SA23. Taxation: a brief history by Roy Douglas

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Mediaeval pattern.

From the Norman Conquest at least, the land belonged in law to the king. Some of that land provided him with direct revenue, in money or in kind. Other parts of the land were allocated to people who rendered goods or services in exchange. In spite of the huge revenue which all of this implied, the king could only discharge his public functions with the assistance of money from other sources – grants which could only be made effective by taxation in one form or another.

A good example of how this practice operated in early times is provided by the origin of customs duties on imported (and sometimes also on exported) goods. A royal navy was developed. Its object was largely to protect merchant shipping from the depredations of pirates or foreign enemies. That navy was expensive, and merchants were prepared to pay for it through customs duties. For a long time the connection between receipt of customs and the duty to provide a navy in support of shipping was stated explicitly, but as time went on customs duties became just one source of state money and the specific link was forgotten. At times – notably in times of war – the king made further claims on parliament for money to be collected in taxes, and these claims were frequently accepted by the principal taxpayers. Responsibility for authorising and collecting taxes devolved on parliament, which naturally demanded privileges of various kinds in exchange for so doing.

A new pattern of taxation

The 17th Century was crucial in developing a pattern of taxation which may be recognised today. In the course of the Civil War of the 1640s, both sides found the struggle expensive and employed various expedients to levy the required money. Parliament developed a device known as excise for raising revenue. Taxes were levied on goods or services, or sometimes on personal possessions. There was an important difference between the workings of customs and excise. Broadly speaking, customs duties were levied on more or less luxury imports, while excise duties were levied on domestic necessities.

Another important kind of taxation soon took shape. This was originally conceived as a kind of property tax. There was little which could be considered a civil service to collect the tax, but parliament gave the job to local authorities. Each county or borough was told to levy a share of the total requirement and to assess residents accordingly. It soon transpired that it was impractical to assess moveable possessions and in practice the assessments were made on the basis of “land” and the tax became generally known as “the Land Tax”.

It is important to note that “land” in law, and for the purpose of this taxation, meant something different from “land” in economics. In economics, “land” meant more or less the same as “natural resources” and would not include such things as buildings, or artificial drainage, while in law those things were part of “land” and subject to the assessment for taxation purposes. According to current government needs, the “Land Tax” would vary. At one time, for example, it might be 5% of the assessment, at another it might be 10%, 15% or 20%. The “Land Tax” continued in that form for most of the 18th Century.

Even before the end of the 17th Century, the government requirements from the taxpayer were not confined to the ordinary needs of day to day expenditure. A new item had appeared: the National Debt. When governments were spending money at a great rate – particularly in wars – they found it convenient to borrow a large proportion of the requirement. Taxpayers would be reluctant to pay for wars if the money was demanded upfront, but they were more willing to do so if they could defer payment to a later date, or even to future generations.  Part of the National Debt might eventually be repaid (at least in theory), but “servicing” that Debt – i.e., paying interest on it – was an important requirement from the taxpayer.

A regular pattern developed, Each war (and there were several costly wars in the 17th and 18th Centuries) resulted in an addition both to the ordinary burden of taxation and to the National Debt which required to be serviced. When the war was over, the exceptional burdens were somewhat reduced; but they seldom or never fell to the level which had existed before the war started.

In 1793 war with France broke out, and was to continue, with two brief interruptions, right down to the defeat of Napoleon in 1815. The war resulted in several important changes in taxation pattern. Some were just temporary; others were of long-term importance.

Taxes were, of course, increased, and so was the National Debt. The “Land Tax” was stabilised at 20%. Prime Minister Pitt, however, was in desperate need of ready money, partly to wage war and partly to bribe dubious allies. He hit on the idea of “selling the Land Tax”. A person liable for “Land Tax” could sell his liability to the government for a lump sum. Much of the “Land Tax” soon disappeared in that way, but vestiges remained even into the 20th Century. Another important expedient devised by Pitt was Income Tax, which became effective from 1799 onwards. This fell on incomes at a level which excluded most people who could loosely be called “working class”. Income Tax was widely resented, not only because it constituted a new burden but because it was seen to be inquisitional in character, and it was often evaded or avoided.

