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In a magic-rich, Tolkien-inspired world, I am developing a system of taxation for a city-state.

Centerseat is an important trade city, with many crafts being made under a guild system. Valuable magical items are also made, bought and sold here. It is located on busy trade routes and is also the most-inland city to have access by boat to the ocean. Its population and influence are now significantly less than they were when it was the capital city of the old empire that ruled the continent thousands of years ago. Legal entry to the city requires that you answer questions, with any lies likely to be detected.

These are the ways I know of to tax:

  • sales tax
  • VAT (value-added tax)
  • income tax
  • property tax
  • inheritance tax

Then there are fees:

  • water/sewer
  • school
  • dangerous goods (tobacco, alcohol, etc.)
  • fees to bring goods into the city to sell or trade (Note: small valuable items are easy to smuggle)

Also in-kind taxes:

  • farmers give part of their crop
  • guilds are required to have members provide service
  • religious institutions contribute healing

Tax collectors are likely to detect lies told by anyone they interview.

Which one, or combination, of the above will generate enough revenue/goods/services to support:

  • security
  • public services
  • regulation (building code, etc.)
  • infrastructure maintenance, repair, and growth

with minimal deficit spending? They should not be so burdensome that they lead to revolt, and, ideally, they should decrease the existing wealth gap in a controlled way.

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    $\begingroup$ Strong recommendation: delete your second question and repost as a separate post. You’ll get better answers. $\endgroup$ – SRM May 9 '18 at 3:53
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    $\begingroup$ Welcome to worldbuilding.SE. Please take our tour and visit our help center to learn more about us. This question clearly violates our "too broad" rules. Fruther, #1 is primarily opinion-based (POB) since any tax system will work if you set the percentage high enough. #2 is POB because there's nothing to indicate what a correct answer would be. Please note that the Stack Exchange model is one-question-one-best-answer, it is not a discussion forum. $\endgroup$ – JBH May 9 '18 at 4:07
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    $\begingroup$ @Aify the RPG stack is more about rules, etc.and less about worldbuilding, so this question easily fits here as well if not even better. $\endgroup$ – dot_Sp0T May 9 '18 at 4:48
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    $\begingroup$ I believe this sounds very much like a worldbuilding question at it's core. $\endgroup$ – o.m. May 9 '18 at 5:02
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    $\begingroup$ @Aify, Ed's asking non-game mechanics questions, so I agree it's OK. However, he hasn't solved the POB problem. How can we decide what tax system is best when we know little to nothing about the city? economics? population demographics? business demographics? politics? It's like asking "you don't know how big my city is, how wealthy it is, or what it costs to operate it... but can you tell me what the best tax system is?" The question is IMHO unanswerable. "Run it like a numbers game and shake the people down" is as valid an answer as "set up a graduated income tax with exceptions." $\endgroup$ – JBH May 9 '18 at 5:38
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First, we can't balance your budget for you. You'll have to sanity check your numbers yourself. One piece of advice : your city probably spends less on bureaucracy and services than you think. Cities did not really get that organized until industrialization apart from special cases such as Rome which was at its height just too big to do without extra administration.

But that reduced administration does give some pointers on the taxes. You need taxes that are fairly simple to administer and hard to avoid.

Property taxes

Generally you would be taxing the means of production and generating income, not the production and income themselves. Much less bookkeeping means much less opportunity for cooking the books.

Agricultural land is a favorite as it is fairly difficult to hide from tax collectors or to move to a city with lower taxes. Tax would be based on area and area ;). How large is the property and where is it located?

Buildable properties within cities would also be taxed similarly.

Specialized tools such as anvils, forges, kilns, or ploughs can also be taxed with preference on those too large to hide. Making noise or clouds of smoke when used is also good.

Means of transport such as carriages, carts or ships can be taxed with tax tokens attached to them and occasionally checked. In many countries cars are taxed similarly today.

Animals of economic significance can be taxed. Preferably large working animals such as horses and oxen. Cows and sheep can be also taxed. With horses and sheep the kind might make a difference on the tax. Such forms of wool have much higher value than others and horses bred for different purposes are quite different.

Slaves might be considered means of production and taxed based on their skills.

Access taxes

These give you a right to do something that the authorities can reasonably stop unauthorized people from doing. An easy example from your question is entering the city.

These are generally called fees rather than taxes. Examples are entering the city. Bringing a cart or carriage into the city. Bringing a carriage into roads controlled by the city. Docking a ship in the harbour.

Paying for the right to reside within the controlled area is also possible. The rights and prices can have levels. A slave might be cheaper than a free man. Unless they are considered as a means of production in which case they might be more expensive. Voting rights might require a higher tax. Right to own certain property or operate a business might require a formal license and a higher fee, generally organized and enforced thru a guild system.

