History lessons on the destructive effect of taxation

The economic effect of taxes should be a fairly simple concept to grasp. Taxes discourage the item or activity that is being taxed. The more an item is being taxed, the less of it there will be. The idea is clear. If you penalise an activity by placing an extra financial burden on it, then you should expect less of that activity.

However, the fact that taxes have a negative impact on economic activity seems to have been a particularly hard one for politicians to grasp. This is despite reams of evidence both from our recent past and from history.

Of course, there are cases when the specific public policy intention is to use a tax to reduce use of the item being taxed. Peter the Great, for example, introduced a tax on beards. His intention was not to raise money but to discourage members of his court wearing beards in order to bring them in line with European norms.

Those who seek to increase taxes need to be clear on their intentions. Is their objective to discourage the activity or to raise revenue? The two are in conflict. To avoid damaging economic effects, such taxes as are necessary to finance state activity should be as low as possible.

We will publish on this blog a short series of articles on historic taxes demonstrating not only how taxes discourage the item or activity that is being taxed, but also have other extensive side effects.  

The only thing that we learn from history is that we learn nothing from history.