The 19th Century

At the end of the French wars, other important changes in the pattern of taxation took place. With the development of industrialism and the rising population, Britain was no longer easily self-sufficient in food production. During the wars, substantial imports had often been impossible, and much marginal land had been brought under the plough. Agricultural interests were appalled at the prospect that they would face full-scale foreign competition now that the wars were over.

In 1815 the Corn Laws were set up in what was intended to be a permanent form. Importation of grain was forbidden unless the domestic price reached a very high level. At that time the price of the Englishman’s bread and the Scotsman’s oatmeal formed a major part of most working class budgets, and the Corn Laws threatened hunger or even starvation. The Corn Laws underwent a substantial change a few years later. A new arrangement was introduced, under which the original embargo was replaced by a “sliding scale” of import duties related to the domestic price of grain. But the Corn Laws were deeply hated, most particularly by the poorer section of the population.

Another taxation change affected wealthier people. In 1816, Parliament was invited to renew Income Tax for a further year, but refused to do so, and the hated tax remained in abeyance for a further quarter of a century.

In 1842 important taxation changes were introduced by Sir Robert Peel, There was a general rationalisation, and some reduction, of import duties. At the same time Income Tax was re-introduced, but – as in Pitt’s time – it was set at a level well above most working class incomes. There was a substantial shift from indirect to direct taxation.

The Corn Laws remained a cause of deep resentment, which was felt particularly strongly at times of economic recession. By the 1840s, however, the suffering poor had received influential allies in the form of manufacturers who perceived that the wages they must pay were related, at least in part, to the price of imported grain. As often happens, it required the threat of imminent disaster to produce a long-overdue reform.. In 1846, the first rumblings of the appalling Irish famine were heard. There was also a recognition that something similar could happen in Britain. Prime Minister Peel took the bull by the horns. At much cost to his own career, he proposed repeal of the Corn Laws, which was duly carried.

After the Corn Laws were repealed, those other import tariffs which were “protectionist” in character – that is, those which were designed to protect domestic producers from foreign competition – were doomed. It took some time before they were all removed, but by the time of W. E. Gladstone’s great budget of 1860, Britain was a more or less completely Free Trade country.

Is Free Trade enough?

In the mid-19th Century, many people appear to have believed that the establishment of Free Trade in the narrow sense of the term would do just about as much as could be done to improve the lives of the people. But in the last few decades of the Century, important changes in thought took place. It was recognised that big – and expensive – action must be taken by the organs of government, local or national, in matters like sanitation and education. Furthermore, there was a growing opinion that much more action could, and should, be taken by public authorities to counter the manifestations of poverty.

The writings and personality of the American economist and philosopher Henry George had great influence. George’s most famous work, Progress and Poverty, appeared in 1879. It has since gone into many editions in many countries, and is still in print today. The author made several influential lecture tours in the British Isles. His essential argument was that the root of poverty lay in the form of land ownership and that the conquest of poverty required a policy like Land Value Taxation which would ensure that the value of land reverted to the people as a whole, instead of being arrogated by a narrow group of landowners. It is vital, however, to note that George used the word “land” in the way in which it had been used by classical economists: to mean natural resources and not in the lawyer’s sense to include human developments upon a site.

Many people accepted George’s ideas as they stood. Others demanded different measures by public authorities to counter poverty – either in addition to George’s proposals or instead of those proposals. But the idea that something could, and should, be done to counter poverty gained increasing popularity, and by the turn of the century most forward-looking people were looking to governments to take action, in full appreciation that any action taken would result in radical changes in taxation policy.

Early 20th Century changes.

In 1906 a Liberal government was returned, and radical changes in taxation policy were soon introduced. The first steps were taken towards which is now called the “Welfare State”. Old Age Pensions were introduced in 1908, on a non-contributory basis. In 1911, the first National Insurance legislation appeared. This was aimed essentially at “working class” people with incomes below £150 a year. Employees, employers and the State were all required to make contributions towards a fund from which contributors were entitled to draw at times of distress. Provisions were also made for unemployment insurance in certain industries.

