The question of what taxes are could be asked by a child. In fact, few adults know what taxes are. It's basically very simple. Taxes are cash benefits that an instruction-bound subject – the taxpayer – has to pay to a public-law community without being entitled to a directly related consideration. In other words, there is an obligation for all taxpayers to transfer money to the instruction-giving authorities without any consideration. What sounds rather strange in itself is of course a concept that has existed since antiquity.

But taxes underwent considerable development over the eons. Nowadays, taxes at least serve to finance the community. Therefore, taxes can also be viewed in a simplified manner as government revenue in order to cover government expenditure. In addition, taxes have now also taken on other functions. This is about using taxes as a financial incentive to guide society’s behavior – either by granting tax privileges or as a financial sanction. But also to fulfill election promises as a reward to the electorate one may sometimes use taxes.

If we deal with the question of what taxes are, then one can distinguish between a subjective and an objective consideration. The subjective consideration depends in most cases on the financial situation of the respective observer as well as on the amount of taxes that have to be borne. The objective answer to the question “what are taxes?”, on the other hand, is that which those who define, raise and receive the taxes pretend. It is formulated and developed in the form of laws, thus of general legal validity.

Before we go into the question of what taxes are in detail, let us now circle around what we want to refer to here. Although at least some of the characteristics of taxes discussed here may also be of similar or equal importance elsewhere in the world, we refer exclusively to the current situation in Germany in the context of this article. But let's look outside the box later. Because to understand what taxes are, a historical review is quite helpful. However, we will only briefly sketch it here with a few sentences. Because anything else would go far beyond the scope of this article.

The term tax can be found in its definitional meaning in the tax code (§ 3 (1) AO). On the other hand, the legitimacy for the collection and use of taxes is anchored in the Basic Law. It can be found there under Article 104a GG.

But first we take a look at the exact definition that the tax code gives us on the question of what taxes are:

‘taxes’ means cash benefits which do not constitute a consideration for a particular service and are imposed by a public-law community for the purpose of generating revenue on all those who are subject to the facts to which the obligation to provide services is bound by law; the provision of revenue may be ancillary.

This allows us to identify several characteristics that apply to taxes. First, taxes are defined as monetary benefits. Since there is no exception, this excludes both the collection and payment of taxes in other forms, such as in kind. Next is another exclusion. Because in the first secondary sentence, the legislator excludes that you can expect a return for taxes. In addition, there is the indication of who collects the taxes and what purpose they serve in the first place. Taxes are only levied on public-law communities, in particular the state, the states and the cities and municipalities. The purpose is to generate revenue. Then there is the reference to those who bear the taxes, namely taxpayers. Finally, I would like to make a further comment in the second half-sentence. There, the law informs us that taxes, in addition to income, can also have other purposes and these may even be the main purpose.

If you investigate what taxes are, then of course you also examine their purpose and the way they are used. Even though the two terms in question are quite closely linked, one has to distinguish a little more precisely. We are now doing this in order to clarify the lessons learned.

The tax code gives a first indication of the purpose of the taxes. Simply put, taxes are about injecting money as revenue into the state or other taxpayers. Already at this point you can see the demarcation to the ways in which taxes are used. After all, the collection of taxes could simply be an end in itself if it did not serve any purpose. But we'll discuss that later. Before that, however, we would like to address the question of what the alternative purposes of taxes are. Because there is also, as already described, a hint by the legislator. In fact, this note remains unspecific. The law therefore leaves open what the alternative purposes are and thus allows a large number of further interpretations and corresponding uses.

What we can draw from the previous application of these legal freedoms by the legislature is illuminating. One of the main purposes of taxes is to try to influence the behaviour of taxpayers in order to influence their behaviour and thus steer them into certain directions. In fact, the legislator does not hide in this respect, as taxes are seen in this context as a means of implementing policy.

