Worldbuilding: Credit and Taxation

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When it comes to world building, many writers tend to gloss over the economic side of the equation. They will go to great lengths to explain how the magic/technology, cultural influences, political structures and fictional history but give no consideration to the money that underwrites it.

How did the King manage to raise his colossal armies?

Who pays for the elite mercenary companies?

Who foots the bill for all those balls and parties?

How happy is the average citizen with how his leaders spend his tax revenues?

Who controls the wealth and how do they spend it/invest it?

All very important questions which are based on two principles: credit and taxation. Both have existed in one form or another since the rise of the first city states. You want to start a new pottery business, then you head down to the local moneylender for some quick cash. If you do well in your business (and pay your interests on time) then you get an expanded credit line which means you can hire more employees, build new workshops, etc. With the rise of banking in Western Europe (first with the likes of the Crusaders and then with the Medici) individuals and countries had access to large amounts of quick funds.  Of course, that also put them on the hook for the money if the latest war went awry regardless of success/failure on the battlefield.

The American Revolutionary War ruined the French monarchy’s coffers, in part because the newly formed country did not have a means to pay them back.

Credit is also reflected in capital investments. One of the reasons for the growth of corporations in the early modern period was the need for cash strapped countries such as the Netherlands and England to compete with Spanish expansion in America and Africa. The crown used them to finance colonization of the New (to them) World by creating corporations under royal charter. The charter gave an air of legitimacy (and legality) to the endeavor and encouraged investors to support the new founded corporations risky adventures across the seas. In return the investors were entitled to any profits from the new colonies and the Crown got a stake in new lands with little financial risk to itself.

But governments need more than banks to operate.

Enter the taxman.

Again, since the first states rose from clusters of farming villagers in antiquity, governments collected taxes to maintain the state. Taxation represent many things including: legitimacy, authority, revenue, preferential treatment and overall financial policy. The main problems with any taxation scheme are twofold. The first is the most obvious, how much is too much? Any tax on any sector of the economy (economic class, business sector or industry) above 50% will quickly strangle it. Throughout history a quick way to piss off the peasants was too tax them to heavily. The reverse is also true, too little and the cost of collecting the tax exceed the gains.

The second problem is how you collect the tax itself. Enforcing tax law is never easy, in part because people always feel that they pay more than they should. Ancient tax collectors such as those who worked for the Roman Empire did just that. They were private individuals whose profits came from the tax collected, which meant they always charged more than was actually due. This lead to both the taxpayer and the government being cheated out of their money. The tax collector would hound the taxpayer to exhaustion and fudge the books so as to pay less to Rome.

Render unto Caesar indeed.

Taxes come in many forms: property taxes, levies, tariffs, transaction taxes (sales taxes and VAT for example), all of which require careful accounting of the value of what is being taxed as well as the amount extracted.  Each tax scheme shapes the consumption of goods and services. A tax on foreign goods will lead people to buy cheaper domestic goods. A tax on liquor could lead to smuggling or illegal distillation of spirits (see Whiskey Rebellion) because smugglers/moonshiners can offer the same goods at lower price (- tax) and still make a profit.

This is just the tip of the iceberg of course, as I am no economist. But it is an important pillar in your world building, one you should not ignore.



5 comments on “Worldbuilding: Credit and Taxation

  1. Pretty durn interesting. I admit I haven’t given any thought to the credit/taxation angle of my world’s economy. It’s interesting to consider though.


  2. Great thoughts, Ralfast. I don’t have anything to add. I’ll just echo Sonia’s above comment since she said it so well.


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