In between those two pieces of legislation came the famous Budget of 1909. Chancellor of the Exchequer Lloyd George encountered three large and exceptional calls. There were the new Old Age Pensions, new naval costs and a deficit from the previous financial year which arose because adverse trade conditions had resulted in a drop from anticipated revenue. Traditional taxes, notably Income Tax, liquor taxes and tobacco taxes, were – predictably – increased. The Chancellor also introduced some small taxes falling on land. Much more important than these taxes was a new land valuation. Supporters of Henry George’s idea of Land Value Taxation (LVT) were numerous, and recognised this valuation as a necessary prerequisite for LVT. The 1909 Budget was prelude to a a huge constitutional crisis. The House of Lords had much greater power than it has today, and rejected the Finance Bill which was designed to implement the Budget proposals. A General Election was called, resulting in a reduced, but sufficient, Government majority. This time the House of Lords reluctantly permitted the budget to pass. The Government then introduced new proposals designed to reduce the powers of the House of Lords permanently. The House of Lords rejected these proposals too, and another General Election was called, with very similar results. Again the House of Lords was compelled to comply with the Government’s wishes.

The impact of war.

War arose suddenly in the late summer of 1914. The war necessarily produced a huge increase in government spending, in taxation and in borrowing. The little land taxes were already being collected, but the land valuation was not complete, and therefore LVT had not come into effect. In the interest of national unity, the valuation was promptly suspended. In 1915 new import duties were introduced in order to curtail spending on goods which were brought by sea. Those duties were eventually repealed; but they provided precedents for much more extensive import taxes in later years.

The political changes brought about by the war were even more dramatic. In 1915 a three-Party Coalition was formed, with the Liberal Prime Minister Asquith still in place. Towards the end of 1916, for reasons which have been the subject of controversy ever since, Asquith was replaced as Prime Minister by another Liberal, Lloyd George, and a different Coalition was constituted. Asquith and his closest associates were omitted from the new government, and Lloyd George, once the great radical hero, became increasingly dependent on the Conservatives.

The war ended in November 1918, almost as suddenly as it had begun four years earlier. Prime Minister Lloyd George called a new General Election, with the Coalition still intact. He secured a great majority, but the dominant party within that Coalition was now the Conservatives. Much of their support came from landowners who were anxious to remove any threat of LVT.

Between the Wars,

In 1920 the little land taxes and the land valuation were both ended. In the next year there was a sudden surge in unemployment. This soon abated to an extent, but it remained a major problem for the remainder of the inter-war years. The coalition came to an end in 1922 and was followed by a long period of kaleidoscopic changes in the fortunes of parties. The existence of prolonged large-scale unemployment forced governments to make gradual changes in provisions for the destitute, which necessarily required higher taxation for the remainder.

At the end of 1929 there were early signs of a major economic recession, with huge further increases in unemployment and business failure. This provided the pretext for a major change in taxation policy. Free Trade, which had dominated the British economy since 1846, had been eroded to an extent during the 1914 war and its immediate aftermath, but in essentials it remained in force. In 1932, however, it was abandoned and a policy of “protection” formally introduced. This necessarily resulted in price increases for the consumer. Imports were reduced, and, as a nation can only pay for its imports by exports, so exporting industries suffered as well.

War again.

The outbreak of another general war in 1939 was followed by great changes in taxation policy. Predictably, there was a massive increase in government spending and consequently a huge rise in both taxation and National Debt. The Debt was generated partly by appeals to domestic investors but also, in the later phases, by special indebtedness to the United States. This Debt inevitably required to be serviced for an indefinite period. The base of Income Tax was greatly broadened, and for the first time it became nearly universal in its incidence. The war also saw the introduction of a new tax – Purchase Tax, charged on the sale of a great many kinds of goods.

An important change in public attitudes took place in the course of the war. There was widespread determination to ensure that the great poverty and unemployment of earlier times did not return, and that much better educational opportunities should become available. All this implied further State expenditure and therefore further taxation. The first steps towards meeting this new demand took place while the war was still in progress, but it was plain that much more would be required once the conflict was over.