Free work

Instead of collecting taxes it is often simpler to require citizens to provide service for free (possibly with financial support provided by state for those needing it). Modern way of doing this is by tax deductions, ie. you do something the state considers valuable and can deduct the cost from your taxes but this requires too much bookkeeping for pseudo-medieval city, so flat tax exemptions or granted monopolies would probably be used instead. There is a plethora of possible privileges that can be granted.

Common examples would be military service with equipment bought by the citizen, days of labour per year for city walls, roads, irrigation or other infrastructure. Administrative help is also possible with guilds for example helping with tax collection and law enforcement in exchange for privileges.

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Regarding burdens and revolts, it comes down to what the citizens are familiar with. They know how it works out in practice and how bearable it is, while novel concepts might bring fears.

  • In a society where literacy, numeracy, and even paper may less common than today, complicated concepts like VAT or income tax may be too difficult. A flat sales tax on a few "indispensable" items sounds better. On salt, maybe. Alcohol is another option, but there would be moonshiners while salt may be imported.
  • Staple rights. Merchants passing through must offer their goods for sale a number of days before they can go on, which encourages them to sell early and at a worse price than they'd otherwise get.
  • Guilds as government agencies, providing some welfare, defense and policing. Membership in a guild and guild dues are compulsory for artisans, and guilds after their widows and even form military units.
  • Last but not least, consider a poll tax. Unfair to modern sensibilities, but I guess you're not building a just society here.
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  • $\begingroup$ About per capita tax, in some ways it is fair. for example, things like army, aka "not having war where you live and not dying", is similarly valuable to poor man and to rich man. Being safe from rape is, too. And being safe from theft is worth more for rich people, but it depends on their wealth, not their income. Thus, window tax. It was applied once, when windows were sign of wealth. $\endgroup$ – Mołot May 9 '18 at 8:10
  • $\begingroup$ @Mołot, I fundamentally disagree that a poll tax is fair, but I understand why people argue otherwise. In my view, fair taxation must always take the capacity to pay into account. $\endgroup$ – o.m. May 9 '18 at 15:05
  • $\begingroup$ Capacity to pay is not taken into account in most of the western world anyway. Someone who amassed millions $ and has 0 income pays no income taxes and have ways to avoid VAT, and someone who has income and is in debt pays quite significant % of income as income taxes, have no means to avoid VAT, even if his net worth is negative. $\endgroup$ – Mołot May 9 '18 at 15:14
  • $\begingroup$ @Mołot, that makes the system unfair. Capacity to pay is not the only issue, a fair system also has to consider if money has been through taxes before and not tax it over and over again, and I also consider it good policy to some tax bad habits (like excessively large cars) instead of banning them outright. But capacity to pay has to enter the question. On the other hand, the OP specified a somewhat medievalish setting, and my notions of fairness won't enter the picture. I'm advising on a fictional world and there unfair is in character. $\endgroup$ – o.m. May 9 '18 at 16:45
  • $\begingroup$ @o.m. what do you mean by "a fair system also has to consider if money has been through taxes before and not tax it over and over again,"? Does money suffer if it is taxed more times during the year? Why is it important to be fair to the money? $\endgroup$ – M. A. Golding May 9 '18 at 18:42
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I don't think the question as you've asked it has a determinant answer as it stands, but here's how I'd suggest arriving at one:

Step 1: Draft an expense budget. How many people are employed by the city-state (soldiers, engineers, sanitation workers, wizards?) What services are provided, and to how many people? Are/how are the main thoroughfares lit through the night?

Step 2: Estimate revenues from different modes of taxation until you find the blend that pays for everything without making it prohibitively expensive to live or do business in your city-state. (You could justify a vendor paying a 100% sales tax, but only if it's still cheaper than going to the next-nearest trading post at which they could conceivably sell the majority of their inventory.)

Step 3: Don't forget about non-taxation revenue streams. We're talking fines, baby, the very lifeblood of the American municipality! In addition to all the myriad behaviors that can attract fines in the actual world, a big one that suggests itself is a fine for the public exercise of magic. Even if it's a generally magic-friendly society, it might be treated like a public nuisance to do it in certain places.

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First of all, there is not one solution, let alone one amount of taxes, that can be considered 'the' solution.
Taxes will always be considered unfair by the majority of those who pay them (even if they aren't, but people tend not to like paying taxes).

The amount of taxes you need to collect is the sum of your expenses. So you may want to start with the question: What kind of services does your city provide that require money? Defense comes to mind, as in a city guard or army, and fortification. Then there may or may not be a sewage system and waste removal, you will definitely have some kind of police and jurisdiction, all of which need to be paid for.

