Where do taxes come from? Brief history of taxation and how it shaped our finances and our lives

What would you say if we asked you to name one concept that is common to all times, countries, and cultures?

When we go a little deeper into our society’s essence there are very few aspects that we can pinpoint as common denominators defining people's lives in the modern world, in Roman times, or in ancient Egypt. Probably the word that we will write next is the one that you least expected: tax.

What is tax?

Whether we like it or not, it’s something that everyone accepts naturally, and this makes sense since taxes have been ingrained in society since the very beginning. Already when humans were starting to organize themselves into communities, the concept of giving a share of one’s production to the leader was not even questioned. 

Where do taxes come from? Is there a good reason for them to exist? What can we learn from the history of taxation?

What is tax? Are taxes mandatory? They absolutely are, and to such an extent that you may be paying them without even knowing it. Nonetheless, it doesn't hurt to question once in a while those aspects of our daily lives that seem natural only because we're used to them.

By asking ourselves what is tax, we can quickly identify that they apply to all social layers, to mid, high-end, and ultra-high-end worth individuals. In other words, they are firmly fixed in our view of society. Moreover, for many people, they become a headache as filing taxes requires knowledge and accuracy. They may ask themselves “what do I need to do my business taxes?” On many occasions, you probably wonder what happens if you forgot to file taxes. 

In some cases, the systems are somehow simplified allowing for a flat fee according to the yearly gross income, while, in others, it becomes essential to hire an accountant if one wants to do things right.

When we wonder “are taxes mandatory?” the answer is “yes”. Failing to pay them may result in jail in some countries. In others, more flexible ones, fines may apply. Consequences like restrictions on transactions, or frozen bank accounts are also possible risks.

Clearly, this topic touches us all, one way or the other. This is why we decided to ask ourselves what is taxation and understand its very essence in the best possible way: the history of taxation.

Brief history of taxation

What do I need to do my business taxes? Before we even get to this point it's a good idea to take on a journey that will teach us what is tax and why it has become a part of our lives. From the food you buy at the supermarket to the moment you purchase a car or receive an inheritance, taxes are always there. Most of the taxes that we know today have been around since the dawn of society and they've had a key role in the history of humankind. 

Taxation has been the basis on which great empires were built. One must not mistake the word “tax” with the existence of paper money or coins, since the history of taxation shows us that they were here long before. In ancient Egypt, for example, the people gave the Pharaoh 20% of their harvest. Throughout history and along the way as the economy evolved so did the taxes. Soon the payment was not a share of the harvest but a contribution through land, animals, precious metals, and, finally, with money.

In ancient Greece and the Roman Empire tax collection created a fund to consolidate the empire's power.

While the Greeks imposed taxes only on the rich, Rome implemented the collection across its vast conquered territories which included lands in Africa, Asia, and Europe. The Romans imposed taxes on land, inheritance, import and export, and slaves. Everything but the latter can be easily extrapolated to our days. The funds were used to build roads, to empower the army, and to erect the impressive buildings that made the Romans famous.

From the 15th century and on, the colonies in America were not exempt from knowing what is tax. Spanish colonies, for example, were bound to send a fair amount of gold and spices to the crown.

In our days, taxes have not changed in essence. The history of taxation shows that the ways of collection have evolved but the principles remain the same. In general, practically all we do is subject to taxes. 

Many of the products we buy are subject to VAT, and buying or purchasing a home, a car, or any property requires a contribution to the government. The ultimate form of taxation is maybe the income tax which is directly giving away a share of our earnings.

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History of taxation and what can it teach us

“(If you take a walk) I'll tax the street

(If you try to sit, sit) I'll tax your seat

(If you get too cold, cold) I'll tax the heat

(If you take a walk, walk) I'll tax your feet”…

In the 60s, The Beatles described the feeling quite accurately. Taxes can be a heavy lift as we can learn from the history of taxation. Given the world situation as it is right now and the increase in international regulations, adding to this the technology that allows for a faster exchange of information, Mundo doesn't recommend going after a zero-tax strategy. However, the burden can be (and should be) lightened.

Certain jurisdictions impose a lower rate with financial incentives to make businesses and transactions easier. If we look away from the typical Western powers, we find jurisdictions that offer much friendlier tax conditions. One needs only to take a look at countries like Hungary, Estonia, or the Czech Republic in order to understand that there are other options. For instance, none of these has a tax rate higher than 23%. Outside the OECD countries, we have even lower rates like 12% in Moldova.

Furthermore, there exist small countries, generally islands, which make low taxation their policy in order to attract businesses and trade. A fine example is Singapore, a country that we featured in Mundo because it boasts excellent corporate opportunities. When presenting a brief history of taxation and its influence in our times, a country like Singapore comes up. Among other things, it provides a flexible and convenient corporate environment in a fully compliant framework. 

Hong Kong is also to be listed among international business people's favorite jurisdictions. Being an autonomous region it has an incredible advantage as a bridge between Western policies and the Asian market. Furthermore, its leaders have been able to take advantage of this unique characteristic. We've featured its peculiar history in our investment and finance section.

Are taxes mandatory in a territorial taxation country?

If you're interested in what is tax and what is taxation, you'll probably know what a territorial system is. Now, if we wonder where do taxes come from under these frameworks, it's vital to understand that taxes are always mandatory. 

The myth about free tax on territorial jurisdictions comes from the fact that these countries do not levy taxes on foreign income. Nonetheless, they do tax domestic activities and they require physical presence in the country for most of the year. In conclusion, the individual or company will have to pay taxes on the money they use for their daily lives or operations. This includes accommodation, transportation, tuition, utilities, entertainment, and similar expenses. 

It's worth noting that territorial taxation is only one of the three existing taxation models and not precisely the most common one. Generally, each nation taxes worldwide income of all the people that live there the majority of the time, usually more than six months a year, independently of whether they have nationality or legal residency. 

This leaves a few countries that charge tax on worldwide income independently of the place of residency, like the US or Eritrea, all those countries that don't levy worldwide income if this is not perceived within the territory, like the case of Hong Kong, Panama Gibraltar or Costa Rica.

Disclaimer: this article is based on general research and reflects the opinion of Mundo's editorial team. However, this information may be interpreted in many ways. The present article should not be taken as financial or tax advice. Tax is a delicate matter that must be addressed cautiously, seriously, and together with a professional.

Understanding where do taxes come from: a conclusion

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes”. 

Benjamin Franklin

To sum up, there may be many things you don't know but you do know what is tax and the fact that you have to pay them, sometimes even without knowing it. Luckily there are ways to legally reduced the tax burden by putting together and combining diverse tools in different countries.

At the end of the day, we're talking about the same old principle, one that's sacred, especially in the finance world: diversification.

Contact your Mundo team and find out the options available for companies in Nevis The Cayman Islands, Seychelles, and Panama. A good bank account will be necessary and it's better in a country like Puerto Rico, the United States, or Saint Lucia.

Mundo is a publication dedicated to the perpetual traveler and the nomad capitalist, therefore, we're happy to help you find the right set of tools that adapt to your needs in your journey towards achieving financial freedom.

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