The extraction of resources from the domestic population has always been a crucial and central function of every state, whether it’s the United States, Russia, or Argentina. In the modern world all states at least attempt to impose a mixture of excise taxes, income taxes, import taxes, or a variety of similar taxes. Most states with a reasonable level of state capacity are able to successfully impose and enforce these taxes.
States that are able to impose taxes in this manner are what Joseph Schumpeter called “tax states.” These are states in which the power of the central government to impose direct taxation at will is fully developed. Tax states are generally characterized by the following:
- Centralization: taxes are directly imposed by the central government. The central government does not rely on regional or local governments to collect taxes or enforce tax laws. (This does not preclude regional or local governments from imposing their own taxes.)
- Unilateral power: The central government can raise taxes unilaterally. The central government’s legislature or executive has the prerogative to raise taxes on its own authority without the permission of any other sovereign within the state’s territory. Put another way, no regional or local government has the ability to veto a tax increase or legally prevent its implementation.
- The central government freely decides how revenues are spent. Once tax revenues are collected, the central government spends the revenues in whatever manner is preferred by the central state’s legislative power.
- Taxes are not fees or a payment for a service. Strictly speaking, a fee is a payment that is designed to fund a specific service, and only those who “benefit” from the service pay the fee. Tax “benefits,” on the other hand, are not tied to any particular service. Tax states are not legally held to any sort of reciprocal duty to spend tax revenues in a manner that benefits those who pay the tax.
Nearly all residents of the “developed” and middle-income worlds today are very familiar with this sort of taxation. This has been the modern reality for tax states for more than a century.
It was not always so, however. In the West, tax states are relatively modern institutions, and they developed from earlier non-state civil governments that were not primarily funded by taxes.
The Domain State versus the Tax State
The political economist Joseph Schumpeter developed and popularized the idea of the “tax state” with his influential 1918 lecture “The Crisis of the Tax State.” In the lecture, Schumpeter provides, among many other things, a brief explanation of what preceded the tax state. This was the “domain state”—although Schumpeter does not appear to have used the phrase. In a domain state, the prince was expected to use his own funds—collected through rents and fees on the prince’s personal property—to fund the prince’s acts of governance. Although taxes did exist, taxation was regarded as an extraordinary and temporary measure to be reserved for infrequent emergencies. Or, as economic historian Jacob Viner put it, taxation in this period was not assumed to be a “routine, normal, [or] respectable method of providing for the financial needs of government.” Consequently, princes who sought to raise revenue via taxes or tax increases faced major institutional, ideological, and political impediments to a degree unknown in most modern states.
However, with the rise of the state in the early modern period, taxation became a commonplace practice and both the state and taxation grew concomitantly from earlier non-state origins. “[I]t is well known that the modern tax state is not rooted in the tax state of antiquity,” Schumpeter writes, and he attributes the tax state’s origins to the consolidation of power under “the princes of the fourteenth to the sixteenth centuries.”
So, what came before this period? How did political rulers fund themselves before the tax state? This can be extraordinarily difficult for modern readers to imagine since we have been so completely inculcated with the idea of the state as a sovereign, unified corporate entity that has a monopoly on legitimate coercion within a territory. Schumpeter nonetheless attempts to explain this and notes that prior to the state and the power to tax at will, ”The prince did not look upon his territory then as a modern estate owner looks upon his cattle. All this came later.”
Schumpeter explains that in the medieval period prior to the tax state, there was no concept of the “common good” as we now think of it, and the prince did not exercise “social power” in a way that allowed him to claim to be the provider or arbiter of any sort of “public” benefit. There were simply the prince’s domains, over which he exercised property rights. But this “sovereignty” was merely that of a private property owner. The prince might claim to be a ruler over a certain population, but he met strident opposition from the nobility, the towns, and even the peasantry, all of whom exercised their own forms of sovereignty and property rights. A prince’s “powers” were only “the sum of diverse rights” stemming from the prince’s personal possessions spread across many properties. There was no “public” that could be taxed for the benefit of an imagined common good since there was nothing we would call a “commonwealth” or state. There certainly was no “nation-state” as we now conceive of it.
Consequently, Schumpeter notes that a prince had to look to his own properties for resources:
So far as the economy of the prince was concerned, it followed that he had to meet all the expenses of any policy which was his private affair and was not the policy of the state. For instance, he himself had to meet the cost of a war against “his” enemies, at least unless he had a right to the necessary contributions by virtue of particular titles, such as the vassals’ obligation to render military service. ....Neither the means at the prince’s disposal for this purpose nor his sovereignty derived from any centralized state power.
Whatever claims the prince enjoyed over a right to call for military service or a share of agricultural production, this was due to specific legal contracts and oaths. So, what were these revenue sources that a prince could cultivate? Schumpeter lists them:
Most important were the revenues from his own lands, that is, the dues of his subjects, the peasant-serfs, whose landlord he was. Since the thirteenth century these dues were paid mostly in money. Until the sixteenth and seventeenth centuries these revenues were considered the foundation of the princely economy .... In addition there were diverse feudal rights, such as the mint, market, customs, mining, or protection-of-jewry regalia and all the rest of them, and finally the revenues from those powers which he had as a dispenser of justice or as lord over towns and bailiwicks. Apart from that there were traditional gifts of vassals, the highly controversial contributions of the church, but no general right to “taxes.”