When the war ended in 1945, there was a general consensus that what would come to be called a “Welfare State” should be established. National Insurance had started in 1911 as a provision for people many of whom were too poor to make their own arrangements. It was now developed as a sort of “safety net” for everybody, designed to ensure that nobody should lapse into the kind of poverty which had existed in earlier times. The three-way burden of payment for National Insurance continued. As time went on, however, National Insurance came more and more to be seen not so much as an insurance scheme but rather as a tax. The Health Service also was greatly expanded.

For a quarter of a century after the war, the doctrine of “Full Employment” was generally accepted in all parties. It was widely agreed that a major duty of any government was to pursue economic policies designed to ensure that there were more jobs available than there were people seeking jobs. Full Employment must have resulted in a reduction in State expenditure and therefore in taxation, for it greatly reduced the need to provide money for unemployed people and their families.

But if, nevertheless, the overall result of maintaining the Welfare State meant more taxation then, in the judgement of most voters and most politicians, so be it. While the aftermath of the 1914 war had been economic recession, the aftermath of the 1939 war was very different. There were many shortages of pleasant luxuries in the first few years, but thereafter the economy seemed to take off. In a famous speech of 1957, Prime Minister Harold Macmillan was able to declare that “most of our people have never had it so good”. There was, he claimed, “a state of prosperity such as we have never had… in the history of this country”. Much argument has ensued as to how that state of affairs had been created; but the overall effect was to make the taxation necessary to sustain the “Welfare State” generally acceptable.

The 1970s witnessed a great change. “Full Employment” faltered, and widespread unemployment returned, but the main structure of the “Welfare State”, and the high taxation necessary to support it, remained in place. One important change in taxation occurred. At the beginning of 1973, Britain adhered to the European Economic Community, widely known as the “Common Market”. The EEC countries applied a Value Added Tax – VAT – which covered not only the purchase of commodities but also the provision of services. The British Government soon replaced Purchase Tax by the more extensive VAT. Since then, the tendency has been for VAT to play an increasingly large part in the scheme of taxes.

Local Taxes

Today taxes paid directly to local government bodies form a smaller burden on most people than do taxed paid to the organs of central government. In the past that was not the case.

Tithes were compulsory dues, at first paid in kind rather than in money, which had been collected by the Church. They were levied on agricultural production and were originally designed to meet such functions as relief of poverty, as well as maintenance of the Church fabric and support of the parish incumbent. Tithes were not the only source of relief for the poor. Monasteries became more and more important as the Middle Ages advanced, and many acquired vast areas of land. Much of this land was rented, and the revenue thus generated was used partly for the benefit of the monks and monastic building, but also for relief of poverty.

In the first half of the 16th Century, the monasteries were dissolved and their property passed into secular hands. One consequence was that the new holders frequently failed to follow the old monastic practice of poor relief and there was great poverty. Something had to be done. Eventually the duty to support the poor fell largely on parish authorities. To this matter we will need to return; but tithes for essentially ecclesiastical purposes remained in place.

The obligation to pay tithes was often resented, most particular in places like Wales where the large majority of people dissented from the Church of England, to which the tithes were due. In the 19th Century, tithes sometimes became a burning issue. Most farmers were tenants at that time, and some heat was taken out of the agitation by an Act of 1891 which made tithes payable not by a tenant-farmer but by his landowner. Finally, an Act of 1936 provided that tithes would be extinguished, while tithe owners would receive government stock, redeemable in 1996, in compensation. Some part of the financial burden once met by tithes, e.g. for the maintenance of cathedrals and support of necessitous clergy, devolved on general public funds. But tithes, as such, disappeared.

Taxes for secular local government purposes have proved much more durable. Before the end of the 16th Century, parish and municipal authorities received the duty to provide relief of the poor as well as the maintenance of highways and other duties. The relief offered to the indigent was sometimes “outdoor relief” and sometimes relief contingent on residence in a workhouse. For these purposes, local authorities levied rates. Rates, just like the 18th Century “Land Tax”, could originally be collected on the basis of the value of various kinds of property, but eventually they were collected exclusively on the basis of the value of the ratepayer’s “land” – which, it must be remembered, included, for this purpose, developments on a site as well as the site itself.

