History of Taxes: A Brief Overview

What You’ll Learn

1. Learn where and when some taxes originated and how they resemble taxes we have today.
2. Understand how the American taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code developed from the beginning of the colonies with key examples.

Introduction

Taxes can be complicated, and understanding them requires going deeper than knowing the current tax code and how it impacts behavior. The history of taxation—including why it was used and how it has influenced previous societies—can help us understand the potential benefits and consequences of current and proposed taxes. This history can also help policymakers draft better legislation based on outcomes and patterns from the past, while guarding against possible abuses. This primer is a basic overview of how taxation has shaped society throughout history. It covers the origins of some forms of taxation, common types of taxes, and the history of the American tax system.

Taxes: The Origin Story

Today’s tax codes are extensive and ever-changing, but many of the basic tax types governments depend on, including sales taxes, excise taxes, and property taxes, have been around since early civilization.

The earliest record of taxation yet discovered relates to ancient Egypt around 3000 BCE. Initially every two years, and then every year, the ancient Egyptians would celebrate an event called Shemsu Ho, or Following of Horus, where the pharaoh and his advisors would tour the kingdom, assess the value of livestock, and then collect a tax on the ownership of that livestock. At the time, Egypt lacked coined money, so grain represented a tangible store of value that could easily be collected, traded, and redistributed throughout society.

Taxes are also referenced in ancient Sumer, where scribes used cuneiform clay tablets to keep records of what was owed to local temples.

As with many modern innovations, the Greeks and Romans also helped spread and standardize taxation throughout the ancient world, as they expanded their realm and civilization evolved.

Fun fact: the Rosetta Stone, our key to unlocking the meaning of hieroglyphics, was partly a tax document that explained new tax laws decreed in 196 BCE.

The Start of Familiar Taxes

Sales and Gross Receipts Taxes

Ancient Rome administered a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.  . For instance, during the reign of Caesar Augustus, a one percent transaction tax, known as the centesima rerum venalium, was levied on all goods sold at market or during auction. Because it only applied to goods sold at market, it was not quite a modern gross receipts taxGross receipts taxes are applied to a company’s gross sales, without deductions for a firm’s business expenses, like compensation, costs of goods sold, and overhead costs. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding. , but because it lacked any express exemptions for intermediate transactions, it was also far from a well-designed sales tax, and is variously described as a sales or gross receipts tax in the literature.

Income Tax

Possibly the earliest known example of the income tax can be found in Ancient China, where in 9 BCE, Emperor Wang Mang of the Xin dynasty established a 10 percent tax on net agricultural income and some nonagricultural activities and forms of trading. Under the tax, people were required to report their taxes to the government, taxes that would then be audited.

Roman Emperor Augustus changed the empire’s tax system around the same time. Until then, Roman tax collection had originally been done through “tax farmers” who collected taxes from their respective regions based on the assessment of the region as a whole and turned them over to the government. Augustus switched to a direct system of taxation, and one of the taxes administered outside Italy was a graduated tax based on wealth that some scholars have seen as better approximating a poorly designed income tax (somewhat similar to much later occupation taxes) than a true wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. .

Property TaxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.

In ancient times, property taxes were levied in Babylon, Egypt, Persia, China, and elsewhere. Originally, these taxes were based on the production value of the land, or how much the plot was expected to yield in goods, and therefore were typically paid by farmers. Property taxes continued in medieval Europe under rulers, like England’s William the Conqueror, who imposed an assessment on the value of land to raise protection money against Danish raiders.

Tariffs

Tariffs have been dated to approximately 3000-2000 BCE on trade of metal and textiles between the ancient city of Kanesh in Anatolia (modern-day Türkiye/Turkey) and Assyria (in modern-day Iraq). The Roman Empire also levied tariffs, both on the goods traded within the empire and on those imported from outside. Throughout history, tariffs have been levied to control the trade of certain goods, like wool, leather, butter, cheese, and more.

An Overview of the History of the American Tax System

Much of the start of America’s history centered around taxation. Originally, America was without its largest source of modern revenue: the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. . Additionally, many original colonists and traders in the 17^th century were exempt from tax collection since the mother country wanted to colonize the New World and incentivize trade.

