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Supervision 2: State, Economic Policy and Capital Markets during the Industrial Revolution British Economic History, Paper 5, Part I Essay 1 Discuss how taxation affected the development of the British economy in the period of the Industrial Revolution. One of the most powerful ways a government can exert influence on an economy is through its fiscal policy. Among many instruments, taxation stands out because it raises revenues for government expenditure and strongly affects incentives for economic activity. During the Industrial revolution, the British tax system has seen some major changes. I will describe these alterations and discuss their influence on the British economy. In the course of the seventeenth and eighteenth century, the tax burden for British citizens has seen an unprecedented rise: The tax revenue for the government has increased more than nineteen fold in the period of 1670 - 1815. Taxes rose about 34 times faster than national income in that time, so the proportion of tax revenue as part of GDP increased from 3.4% to 18.2% in the same time. The pace which taxation grew has been unparalleled in Europe, making Britain probably the country with the highest tax imposition of the continent. Compared to France - Britain's main rival at that time - the real burden of taxation relative to population and GDP was three times higher at the end of the 18th century.The factual burden could have been even higher, as there were exemptions for the poor and tax collection was inefficient in remote parts of the nation. The tax revenue was thus derived from less than the total national income. Taking the effective tax base into account, the share of taxes would be at 30% in 1810. Apart from the size of the tax pie, its composition was changing as well. In 1670, it was still more than two thirds of the tax revenue which was drawn from direct taxation, such as taxes levied on wealth and income. By 1785, this proportion has fallen to 20%. The importance of direct taxes was replaced by the rise in revenue coming from excises and
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