The rating and relief system on this general pattern remained in place from the reign of Elizabeth I right down to the late 1980s, but in that long period it underwent many important modifications. Thus, the Poor Law Amendment Act of 1834 established the “workhouse test” for poverty relief. People unable to work by reason of age or health were still able to obtain “outdoor relief” but others (including those who wished to work but were unable to find jobs) could only be relieved if they accepted residence in a workhouse, where conditions were deliberately made unpleasant. In the course of the 19th Century the “workhouse test” was gradually relaxed, but even at the end of the century residence in a workhouse carried a considerable stigma. Thereafter workhouses gradually became less important in the relief of poverty, finally disappearing in the 1920s.

From time to time various changes were introduced in the rating system. Arrangements were made for wealthy parishes to support poor ones. Particular kinds of property, notably agricultural land and later industrial land, received partial or complete relief from liability for rates. As new local authorities were set up, and as new duties, such as responsibility for education and public health, were imposed on local authorities, complex arrangements were made for contributions to be made to local government from the central government. Gradually the old duty of local authorities to relieve poverty disappeared.

A gigantic change in local government taxation took place in the 1980s. A sharp division was drawn between business property and residential property. Business property continued to pay rates related to the value of the property as before, but these were made uniform throughout the country – i.e., they were not related to the spending requirements of the particular local authority in which the property was located. Residential property was subjected to a “Community Charge”, often called the “Poll Tax”. With various exceptions and qualifications, liability for local government taxation was related to the number of people in a particular house or flat. The “Poll Tax” generated furious opposition and in many places it proved uncollectable. It was soon replaced by the modern system, known as the “Council Tax”. This was assessed partly on the number of residents and partly on where the property fell within a number of bands of value. The new system bore all the characteristics of a hurried expedient resulting from a compromise for which nobody felt much enthusiasm. Not only does it persist to this day, but – despite great changes in property values – there has not been a revaluation.


The principal taxes existing today have all changed almost beyond recognition in the course of their history. The observer is disposed to conclude that once a tax has been in existence for a long time, taxpayers and governments alike are disposed to accept it, without seriously enquiring whether the revenue which it produces could be secured more effectively in some other way. Just occasionally a great finance minister – the names of Pitt, Peel and Gladstone come to mind – is prepared to look at a large swathe of existing taxes and consider whether matters could be arranged better by drastic structural changes; but most finance ministers seem prepared to accept the system as they find it, with only tinkering changes.

Yet an extraordinary state of affairs has now developed, which would have been beyond the imagination of anybody a century or so ago. The overall incidence of taxation has become gigantic. Treating National Insurance as, for practical purposes, a tax, the average annual tax burden on every man, woman and child in this country is today around £8,000. How much of this great sum is used to pay for the various subjects for which it was raised, and how much is swallowed up in administration would be hard to ascertain. On top of all this there is a heavy burden falling on the citizen to provide all kinds of information to the taxing authorities, and often to collect tax on their behalf as well.

It is literally true today that everybody, from the very richest to the very poorest, is on one hand receiving some kind of financial benefit from the organs of the government and on the other hand is paying for his own benefit. It requires little imagination to appreciate that the process of transferring money from one pocket of a citizen to another pocket of the same citizen is itself an expensive process.

An important aspect of our present taxation system is sometimes forgotten. The bulk of taxation falls either on the income the citizen receives for working and investing, or on the transactions in which he engages to purchase goods and services. All of this is necessarily a disincentive on useful economic activity. This gives cause to wonder whether there is something deeply wrong with most of our taxation system. Would it be possible to collect the money required to discharge the functions performed by the organs of government in a manner which is administratively cheaper, and also much less damaging in other ways?

This article is not the place to answer that question; but those who care to take the matter further are referred to the various Topic Papers and Signed Articles which are produced by LANDISFREE.



There are enormous numbers of sources for the history of taxation. The author of the present article is also author of a number of books, including one, Taxation in Britain since 1660, Macmillan, Basingstoke 1999, which contains many references on particular aspects of the subject.

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