I always felt that for any taxation system to be considered at least remotely fair, the taxes should have a more or less direct link to services provide. Taxes on property are justifiable because the city-state provides protection for your property. Taxes for market access provide an opportunity to generate income. Taxes for waste and waste water removal provide those services, freeing you from the need to handle matters yourself.

Obviously, taxation has always hurt the poor more than the rich. Rich people and organizations have the power to influence legislation to lift their burdens, which in turn are then carried by those without a lobby. And they have the power to persuade tax collectors to investigate easier targets first.

And then there is Chekov's gun:
If it's for a story, or a game background, you should not try to find out the exact amounts, but instead check what your setup needs: If the taxes are not relevant for your story, ignore them. If the amount doesn't contribute to the story, don't mention it. For a game, go by the general ideas mentioned above, and do the balancing so it works for your gameplay.

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    $\begingroup$ Upvote for Chekov's gun which is the beating heart of this question and many others on this site. If it is shown to the listener / player (like Chekov's gun) it is because it will turn out to be important later in the story. Craft your tax system to optimally drive the narrative / campaign. I smell that the OP has plans for the lie detecting tax collectors - run with that! $\endgroup$ – Willk May 9 '18 at 14:02
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I'm just going to get all Medieval on your answer...

First, taxes aren't always money. In Medieval times this was often in grain and other useful goods.

Second, instead of getting hung up on all the details of all the tax systems ever, pick a time period and a place that fits and research that.

I will give you a start with the Burghal Hidage which is early Medieval period, and covers "food rent" and hide values. This is early England in the 900s. Not much of a monetary system, but certainly within Tolkien parameters. I assume nothing!

There's this regarding the Swedish system in place in late Medieval times. Notice here that certain people don't really pay in, and that STILL, a lot of it is not in cash.

One thing that you will notice as you go through these is that the tax system is basically "whatever the monarchy needs at the time." And that there is the problem with your question--even narrowing to this time period, which is awfully broad...

But here's the boiler plate--

in England at least, earlier taxes were based on land assessments, and it was the nobles who owned the land. It was up to the local lord to get the value owed to the crown from the peasantry/profits gained from land. The more land you had, the crown assumed (which in many periods was assessed at a particular value depending on what it produced) the more you got over a year, the more the crown wanted.

The Poll Tax, which I don't think is on your list, is something they did, which was--every person over the age of 14--paid like 4 pence or something. You just paid it for the privilege of being alive and what not.

Later they introduced a graduated version of it:

In 1379 Richard called a parliament in an attempt to raise money to pay for the war against the French (later known as the Hundred Years War). After much debate it was decided to introduce a second poll tax. It was to be a graduated tax, which meant that the richer you were, the more tax you paid. For example, John of Gaunt had to pay £6.13s.4d., whereas a poor peasant was only charged 4d. The proceeds of this tax was quickly spent on the war or absorbed by corruption. In 1380, Simon Sudbury, the Archbishop of Canterbury, suggested a new poll tax of three groats (one shilling) per head. Another change in the tax was that everybody had to pay the same amount. Most peasants at this time only had an income of about one groat per week. As everybody over the age of fifteen had to pay the tax, large families found it especially difficult to raise the money. For many, the only way they could pay the tax was by selling their possessions.

The peasants felt it was unfair that they should pay the same as the rich. They also did not feel that the tax was offering them any benefits. For example, the English government seemed to be unable to protect people living on the south coast from French raiders.

John Ball toured Kent giving sermons attacking the poll tax. When the Archbishop of Canterbury, heard about this he gave orders that Ball should not be allowed to preach in church. Ball responded by giving talks on village greens. The Archbishop now gave instructions that all people found listening to Ball's sermons should be punished. When this failed to work, Ball was arrested and in April 1381 he was sent to Maidstone Prison.

Bottom line: Every single country was different, it varied from King to King, decade to decade, dependent on if they were at war and the like. Every method was used...

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  • $\begingroup$ Side note: The flat poll/capitation tax has precedents in the Bible. Each census of the Israelites was carried out as a tax of 1/2 shequel per eligible person. So the idea is Older Than Feudalism. $\endgroup$ – Codes with Hammer Oct 25 '18 at 16:27
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Remember that taxes serve two important functions. They finance the public expenses but they also steer the behavior (taxes on harmful substances, animal etc.) Basically it´s up to you which you choose, but I´ll list some plausible ones:

