taxation represents a transfer of resources from citizens to government. Without it government could not function. Taxation is divided into indirect taxes (levied on sales of goods and other transactions) and direct taxes (levied primarily on persons). The original objective of taxation was to raise revenue to finance public expenditure, often on wars, but taxes have subsequently been adopted (especially tariffs) to protect domestic industries and, in the 20th cent., used as an instrument for the redistribution of income. The advent of Keynesian economics in the post-Second World War period has seen taxation used as a tool of macro-economic policy with rates varied as a stabilizer against economic fluctuations. There has also been a tradition of taxes at urban and regional levels to finance local expenditures.
There is a range of criteria which governs a good tax system. Adam
Smith's four canons in the
Wealth of Nations, that taxes should be based on a person's ability to pay, and that they should be certain, convenient, and economical, remain valid today, although the emphasis on each has changed with time. The problem is that in many instances the most certain, convenient, and economical tax to collect involves taxing those least able to pay.
While modern taxation is conducted using monetary transfers, there is a long history of taxation involving transfers in kind; most notably labour services or agricultural output. The Roman period saw the taxation of consumption and trade (customs duties) and forms of poll (
tributum) and land taxation were employed. Inheritances were also taxed. During the Middle Ages these taxes gave way to the authority of the sovereign to levy taxes in a more or less arbitrary manner. The results were direct service obligations and
aids (essentially gifts and tributes), although transit duties and market fees were also used. Export duties were first introduced in England on hides and wool in 1275. Gradually, a number of, often short-lived, indirect taxes were introduced (e.g. the
window tax) especially at times of national emergency. As overseas territories were acquired, new forms of taxation were developed relating to trade. These provided additional revenue but often bred resentment amongst colonists—as in North America, which felt unrepresented in the political decision-making processes.
Levies on capital or income were not considered a normal means of financing government, except in exceptional circumstances, until the 19th cent. The taxation of incomes was initiated by
Pitt the Younger in 1799 as a temporary measure to assist financing the wars with France and only became a permanent feature of the British fiscal system after its reintroduction in 1842 during a period of tariff reform. Its introduction required a more sophisticated institutional infrastructure and brought with it, as the appropriate sphere of government became more clearly defined, the development of tax law. The growth in importance of direct taxation for income redistribution policy has led to graduated rates and allowances which, combined with an explicit corporate income tax, has added to the institutional bureaucracy.
Indirect taxation has traditionally been on property, especially at the local level, either on the capital or rental value of land (rates), or levied at death (death duties). Excise duties, taxes levied on particular types of goods such as alcoholic drinks, petrol, and tobacco, increased in importance in the 20th cent. They are often depicted as taxes on luxury goods. A general sales tax, purchase tax, was only introduced in 1940, and then seen initially as a temporary measure. It was subsequently replaced by a multi-stage value added tax, where taxes are imposed at each stage of the production process.
Kenneth Button
