The government of the author’s own country gave him a gift—as soon as he sat down to write this piece about taxes, a report appeared that the government was discussing tax increases to fund President Yanukovych’s social initiatives. The report described in detail which taxes would be raised and by how much. Actually, this story transparently illustrates the answer to the question “what are taxes for.” However, taking from some and giving to others to get votes in elections is far from the only answer to the question, and this is what we will try to discuss.
They Taxed Themselves
Textbooks on history and economics mostly shyly avoid the question of the origin of taxes. Worse still, judging by the most common explanations, they offer accounts that are outright misleading. It is believed that taxes are a necessary measure that allows the state to finance “public goods,” a measure that developed on its own, “arose in the course of practice” almost voluntarily. However, any tax has three main characteristics—regularity of payment, mandatory payment, and punishability for non-payment. Let’s try to imagine how people in their right minds and sound memory could have voluntarily agreed to such conditions. Moreover, they agreed to these conditions not only for themselves but for all their descendants. And one more thing—they did it “for ages,” and this in a world where even curses had a term measured in generations. Can you imagine these people? I—cannot. Again, taxation in one form or another exists everywhere. And there is not a single historically reliable monument anywhere that would speak of how people voluntarily agreed to regularly give part of their income to third parties and condemned all their descendants to this ordeal.
War Leads to Taxes, Taxes Lead to War
In fact, everything is much simpler and, simultaneously, orders of magnitude more complex. Taxation is inseparably linked to the history of the emergence of the state. Actually, the tax is the very cause that gave birth to the state. And if one speaks quite generally, taxes and the state are a product of the simple idea of one person using violence against another and the aggressor appropriating the victim’s property. Both the state and taxation are inseparably linked to war and historically generate each other: initially, French “intendants” were messengers of Cardinal Richelieu for extorting taxes from the provinces. Then they became a state institution. The Prussian tax office was generally formed on the basis of a military commissariat, and so on.
The state always expands—both externally and internally (appropriating various social functions), expansion requires war (again, war can be internal, as we have now), war requires taxes, new taxes generate new state structures—therefore, the state expands, war is required, and so in a circle, until the state of North Korea.
It is clear that real history lacks any linearity. It happened, for example, that both the conquered and the conquerors themselves turned into a state. This happened, let us say, with the Roman Republic, which after the Social War expanded dramatically, gaining a mass of new citizens, and thereby set out on the road that led it fifty years later to the empire. However, in any case, war and expansion are the causes of the state and taxation.
In the most general case, the picture looks as follows: tribes of nomadic cattle-herders conquer settled farmers. Here tribute or tax appears, in those times usually paid in kind. There is also another important circumstance. The nomads capture a territory that they could hold by force—territory much larger than the total area of the farmers’ plots. Thus, not only the indigenous inhabitants but also all who end up on this territory subsequently “owe” those who captured it. The conquered farmers become “tenants” of the land that now belongs to the conquerors, and the “rent” in this case is a classical tax. It is important to understand that the “state” can be viewed not only as an organization but also as a method. The method consists in that to obtain a tax you need to control a certain territory and be able to forcibly compel its residents to pay tribute. We are accustomed to seeing states as patches of various colors on the map; however, in principle, this is not necessary. The medieval state, for example, was a matryoshka doll containing many states; any baron who collected tribute from peasants was a state.
Without Taxes
It should be said that in history there were numerous examples when human communities were organized not on the principle of territorial monopoly and tribute collection. Some of these communities are considered the cradle of our civilization. The Greek poleis were organized in this way, as were many free cities in the Middle Ages, the Roman Republic, medieval Ireland, and the Icelandic Commonwealth. A distinctive feature of these associations was an organization more on the principle of a club and membership fees than on the principle of the state and territorial monopoly. Positions were elective or filled by lot, but what is important for our topic—payments were irregular and targeted, and, at least in the poleis, there was nothing resembling a “state treasury” or budget. There is a known case when the Athenians collected 5,000 talents “for the fleet,” and this money was to be kept intact in case of war with the Persians, but this can hardly be called a budget.
