Ibn Khaldun and the Muqaddimah: the higher the tax, the fuller the treasury?

When the state needs money, it raises taxes. But does this always bring in more money? This question was raised in the 14th century by the North African historian Ibn Khaldun.

• The work. Ibn Khaldun's "Muqaddimah" (introduction) was written as an introduction to a book of universal history. According to Britannica, it was written after 1375, over about four years.
• The main observation. In his view, at the beginning of a dynasty taxes are low but total revenue is large. At the end of a dynasty rates are high and revenue is small.
• The reason. When the tax burden becomes heavier, the profits of merchants and craftsmen fall, their incentive to work fades and activity shrinks. As a result, the base from which tax is collected narrows.
• The modern interpretation. Ibn Khaldun is often mentioned as a forerunner of the 20th-century idea of the "Laffer curve". But there is no such diagram in the Muqaddimah; this comparison is an interpretation of a later period.
• Caution is needed. The simple conclusion that "low taxes are always good" oversimplifies Ibn Khaldun's thought: his observation is about the relationship between the tax burden, the incentive to work and state revenue.
• Today's lesson. When setting a tax rate, one must take into account not only "rate × base" but also how the base itself changes when the rate changes.

Example (prepared by the author, hypothetical figures). 100 shops in a bazaar each make a profit of 1 000 coins a year. If the rate is 10%, the treasury receives 100 × 1 000 × 10% = 10 000 coins. The rate was raised to 40%, but 60 shops closed or hid their trade, and the profit of the rest fell to 800 coins. Now revenue is 40 × 800 × 40% = 12 800 coins. If another 30 shops close, revenue collapses to 10 × 800 × 40% = 3 200 coins. The rate rose fourfold, but revenue ultimately fell.