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History of taxation

Many of today's taxes were already in use in Antiquity. Deciding on taxation has moved from autocrats to parliaments and the level of taxation has risen. In earlier times taxes were used to wage wars, today taxes are used to maintain welfare states.

Earlier cultures collected taxes significantly less than what is the situation today. In ancient Greece and Rome, customs duties were one of the earliest forms of taxation. Administratively, the introduction of such external taxes was easier than internal taxes.

Julius Caesar: 1% sales tax

A whole bunch of different forms of taxation came into use for the Romans. These included land tax, life tax, inheritance tax and consumption taxes. Among the indirect taxes, mention should be made of the general sales tax (centesima rerum venalium) imposed by Julius Caesar. This sales tax was 1%.

Also local actors played a role in carrying taxes. These paid the state a fixed amount or some percentage of the taxes they collected. Julius Caesar put an end to this and in his time tax was collected by state officials. Tax collection by locals has however played an important role in later times. Weaker central government has been able to gather resources with the help of locals. On the other hand, this has led to the plight of the people in bad times, when in addition to the ruler, local "chiefs" have been able to increase the tax burden quite arbitrarily.

Conscription is also a form of taxation

The early roots of taxation are partly warlike. Taxes have been collected from conquered territories. Conscription can be considered a form of taxation. Taxation has been an enabler of rulers' aspirations for power. The view of the more moderate tax rate of the earlier cultures may change if the recruitment of military personnel is counted as a tax burden. The level of taxation increased considerably during wartime. On the other hand, state borders have been protected and order has been maintained through taxes. In lean years help has been offered to those in need.

Negotiating taxes and debt developed economic life

In medieval and modern Europe, there was a lot of mutual strife and wars. This required resources and forced the rulers to negotiate with local elites on the organization of taxation. The rulers had to create negotiation systems in order to create a balanced and fair taxation. This has enabled strong development of economic life. States have also started to take debt, initially to finance their military campaigns. Over time this borrowing has created financial interdependence and further developed society's contract systems.

World wars expanded the tax base

The imbalance of taxation has caused major upheavals. For example, the French Revolution of 1789 was largely due to the injustice of taxation. Also, when the American colonies broke away from Great Britain, one of the reasons was the perceived unfair taxes paid to the mother country.

On the other hand, wars have caused great upheavals in taxation. At the beginning of the 20th century the richest 10% of Western Europe controlled 90% of the wealth. With inflation and other destruction, wars destroyed the wealth of the richest the most. The welfare state created in Western Europe after the wars was financed by taxation. After the Second World War income tax has started to be levied based on a larger tax base, value added tax has been introduced and more people have come under taxation. Income taxation has been changed to progressive, i.e. the richer are required to contribute more than the poor. This can be thought of as a just consequence of the poorer people's sacrifices in the form of war effort and military service. In the 1980s the richest 10% controlled only 60% of the wealth. This wealth equalization trend has turned again in the other direction in recent decades.

Value added tax and income taxes support the welfare state

Today the level of taxation is significantly higher. Taxes are collected in the form of money and no longer as different commodities. Deciding on taxes is done parliamentarily, not unilaterally. The collection of taxes is done by the civil service and is not outsourced to local "guys". The focus of taxation has also shifted more in the direction of consumption taxes, such as value added tax or sales tax, and the importance of personal taxation has also increased. At the end of the 20th century, there was a shift from turnover tax to value added tax. Value added tax has recently faced challenges due to the growth of internationality and online shopping, as well as digitalization.

In the developed countries taxation is more focused on personal taxation, value added tax and social security payments (payroll tax). In developing countries taxation is more focused on corporate taxation. Of course, taxes are also collected significantly more in developed countries.

High taxation is one of the prerequisites of a welfare state, and value added tax in particular has been considered, at least in theory, to be a very effective tax collector.



Sources and additional information:

Encyclopedia Britannica: History of Taxation
Antti Kujala: Voudintileistä veroparatiiseihin, verotuksen historia, 2021
Wikipedia: Centesima rerum venalium
Virtues and Fallacies of VAT, An Evaluation after 50 years, ed. Robert F. van Brederode, 2021

Published: 9.12.2022

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