L’etat c’est moi
However, let us return to our history. Actually, the phrase “the state is me” would sound much closer to the truth in the mouth of a classical medieval monarch of the feudal era. He was indeed the state (for simplicity, let us discard all dukes, counts, and barons, let us consider only one layer of the matryoshka). He received income from his land, payments from vassals (if they allowed him to collect these payments), the church (if he managed to force it to do so), and so on. His personal income was actually state income, and his personal treasury was the state treasury. Accordingly, he also made expenditures from his own pocket—paid for wars, hunts, the court, and other things.
It is clear that monarchs had to spend a lot, and many of them were (relatively) poor. The classic of the genre is the wandering monarch, living with his court in turn at his vassals. In this case, the vassal paid for the court and entertainment, and there were significant savings. This practice was widespread in Europe.
Extraordinary Needs
Periodically, or more precisely—regularly, monarchs had extraordinary needs that they could satisfy only by going beyond their personal income. These needs, caused in the overwhelming case by waging wars, forced kings to seek income from outside. Thus appeared what is usually called taxes, apparently assuming that feudal levies were a perfectly legitimate matter. The difference between these payments and those that already existed was that they were not part of the feudal system but had a more “national” character, that is, they were collected from everyone who met the payment conditions. Perhaps the first such tax was the duty on the export of wool and leather in England, introduced in 1275. The salt tax, obligating the purchase of salt from the state monopoly at a certain price and in specified quantities, should be noted. This tax, introduced by Charles V, became very popular among the nobility of that era. The land tax paid by free peasants acquired exactly the same popularity. There are known taxes on beer, the window tax, with which England financed the military campaigns of the 17th century. In Prussia, there was a tax on all types of meat except pork. During this same era, taxes on corporations appeared, that is, on the church. The Spanish King Philip II received from the church as much income as from the American colonies.
Unintended Consequences
Let us note that the taxes under discussion are predominantly indirect, which somehow poorly agrees with the theory of “voluntarily taxing oneself for the common good.” Indeed, the public accepts indirect taxes more easily than direct ones, although the damage from indirect taxes due to purely economic reasons can be significantly greater.
Constant demands by monarchs for new taxes always caused dissatisfaction among the population, as they were perceived as exceeding the permissible limits. Medieval society, based on countless rules, exceptions to rules, and privileges, was very sensitive to such things. Therefore, in the largest and most developed countries of Europe, representative bodies already existed that were convenient in that they allowed the tension on this issue to be relieved, as they were the ones who had to approve new taxes. In England, kings could not overcome the resistance of Parliament, and starting from Henry VIII, they became dependent on the representative body in financial matters. In France, everything turned out the opposite—Francis I created a single treasury as early as 1523 and eliminated the difference between regular and extraordinary (approved by the Estates-General) revenues of the crown.
However, in both cases, an unintended consequence was the separation of the king’s revenues from state revenues, or more precisely, the appearance of an independent state treasury as such. In England, the final point on this matter was put in 1770, when Parliament appointed George III an allowance of 800 thousand pounds per year. Actually, from this moment begins the history of independent state finances.
Bureaucracy
The opponents of kings were the aristocracy and the church. The state in the Middle Ages and the era of mercantilism was organized on the principle of delegated governance. Different functions in different places were performed by different people and organizations. In search of income, state positions were sold and bought, especially in France. Tax collection (a collection rate of 30% was considered good) was handled by guilds or special tax farmers, who paid the treasury in advance and then collected taxes on behalf of the king with profit for themselves. The struggle to expand the “tax base” led to monarchs being forced to rely increasingly not on the unreliable nobility, which traditionally occupied various positions at court, but on a hired “team of professionals.”
In England in 1664, the last mercantilist privileges were abolished (except for “copyright”) and all its inhabitants became equal before the law, which meant that they paid taxes approved by Parliament. In 1692, tax farmers were replaced by salaried collectors, which dramatically increased the revenues of the royal treasury. In France, after the centralization of the treasury from 1523 to 1600, the king’s revenues grew fourfold.
It should be said that the creation of a class of paid officials was more of a side effect of the process and was not part of the kings’ intentions. Officials appeared “by themselves”—the state gave birth to taxes, taxes gave birth to the state. There are many stories of how this happened. For example, the story of how the king of Savoy-Piedmont, Emmanuel Philibert, invented a tax that forced the populated places in his possession to clearly establish their own boundaries. Accordingly, there arose a need for cadastres and officials to maintain them.