In some cases, towns were subject to taxes, but, as Schumpeter notes, “Aside from this neither the freeman nor even the dependent nobleman paid taxes as a rule.”
Moreover, if a prince did attempt to raise taxes, he often met fierce resistance because the very idea of a general legal right to taxation was largely rejected by those princes sought to tax—i.e., the “estates” of the nobility, Church, and town councils. Thus, cut off from raising taxes to fund new projects, the princes were forced to borrow. But, once debt became crippling, taxation was again the assumed recourse. Schumpeter continues:
The prince did what he could: he got into debt. When he could borrow no more, he turned begging to the estates. He acknowledged that he had no right to demand, declared that accession to his plea was not to prejudice the rights of the estates, promised never again to beg...
The princes also benefited from the presence of military threats—both real and imagined—in neighboring lands. This was the ultimate shortcut to the creation of new centralized states. Taxation gradually became permanent and insidious in pursuit of what we now call “national security”:
The prince pointed to his insolvency and suggested that matters such as the Turkish wars were not merely his personal affair but a “common exigency.” The estates admitted this. The moment they did so a state of affairs was acknowledged which was bound to wipe out all paper guarantees against tax demands.
Yet, even at this point, princes still were forced in most circumstances to look to their own properties to fund the prince’s plans. Over time, however, this changed. ”At first the concession of taxes by no means implied a general tax duty,” Schumpeter notes. Rather, the tax concession was valid “only for the estates which granted it and perhaps for their own vassals...[A]t first, only those who had themselves voted for the tax concession were committed, while he who had mounted his horse before the concession and had ridden off did not have to pay.”
Nor did the taxpayers simply allow the prince to spend these revenues as he saw fit, and Schumpeter adds that
The estates did not trust their prince. Frequently the funds that had been raised were channeled to their intended purpose through the estates’ own agents, and always, except in disagreeable cases of difficult collection, the estates opposed the intervention of the prince as to the way in which the voted sums were to be raised.
Needless to say, this contrasts greatly with our own modern idea of taxation in which a simple vote among members of a national legislative assembly somehow grants “consent” among all potential taxpayers within a state, with the ruling party then free to spend these funds however it wishes.
Modern Taxation vs. Medieval Fees and Dues
Nonetheless, as the “medieval political community” gave way to the modern state, the tax state was formed, and as Schumpeter concludes, “Tax liability on the basis of a majority decision, even more so general tax liability and a legally controlled distribution of the tax burden among lords and vassals—all this came about but very slowly.”
The extensive time necessary to establish a “right” of taxation illustrates how taxes were not simply a new name for the dues, rents, fees and tolls under the medieval arrangements. There was a recognized qualitative difference between taxes and the revenues collected under feudal oaths. After all, the dues and rents paid by the peasantry and vassals were often based on centuries-old contract—albeit usually unwritten—in which the lord was obligated to provide specific services in exchange for revenues paid. Services included primarily military defense from invaders and criminals, but also legal arbitration and defense, and keeping roads and waterways clear. That is, revenues were tied to specific services, and revenues were expected to be spent on those services considered to be beneficial to those who paid. More importantly, these agreements were reciprocal in nature and did not grant the lord the power to unilaterally increase the size of fees, dues, or rents. Even in cases where payments of rents and fees were de facto mandatory, the oaths, rights, agreements, and conditions varied from place to place within a prince’s own domains. This amounted to an enormous and complex patchwork. Unlike a tax state, within which uniform taxes may be imposed upon a population of “equal” citizens, the utter lack of uniformity among pre-state domains imposed sizable transaction costs on princes which led to innumerable difficulties in imposing increased demands for revenue en masse.
[Read More: “Feudalism: A System of Private Law“]
There was a quantitative difference between taxes and the old fees-and-dues system as well. Schumpeter emphasizes that non-tax revenues were remarkably small in Western Europe, and he illustrates this by comparing the revenues of Western princes—who mostly relied on non-tax revenues—with the tax-bloated revenues of the Turkish regime. While the Turkish regime could send tax-funded armies into the field with relative fiscal ease, the princes of the West could raise only small fractions of the Turkish sums being spent. Thus, Western princes hoping to go on campaign in the east relied on one-time tax payments from resistant nobles and bourgeois townsfolk who regarded taxation as an absolute last resort—and a shameful one at that.
Ultimately, however, the forces in favor of a general “right” to taxation on the parts of princes—later transferred to democratic regimes—won the day. Most modern states now are fully developed in the sense that they meet all the requirements of the tax state as listed above: states raise funds on their own accord, unilaterally applied, universally, without fear of veto, and with an assumed right to spend freely as the central government sees fit.
The rising tax state enabled the newly empowered princes to wipe away the old medieval estates, the decentralized sovereign nobility, and the countless impediments to taxation that had grown up from the rubble of the Roman Empire in the west. Naturally, this windfall to the states’ ruling classes has remained at the very center of state-building ever since, and thus Schumpeter concludes:
Taxes not only helped to create the state. They helped to form it. ... Tax bill in hand, the state penetrated the private economies and won increasing dominion over them. The tax brings money and calculating spirit into corners in which they do not dwell as yet, and thus becomes a formative factor in the very organism which has developed it.
Image credit: Homage ceremony in the Middle Ages, Archives Départementales de Pyrénées-Orientales 1B31, via Wikipedia.
