A brief history of tax

“NO TAXATION without representation.” The slogan of the American revolution has long been a rallying cry for taxpayers and tax evaders alike—though not always with such dramatic consequences. Arguably, the struggle to tax people in ways they find acceptable has been the main force shaping the modern nation-state. But are tax policies designed when the nation-state was all-powerful still appropriate now that globalisation, spurred on by the Internet, is rapidly eroding national borders?

Prostitution may be the oldest profession, but tax collection was surely not far behind. The Bible records that Jesus offered his views on a tax matter, and converted a prominent taxman. In its early days taxation did not always involve handing over money. The ancient Chinese paid with pressed tea, and Jivaro tribesmen in the Amazon region stumped up shrunken heads. As the price of their citizenship, ancient Greeks and Romans could be called on to serve as soldiers, and had to supply their own weapons—a practice that was still going strong in feudal Europe. As Ferdinand Grapperhaus recounts in “Tax Tales” (International Bureau of Fiscal Documentation, Amsterdam, 1998), the origins of modern taxation can be traced to wealthy subjects paying money to their king in lieu of military service.

The other early source of tax revenue was trade, with tolls and customs duties being collected from travelling merchants. The big advantage of these taxes was that they fell mostly on visitors rather than residents. One of the earliest taxes imposed by England's Parliament, in the 13th century, was “tonnage and poundage” on wine, wool and leather, targeted at Italian merchants. Sometimes rulers went a little over the top. Excessive taxation was one reason why King Charles I of England lost his head. Many of those guillotined during the French Revolution of 1789 were much-resented private tax collectors. And the Boston Tea Party was a protest by American patriots against the tea tax imposed by their British rulers.

Income tax, the biggest source of government funds today, is a relatively recent invention, probably because the notion of annual income is itself a modern concept. Governments preferred to tax things that were easy to measure and therefore to calculate liability on. That is why early taxes concentrated on tangible items such as land and property, physical goods, commodities and ships, or the number of windows or fireplaces in a building. The first income tax was levied in 1797 by the Dutch Batavian Republic. Britain followed suit in 1799, and Prussia in 1808. Like most new taxes, these imposts were first introduced as temporary measures to finance war efforts. After the European powers had made peace in Vienna in 1815, Henry Addington, the British prime minister of the day, swore that an income tax would never be imposed again. But in 1842 the British government revived the tax.

What stands out about the 20th century—and particularly its second half—is that governments around the world have been taking a growing share of their countries' national income in tax, mainly to pay for ever more expensive defence efforts and for a modern welfare state. Taxes on consumption, such as the sales tax that is a big source of revenue for America's state and local governments, and the value-added tax on goods and services in Europe, have become increasingly important.

Big differences between countries remain in the overall level of tax. America's tax revenues amount to around one-third of its GDP, whereas Sweden's are closer to half. There are also big differences in the preferred methods of collecting it, the rates at which it is levied and the definition of the “tax base” to which those rates are applied, as well as the division of responsibility for taxation between levels of government.

Global economy, national taxes

The increasing globalisation of economies in the 20th century was accompanied by a rare outbreak of internationalism by the tax authorities. Many countries chose to tax their citizens—individual or corporate—on their global income, whether or not they had already paid their due on some of it abroad.

The League of Nations, the forerunner to the United Nations, in 1921 commissioned a report by financial experts who concluded that this practice of “double taxation” interfered with “economic intercourse and...the free flow of capital”. It suggested rules for determining when tax should be paid to the country in which the income is generated, and when to the taxpayer's country of residence. It drafted a model treaty (now updated by the OECD) that spawned many bilateral agreements. Initially intended to stop income being taxed twice, these bilateral treaties opened the way for multinational companies to avoid tax on their profits altogether by setting up in business where taxes were lowest. Combined with greater mobility of capital, this new flexibility encouraged tax competition between countries.