American colonists were subject to property taxes, import duties, excise taxes, poll taxes, and some early forms of income taxes, though tax rates and burdens were considerably less than in Great Britain. Following the conclusion of the Seven Years’ War with France, Britain faced mounting debt and desperately needed a large cash infusion.

This led to the British government turning to the American colonies for additional revenue, placing greater burdens on the colonists and helping spark what would become the American Revolution. These included:

• The Sugar Act of 1764: A tax on molasses, sugar, and wine
• The Stamp Act of 1765: Taxes on important printed material like legal documents, newspapers, and pamphlets
• The Townshend Acts of 1767: Taxes on 72 items, including the tax on tea that led to the Boston Tea Party
• The Tea Act of 1773: Granted the British East India Company an effective monopoly on tea sold in the colonies

Opposition to “taxation without representation” played a large role in the development of the American legislative system and is evidenced in Article I, Section 8, Clause 1 of the US Constitution, which granted the elected representatives in Congress the exclusive power to “lay and collect” federal taxes. While tax rates were lower in the colonies than in England, the colonists lacked formal representation in Parliament that would grant them a say over tax matters. State and local taxes were developed under the same guidelines.

Tariffs were the original pipeline of tax revenue for the US government, including the “Tariff of Abominations” in 1828 and the subsequent Nullification Crisis from 1832 to 1833, which increased tensions between the North and South. Proponents and opponents of trade liberalization in the government would continue to fight over tariff policy leading up to the Civil War, but tariffs would remain the primary source of government revenue until the early 20^th century.

During the Civil War, the Union needed more money to finance the war effort, so Congress passed the Revenue Act of 1862, which created the nation’s first individual income tax and helped raise $55 million to fund the Union cause. The income tax law would be repealed entirely in 1872, and a replacement introduced in 1894, which, for the first time, made a distinction between taxing corporations as entities separate from their owners. This tax law would subsequently be found unconstitutional, as a “direct taxA direct tax is levied on individuals and organizations and is not expected to be passed on to another payer (unlike indirect taxes such as sales and excise taxes), though economic incidence can still fall upon others. Often with a direct tax, such as the individual income tax, tax rates increase as the taxpayer’s ability to pay, or financial resources, increases, resulting in what is called a progressive tax. Article 1, Section 9, of the US Constitution requires direct taxes to be apportioned by state population, though the 16^th Amendment establishes that income taxes are not subject to this requirement. ” requiring apportionmentApportionment is the determination of the percentage of a business’s profits subject to a given jurisdiction’s corporate income tax or other business tax. US states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. to states by population. 

However, a combination of rapid industrialization, declining tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. revenue, and a political push to shift tax burdens onto the wealthy led Congress to pass the 16^th Amendment in 1909. Following its ratification by the states in 1913, Congress passed the Revenue Act of 1913, reestablishing the federal income tax and allowing federal taxes to be levied on individual and business incomes.

The demands of two world wars, particularly the need for higher defense spending, would lead to an expansion of the federal income tax. However, even after their conclusion, the federal income tax would remain in place and at elevated rates. Today, the income tax is the top stream of government revenue.

This period also saw the implementation of various new taxes that are familiar today: the estate tax (1916), the gift tax (1924), and Social Security payroll taxes (1937). State sales taxes began in Mississippi in 1930 as a response to lower property tax collections (until then the primary form of state tax revenue) during the Great Depression, and quickly spread to other states nationwide.

Gross receipts taxes, which were imposed in various forms in the early republic, also gained popularity in 1930s America, though the first in the modern era was adopted in West Virginia in 1921. Many of these taxes were repealed by court decisions in the 1970s, and today, only seven states still levy a gross receipts tax at all.

Major reforms to the US tax code have occurred since then. One noteworthy example includes the Economic Recovery Act of 1981, which reduced all individual tax rates and altered how businesses account for capital investment and expenditure. More recently, Congress passed the Tax Cuts and Jobs Act (TCJA) of 2017, which further reformed individual and business taxes by reducing marginal tax rates, providing more generous tax deductions, and lowering the corporate tax rate, among other changes.

To learn more about some of the weirder taxes throughout history and their unintended consequences, check out our Tax Policy 101 Primer: The Weird Way Taxes Impact Behavior.

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