Tax Farming

Tax Farming 

a system for collecting taxes and other state revenues from the population. Under this system, the state transfers the right of collection to private individuals called tax farmers in exchange for a certain fee. Tax farmers accumulated great wealth since the taxes and charges they collected exceeded by two or three times the amount deposited in the treasury.

Tax farming is characteristic of precapitalist systems in which a natural economy is predominant, credit is not developed, the state is in financial difficulties, and communications are poor. Three forms of tax farming existed: (1) general, which encompassed a country or the entire tax system; (2) regional, which encompassed a single city or region; and (3) special, which dealt with individual taxes, such as customs duties or revenues from the liquor monopoly.

Tax farming first became widespread in Iran in the sixth century B.C. and in Greece and Rome in the fourth century B.C. In the Middle Ages, it was widespread in France from the 13th century and was also practiced widely in Holland, Spain, and England. It was one of the most important sources for the primitive accumulation of capital. As capitalism developed, tax farming was preserved in a distinctive form in 20th-century Italy, where private and savings banks collected certain taxes. In the late 19th and early 20th centuries, forms of tax farming were used for collecting tax arrears in the USA. Tax farming was widely used in the Ottoman Empire beginning in the late 16th or early 17th century; it was abolished in 1925. It was also widely practiced in Iran from approximately the tenth century to the 1930’s and in India from the 13th or 14th century to the 19th century.

In Russia, tax farming (otkup) was introduced in the late 15th or early 16th century. It was used especially for customs duties and salt and liquor revenues. Tax farming to collect liquor revenues was introduced in the 16th century and assumed the greatest importance during the 18th and 19th centuries. Treasury revenues from the liquor tax constituted more than 40 percent of the income from all taxes in the state budget. In 1863 tax farming to collect liquor revenues was abolished and replaced by an excise tax.