3.1.1. Purposes of support

The legislator selectively uses two fundamentally different methods. On the one hand, by granting tax privileges for certain purposes, it can financially indirectly promote them. A good example of this is the tax promotion of listed properties or other cultural goods. By allowing a more attractive depreciation than usual, taxpayers are tried to win and reward for their commitment to the preservation of monuments instead of a new purchase. Finally, the legislature is also aware that the renovation or maintenance of such assets entails burdens for the owners.

3.1.2. Purposes to prevent behavior

In contrast, the legislature can also collect taxes specifically in order to give taxpayers a choice. So you have to decide whether to refrain from a certain behavior and thereby avoid the associated taxes, or whether to maintain the tax-sanctioned behavior, knowing that it entails a tax burden. A classic example of this is the tobacco tax, which is subject to a politically desired increase every few years to encourage smokers to stop using nicotine.

3.1.3. Client policy purposes

What can sometimes be observed is that taxes are the content of campaign promises that target certain categories of voters. If donations flow in advance from the later tax-beneficial circles, it is of course understandable that one speaks of client policy. Notwithstanding this, this purpose of taxes before the law is and remains possible. For example, this was also the case with the so-called Mövenpick Act, in which the FDP successfully reduced the sales tax for hotel stays after receiving a generous donation. The tax advantage should have actually been paid to hotel guests, but the hotels adjusted their bills only in terms of the VAT rate, but the gross final amounts, as one might expect, remained mostly unchanged.

3.1.4. International taxation

Even if in competition as a business location you rather rely on a waiver of taxes, this nevertheless shows a purpose of taxes. If tax cuts are used as a lure for international companies, then it is very helpful if a targeted tax cut or even a waiver of the levying of a certain tax reveals that the economic well-being of the companies is definitely in view on the ground. Although this measure may at best be one of many conditions for the establishment of foreign investors, a low tax is certainly one of the most important.

But a tax can also serve to show international large corporations limits in their own tax design. Because of the clever positioning of companies and the shifting of actually taxable profits to countries without or with only a small taxation, many states have already lost tax revenue to a considerable extent. That is why many countries have come together at international level to consider how these taxes can be saved from tax avoidance in the future. This took place within the framework of the OECD negotiations and resulted in concrete proposals to remedy the situation.

Now that we have approached the purposes of taxes and know what taxes are under the law, let’s look at the use of taxes.

With the clientele-political aspect, we can already recognize a first direct connection. Because in such cases, taxes are basically used in return for political support. Thus, the use is also coupled very close to the purpose. But this does not mean that there must be a relationship between the two services.

But the general use of taxes is simply the financing of the state budget. Because only with a secured tax revenue can a modern state finance its budget. Of course, the use depends on the prevailing political will, which determines which objectives should be given priority in the use of taxes. In any case, the financial resources of the public authorities are always an essential aspect of the use of tax revenue. However, this category also includes the use of taxes to finance the tasks that public authorities have to perform in the context of their obligations towards the public. This includes all facilities related to the internal and external security of the State, social security and job promotion, as well as the use for the maintenance and development of infrastructures in the fields of transport, education and health, to name only the main uses.

Taxpayers' money also flows for other goals that seem more or less important – even if in some cases they hardly represent a benefit for the general public or for the community. No wonder, then, that the Federal Court of Auditors regularly complains about the dubious use of tax money for prestigious projects.

Since we have so far asked ourselves what taxes are in our modern state in Germany, we now want to look back on the development of taxes throughout history. The earliest equivalents for taxes were customs and similar duties. Basically, this corresponded more to a usage fee, for example for the use of fords, bridges or paths, but sometimes also rather a protection money payment. Therefore, it is little wonder that since ages tax collectors and other tax collectors generally did not enjoy a high reputation among the general population. Even in the Bible there are concrete references to this. In addition, there was often a taxation of goods that were subject to a monopoly. This offered itself because the monitoring of tax revenues was the easiest. A good example of this is the salt tax, which was widespread both in antiquity and later among many cultures, which in these cases was an excise duty.

4.1.1. Ancient Egypt

Unsurprising for the origins of taxes is also that they coincide with the emergence of the first great state formations in antiquity. Thus, the Egyptians already carried out surveys in the Old Kingdom more than 5,000 years ago, but at that time they provided them in the form of natural resources. But also the performance of a work service was a possibility to meet the duty of duty.