Thus bureaucracy appeared. In the end, kings defeated aristocrats and the church, and now they received income not only from their own possessions but from the “country as a whole.” True, completely unexpectedly, they found themselves in complete dependence on the bureaucracy. As one official said to one king: “Your majesty is no more than a formality.” “Absolute monarchy” is actually the complete powerlessness of the monarch as such, and the first manifestation of the bureaucracy as an independent caste, which from that time was destined to rule the world.
So, as we said, the “weak” monarchy in England and the “strong” monarchy in France ultimately produced the same result of evolution in the form of the emergence of independent state finances and taxes existing to fill them. In England, the king’s finances were separated from state finances and strictly regulated; in France, all finances were royal, but the monarch himself became a function of the bureaucracy. The other European monarchies located between these extremes, of course, also arrived at similar results.
Citizens
The Great French Revolution should be called the great bureaucratic revolution. By eliminating mercantilism and absolutism, the French simply achieved the goals that absolute monarchy and the system of privileges, monopolies, and regulations had failed to achieve. The king and aristocracy were no longer needed, and the cumbersome system of mercantilism was replaced by a highly centralized and much simpler system of hired bureaucracy.
Thus the form of state familiar to us now was finally established. Its difference from the preceding system consists in that instead of the multilayered cake of medieval society, it contains only two main groups of people—citizens, equal before the law and paying taxes, and bureaucrats, serving the abstract corporation called “the state.”
Actually, the revolutionaries “rediscovered” the ancient principle by which a public position existed separately from the person holding it. The state finally became the full “artificial man” of Hobbes. That is, the state became a corporation, a legal phenomenon that gave the legal possibilities of a physical person recorded in notarial books, or, as in our case, a complete abstraction, nowhere properly defined and existing by virtue of recognition by other such abstractions (the institution of “recognition” of states by each other). Moreover, in the old ancient scheme of “people separately, positions separately,” there appeared something that had not been there before—compulsory taxes.
During the revolution and Napoleonic Wars, this system spread throughout practically all of continental Europe. The success of French troops, which conducted essentially continuous war for 20 years, is simply explained—in France, 30 million people became citizens. This meant that the adult male population could be put under arms. European monarchies could rely only on mercenaries and armies collected by “conscription.” Unlike French citizens, their subjects in most cases were deeply indifferent to the wars their monarchs waged.
Radical changes meant that citizens now made completely different demands on the corporation “state,” and this corporation gladly responded to their call. In the age of science, it was believed that the state could quickly fix the “ills of society” if “scientific methods” existed. While the 19th century was the era of liberalism, it was then that the state began to actively engage in what it had never engaged in before—maintaining order, social insurance, “capital construction,” including infrastructure (railroads), unification of education, regulation of labor relations, etc.
In our topic, this means that direct taxes began to be actively used. William Pitt introduced income tax in England for the war with Napoleon. After the war, it was abolished (a rare case). The same thing happened in the USA during the Civil War (the tax was later abolished). But starting from the beginning of the 20th century, direct taxation became the norm. And while poll taxes during monarchies always caused resistance, the new system (much more rigid) was presented as a “civil duty” and was introduced more easily, since taxes were received not by the king but by the impersonal “state,” supposedly serving the “common good.”
Artificial Man
Hobbes, who called the state an “artificial man,” missed by some 350 years the moment when his metaphor turned into reality and began living its own active life. The 20th century was the era of the “masses,” the unchallenged dominion of bureaucracy, and the triumph of the artificial man.
In our topic, the appearance during this time of theories that described life from the standpoint of the artificial man is very important. In the 1930s, when little remained of 19th-century liberalism, Keynesianism appeared, along with a special variety of bureaucrats—economists. Keynesianism generalized tendencies that had existed earlier in economic science—the aspiration to transfer ideas from physics and mechanics along with mathematical apparatus into it and to present human society as a closed system tending toward equilibrium. Keynesianism created a world in which abstract “aggregates” act, not living people, a world where reality is defined by “price levels,” “inflation levels,” “employment levels,” and so on. By manipulating these “levels,” the artificial man achieved his goals. Taxation took an honored place in this system.