  1. Trade fees/ Customs. These have a long history and are one of the first go-to´s. The traders have a big incentive, because there is money to be made in a big marked that the citizens of the city present. So there won´t be as much resentment, especially with foreign traders who do not have a lobby in the city. I´d expect there to be a great many different fees for import/export and depending on the good. Cheap wheat, to feed the masses - expensive wine - exemptions for local businesses etc This is basically you medieval VAT, as it is easier to control transfer of goods then sales.
  2. Property tax This one is quite obvious also. Roads, wells, drains etc. have to be built and maintained. It´s only logical to have the people that profit from it also pay for it. There could for example be a yearly property tax collection, where a collector visits every property, estimate its current worth by some features and collects the rate set by the city-council. Paying tax could also elevate your status in the city, such as voting rights etc.
  3. License for Business If you want to set up shop, again you have a great incentive. It could also be viewed as a good thing, as it keeps competition at bay. If you are one of only 5 licensed taverns and the city council protects you from more, you may actually favor the license fee model.
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If you want to go old-school, then in-kind taxes are how you're going to raise most of your revenue. Most of your population just doesn't have enough coin to make paying someone to collect it profitable. In-kind don't just include having people give you a share of what they trade in; it's paid in what we would now consider time spent on community service, as well. Up until Napoleon, all European serfs were required to spend so many days of the year maintaining public works like roads and sewers.

Also, keep in mind that D&D lore provides methods of taxation and alternatives to the g/s/cp mechanic. For instance, Berdusk has every wagon that leaves the city pay 2 cp. Very technically, there's no single monetary system in D&D beyond what's useful for your game: every city-state and nation-state mints their own coins of varying value, the various mercenary companies issue IOU's that function as bank notes within their territories, and everybody everywhere accepts gems at the exact same price with no market fluctuations.

Finally, no one in these settings is interested in decreasing the wealth gap, and your commoners have no reason to expect it to be. The reason the wealth gap decreased in Centerseat is because your nobles left with their wealth when Centerseat lost its position as capital.

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Most medieval taxes were indirect.

Guilds pay fees to be allowed to operate in the city. Those fees are paid for by those who purchase products or services from the guild in the form of higher prices. It is easier to get money from a few people than to get it from everyone.

Require fees/bribes/taxes/contributions from the nobility. Contributions could be in the form of having them run various government projects out of the nobles pockets. This lets the nobles trade some wealth for some power. This puts the burden of income generation on the nobles. This was very common.

Have the government control specific markets. If the government owns the mills, everyone has to pay to have their grain milled. Or, require everyone to sell their grain to the government for the government to resell.

Take a direct percentage of production. Every farmer must give X% of their produce to the government. A blacksmith must give a percentage to the government. This can be actual product or time. Often, farmers had to spend a portion of the year working the lords farms. Blacksmiths by be required to work a certain number of weeks per year for the government on government commissions.

Gate fees. Have people charged a fee to enter or exit the city (or both). This both generates income and allows greater control over people's movement.

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The previous excellent answers had enumerated most of the possibilities, but let me now present a "worked example":

Taxation of citizens:

Every citizen is a member of a guild or societas. These guilds divide among themselves the necessary public works and goods that are needed for running the city. The general types of tasks one guild has to perform are fixed by ancient custom, but the exact numbers vary yearly according to the membership of the guild. So for example the Guild of Woolloomers might be obliged to maintain a certain section of the city walls and furnish 5 ceremonial cloaks, 30 simple cloaks, 50 trousers and tunics to the magistrates (every year). While the Societas of Beggars have to clean the streets.

The guilds are in turn composed of extended households of Masters. These divide the tasks among themselves, and then give it out to the household members: their sons, apprentices and assistants, and the families thereof. Most societies simply draw lots on who has to work on a given day.

The advantages of the system:

  • Reduced corruption around public procurements. If you are in control of public money, and have to decide who to hire for a certain work (like the reconsruction of a tower) you will be tempted to award the commission not to the cheapest competitor, but to your friend or somebody who bribed you. But in this case you are interested in as quickly and efficiently completing the work entrusted on your guild.

  • Reduced bureaucracy: No need for extended bureaucracy to keep records on the taxes paid by individuals and the money issued for specific purposes, as the distribution happens on many levels, and on each level between people knowing each other personally.

The disadvantages:

  • Inflexibility: If suddenly Centerstead needs something big, that it did not need in the previous years, the guilds might not be able to properly absorb the increased demand.

Centerstead would still need treasury for conducting diplomacy, hiring mercenaries, and to buffer suddenly occurring large problems (like a great bridge collapses, and the Mason Guild would go bankrupt if having to rebuild it as public work) this treasury should be provided by fees and wages imposed on non-citizens:

  • Every time a stranger enters the city gates he has to pay a small fee.

  • Every time a foreign merchant enters the city, he has to pay customs in 1/30 worth of his wares.

  • Every time a foreigner uses a public service in the city: launches an investigation by the City Guards, makes a complaint by the Judge, requests a burial or marriage from the Chaplain, or uses the Hospital, he has to pay a fee.

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