In order to ensure the collection of taxes, an administration was created at an early stage, which was responsible for the accounting that was also in its early stages.

4.1.2. Mesopotamia and Anatolia

Similar taxes were also known to the Hittites, who collected grain as tax revenue in silos to represent the king's wealth. On the other hand, at times neither the Assyrians nor the Babylonians demanded taxes because they financed their budget with tributes from militarily defeated neighboring states. But the Assyrian kings demanded from the traders who came to their cities taxes on the imported goods. For example, the Assyrian kings received 5% of the textiles that a trader had to declare as commodities. Metals that had a high value in the Bronze Age and the subsequent Iron Age were also subject to taxation. And the Babylonians also knew the salt tax.

Although tributes were also an important source of income for the Persians, they introduced a tax liability under Darius I. It was incumbent on the satraps to collect taxes from the territories under their control in accordance with the production capacities available there and to pay them to the Great King.

4.1.3. Europe

Looking at Europe, we also find a collection of taxes in the democratic city-state of Athens. Thus, their citizens were obliged to provide certain services, including work or military service. However, the taxation applied there in particular to the local population of Athens, i.e. all those who were born outside Athens. In addition, further revenue was added via withheld duties.

Also in ancient Rome there were taxes. There has also been a diversification of tax bases. This included a property tax as well as the poll tax, which was issued to the Roman citizens, and the proverbial taxation of urine (pecunia non olet). In addition, agricultural property was considered a source of income for taxation in the Roman Empire. And even those who held slaves had to tax their potential economic achievements, depending on their origin and abilities. At various times, however, the tributes of vassals were also an important source of income for the Roman budget.

Tribute payments continued as a source of income even in the Middle Ages. Anyone who thinks of the tributes that the various Scandinavian armies demanded in Europe from the eighth century onwards, comes to mind quite quickly in this respect the word extortion of protection money. But these tribute demands were directed at the respective rulers of the countries occupied by the Vikings, but indirectly the population paid the taxes.

In addition, only a few kings in Europe levied direct taxes. For this, however, duties were paid to the church in the form of tithing. In the case of the rural population, i.e. the peasants and serfs, which formed the largest section of the population in the Middle Ages, these were, of course, especially natural resources.

With the rapid increase in population in the later course of the Middle Ages, the tax also took on new forms. In particular, tariffs of various types contributed to income. First, the taxation of assets became more important. This applied to both land and other property, including livestock. At the same time, the poll tax also played an essential role, because it was imposed on all people equally, also in terms of the amount of the tax.

Several eligible persons collected taxes at the same time. On the one hand, these were the rulers, usually the kings of the respective country. Then the princes were also entitled to collect their own taxes. As before, the church also demanded its tenth. And finally, at least in the cities, there were municipal taxes.

This brings us to a decisive phase that shapes the development of taxes to this day. In the second half of the eighteenth century, the Scottish economist Adam Smith established universal principles of taxation, which have hardly changed until today. These principles are the uniformity of taxation, the specificity of tax laws, the easiest possible fulfilment of tax liability and the efficiency of tax collection. From now on, more and more states dealt with this and implemented it in their own laws. In the course of the French Revolution, they were also conducive to the development of the principle of equality. Because in this way, the previously widespread arbitrariness in the collection of taxes and other levies had been decisively opposed.

On this basis, England first introduced income tax as a basic tax to tax the population. With a highly efficient administration, England soon became the model for modern taxation worldwide. This was followed by many other states and developed their own tax laws. On this basis, today's tax systems around the world are also based.

We would also like to discuss many other historical tax systems worldwide, among which those in the ancient Chinese dynasties, India, pre-Columbian Central and South America or those shaped by Islam are certainly among the most interesting. However, such a comprehensive historical view of taxes goes beyond the scope of what we would like to achieve here with our search for what taxes are. At this point, we only have to encourage you to do your own research. It is worth it, even if you do not save taxes.