If in the 18th and 19th centuries few objected to taxes being legalized robbery and discussions about taxes were conducted from the position of “necessary evil,” and they themselves were considered a “burden,” now everything changed radically. For the artificial man, taxes are not at all a burden or robbery. Economic theories now quite seriously discussed the “regulating” and even “stimulating” role of taxation. Moreover, “macroeconomists” for a long time insisted (and ours apparently still insist) that the “fiscal function” of taxes had become a thing of the past and now the “regulating” function comes to the fore.
The postwar period was an era of mass experiments by the artificial man with reality. He constantly turned adjustment knobs and invented new methods of regulation and taxation.
Economic Harm
In principle, a discussion of the “efficiency” of taxes should begin and end with the fact that this practice is not voluntary. However, Ukrainians still live in a world of ideas generated by 20th-century technocrats. As long as many people consider it such and as long as the dominant opinion is “but how else?”, it is worth saying a few words about the economic harm of taxes.
First, economics is various kinds of relations and effects generated by the activities of living people, even if they act through “artificial persons”—corporations or the state. Therefore, the idea that “my taxes return to me in the form of something or other” is incorrect by definition. Nothing is returned to you. It is returned to you only if you yourself directly spend money on some good or voluntarily make contributions. Taxes are neither your personal expenditure nor contributions.
Second, from this it follows that such use of taxes as “state investment” is not investment in the economic sense of the word. 19th-century economists already knew about this, and some rightly attributed state expenditures to consumption. Investment is based on saving. And saving means forgoing consumption. The state, however, forgoes nothing. It takes and spends what belongs to others. State expenditures in general, and “investment” in particular, in the economic sense is the consumption of officials. They consume political dividends.
Third, the classic example of “Bastiat’s broken window” tells us that discussions about state expenditures always overlook a simple alternative—where the original owner of the funds would have spent this money. Discussions that an accidentally broken window in a baker’s shop will now give work to a glazier (such discussions you will find everywhere state expenditures and “investments” are talked about) overlook the fact that the baker himself intended to spend this money on a new suit (which would have given work to a tailor). For each of us, the baker’s intentions are far more important, as they are voluntary and confirmed by his savings. These, not “investments” from seized money, constitute the daily fabric of the economy, that system of relations that allows such an enormous number of people on Earth to exist.
Fourth, the example of a thief who steals money and spends it in a supermarket makes obvious another aspect of taxation—the absence of voluntary exchange. The wealth of “society as a whole” grows through exchange, in which there are always two parties who voluntarily come to an agreement. For exchange, each party must give up something belonging to them in favor of something belonging to the other party. The thief created nothing; he simply appropriated someone else’s wealth. Mainstream economics, discussing the benefits of state expenditures, sees only the thief buying goods in the store; it ignores the fact that wealth in this case does not increase.
Fifth, the violation of exchange occurs even when taxes are collected during the exchange process, for example, when “paying wages.” It turns out that the buyer of your labor values you, let us say, at 10,000 hryvnias (and this information exists on the market as your wage), but you receive, let us say, 8,000 in hand, that is, in the end you will offer your contracting parties an amount for exchange less than the market value of your services. This introduces constant distortions into the economic process.
There are countless types of taxes and methods of collecting them; moreover, the burden placed on citizens’ shoulders depends very much on tax administration, that is, taxes themselves may be small and few, but the associated procedures may simply be unbearable.
Additionally, in indirect taxes, one must still determine who actually pays the tax, or, as economists say, onto whom it is “shifted.” Henry Hazlitt and Murray Rothbard spent considerable effort analyzing the main types of taxes and found, in particular, that the widespread sales tax, for example, is actually paid by the producer, not the consumer, and ultimately by the owners of the primary factors of production—land and labor. The general rule, however, is that “taxes cannot be shifted forward.” This is important for understanding reality, including the legend about sales taxes as “consumption taxes,” etc.
