting the near lack of social
security systems in the latter. Indeed, in many developed countries, payroll taxes rival or surpass the
individual income tax as a source of revenue. Demographic trends and their consequences (in
particular, the aging of the world’s working population and the need to finance public pensions)
threaten to raise payroll taxes to increasingly steep levels. Some countries have responded by
privatizing the provision of pensions—e.g., by substituting mandatory contributions to individual
accounts for payroll taxes.
Taxes in general represent a much higher percentage of national output in developed countries than
in developing countries. Similarly, more national output is channeled to governmental use through
taxation in developing countries with the highest levels of income than in those with lesser incomes.
Indeed, in many respects the tax systems of the developing countries with the highest levels of
income have more in common with those of developed countries than they have with the tax systems
of the poorest developing countries.