Stepping Outside Reality
However, let us return to our history. As we remember, the main task of the state is to constantly expand. Over time, the money received from taxes was again insufficient for expansion. Therefore, states gradually discovered new methods of financing their needs in the form of inflation and loans. We should not forget that taxation, however invisible they try to make it (for example, by taxing corporations or, as with us, withholding taxes before paying wages), always causes a reaction from those being taxed and, generally speaking, is too dependent on political decisions. It would be logical to minimize its role in the current “filling of the budget.” Somewhere around the 1990s of the last century, we found ourselves in a new world in which the artificial man completely stepped outside the bounds of our reality. States have long and confidently been spending much more than they collect in taxes.
The positive aspect here is that no one, it seems, any longer seriously talks about the “regulating” or, worse, “stimulating” role of taxation. These talks remain for politicians and completely compromised economists. Along with the loss by taxes of their role as the sole filler of the budget, awareness has returned of the fact that taxes themselves are nothing more than expropriation of property.
Return to Reality
Fighters for economic freedoms make a mistake when they say that taxes have ceased to be decisive and that state regulation as such now causes much greater harm. This is so if one looks at the world through the eyes of the artificial man. In the world of an ordinary person of flesh and blood, taxes remain the foundation of the system, after all, the system itself has not changed. Nothing has changed from the fact that instead of a prehistoric chieftain accepting tribute from subjects, we have an abstract corporation that “imperceptibly” takes a part of our property. The state remains a territorial monopoly existing for the purpose of obtaining tribute from people who find themselves on this territory.
Taxes cannot be considered only from an economic point of view (although, of course, different types of taxes cause different harm), nor can they be considered exclusively a “fiscal instrument.” Taxes are a system-forming factor of the modern political economy machine. As Ukrainian observer Maksym Kryzhny aptly noted, modern money should read “secured by your health and your freedom.” The very obligation to pay taxes underlies the fiat money with which we must pay the state, and the entire machine of monopoly violence as a whole. Remove taxes, and this machine will fall apart.
Masking and Mythology. Conclusions
If taxes actually were, even to some degree, payment for certain services, then a logical tax system would be a system with a single, direct tax. From the standpoint of efficiency of both the “service” itself and control over all this, this is perhaps the only possible option. However, you will not find anywhere a country with a single tax, let alone a direct one.
Moreover, a characteristic feature of all countries without exception is the confusion with taxes. There are not simply “more than one” tax; the tax system itself is designed to mislead. States pursue two goals here. The first is to maximally use “anesthesia,” that is, to make it so that the ultimate bearer does not feel the fact of robbery. Taxing corporations and taxation of “legal entities” in general is a classic example of such anesthesia. Taxation of wages before they are paid out, as in Ukraine, is another example. The second task is to prevent a clear division of society into donors and recipients. Everyone pays taxes, even those who receive income from taxing others—retirees, officials, military personnel, and so on; moreover, there are taxes like VAT that cannot be avoided and that, again, “cover” all citizens of the state, regardless of whether they “bring in” taxes or “take out” them. Political struggle in modern democracies ultimately takes place between recipients and donors. However, masked taxation directs it past the target. I think that a clear division into those who give and those who receive can much more quickly lead to the disappearance of taxation.
Finally, the most important element of the taxation system is the mythical “punishment for wealth,” which allegedly comes as a result of certain types of taxation, such as progressive income tax, and which supposedly make “the rich pay more.” While in reality in most cases the poor still pay more, the very existence of such a system keeps them politically energized and makes them maliciously vote in elections for the corresponding proposals.
So, in conclusion, the following can be said. Taxes evolved from tribute in kind to monetary tribute. The latter was facilitated by the expansion of the state both internally (functionally) and externally (territorially). Taxes evolved (ceteris paribus) from more indirect to more direct. And, finally, in our time, taxes play the role of the foundation of the entire system of state coercion.
When discussing taxes and how they can be “improved,” one should proceed from the ultimate goal of complete elimination of taxation as an illegitimate and economically harmful activity and from the fact that taxes themselves are not an economic but a political phenomenon. Therefore, an “improvement” is only what is directed (ceteris paribus) toward simplifying administration, toward eliminating tax “anesthesia” in the form of taxation of legal entities, etc., toward the transition from indirect to direct taxes, and toward a clear division in taxation between donors and recipients. Only such an approach has any practical meaning. Everything else is discussions about which punishment is more humane—birching or standing on buckwheat.