Rise and Fall 
    Ibn Khaldun and the Effects of Taxation 

        Ibn Khaldun and his Influence  
        The historian Ibn Khaldun (1332-1406) was from a family whose ancestors had moved from Arabia first to Spain and then northwest Africa in the years following the spread of Islam throughout the southern Mediterranean. He was born in the city of Tunis, on the northern coast of Africa. While still a teenager, he lost both his parents, who were carried off in the Black Death of 1349 (which had the same catastrophic effect in the Muslim world as it did in Europe). Given his family's prosperity, he was able to complete his education before he began a professional career as a government administrator. In this role, he worked for various rulers in northern Africa, performing a multitude of tasks, including secretary, diplomat, and prime minister. 

        The practical knowledge Ibn Khaldun gained in his political career led him to devise what was to become a path-breaking philosophy of history, which seeks to explain the rise and fall of political dynasties based on laws of social change - including economic trends. He withdrew from public life so that he could devote himself to setting down his ideas in the Muqaddimah ('An Introduction to History') - which, in the words of historian Arnold Toynbee, is "the greatest work of its kind that has ever been created by any mind in any time or place."1 

        In his later years, Ibn Khaldun returned to public life with a move to Cairo. Here, in what was then the Arab world's largest and wealthiest city, he performed occasional services for the Egyptian sultan, while also working as a professor and judge. He died just as a new political power - Ottoman Turkey - was establishing its dominance throughout the Arab world in ways that his own historical theory had predicted.

       
        The Division of Labour 
      According to Ibn Khaldun's view of history, dynasties begin with a generation of warriors whose bravery and vigour is gradually eroded in later generations, until the dynasty is finally swept aside. Through these endless cycles of growth and decay, the economic conditions of the dynasty's subjects rise and fall as well. In particular, periods of economic progress occur when political expansion leads to large-scale production based on the specialization of labour. His comment on this issue has a surprisingly modern flavor: 
       ...a single individual is incapable of satisfying his needs by himself, but must cooperate with other members of society. The product of such cooperative labour will exceed by far the needs of the group. Thus, in the production of wheat, for example, we do not see each individual providing for his own needs; rather we six or ten persons cooperating: a blacksmith, a carpenter to repair tools; an ox-tender, a man to plough the soil, and another to reap the grain; and so forth for the different kinds of agricultural work, each man specializing in one operation...Thus the inhabitants of a more populous city are more prosperous than their counterparts in a less populous one.2
      A few earlier writers had touched on the specialization of labour and its impact. For example, the practical-minded classical Greek writer Xenophon had observed, "...he who devotes himself to a very highly specialized line of work is bound to do it in the best possible manner."3 But no one before Ibn Khaldun had appreciated the central importance of labour specialization in determining living standards. This realization allowed him to make yet another striking insight. A dynasty's wealth, he noted, cannot be identified solely with money, since gold and silver "are only minerals and products having exchange value."4 It would take several centuries before Ibn Khaldun's realization would be fully incorporated in conventional economic thought. In the meantime, most economic writers erroneously defined wealth in terms of money rather than relating it to endowments of productive resources. 

      Effects of Taxation 
      While Ibn Khaldun deserves credit for his original treatment of labour specialization and wealth, it is his theory of taxation that has cemented his position in the history of economic thought. His emphasis was on how a society's living standards could be affected, either for better or worse, by state policies. He was especially interested in the topic of taxes, and believed that a greedy ruler might impose such a high tax rate that economic activity would be stifled and tax revenues ultimately reduced: 

      In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation.5 
      This argument can be summarized in a graph, as illustrated by the hypothetical example in Figure A, where a state's average tax rate and total tax revenue are portrayed on the horizontal and vertical axes respectively. If we start with a tax rate of zero (point a), total tax revenue is also zero. At first, successive increases in the tax rate also raise tax revenue. But after some crucial level (point b), further rate increases cause tax revenue to fall. Finally, at a 100 percent tax rate, tax revenue will have shrunk to zero (point c), since any incentive to engage in private economic activity has completely disappeared. Ibn Khaldun believed that the rightward movement along this curve was a natural part of the gradual decay of dynasties. As each generation of rulers desired to live in greater luxury, tax rates would be continually raised until the dynasty reached the point where tax revenues began to decrease. Once this happened, the dynasty's military resources would be reduced, inviting attack by outsiders or revolt by the ruler's own subjects. In Ibn Khaldun's words, "Neighboring dynasties, or groups and tribes under the control of the dynasty itself, become bold and attack it, and God permits it to suffer the destruction that He has destined for (all) His creatures."6
       
        Figure A The Tax Rate and Tax Revenue
      The Laffer Curve
       
      As the tax rate increases from 0 percent (at point a), tax revenue initially rises. But, according to Khaldun's analysis, after some point (such as b in the graph), further increases in the tax rate cause a reduction in tax revenue until - at a tax rate of 100% - tax revenue theoretically falls to zero, since all incentive to engage in money-making economic activity has ended.
      Contemporary Relevance 
      Ibn Khaldun's view of taxation offers a useful example of how an economic concept can be reapplied in an entirely different setting. As insightful as this view undoubtedly was for the times he lived in, it might not seem to be applicable to the modern age of democratic governments. After all, no elected government would ever raise tax rates beyond the point where tax revenues would fall. Or would they? In fact, this question was part of a recent controversy in economics, which had important practical ramifications. During the 1970s, a group of economists developed a theory known as supply-side economics, which concentrates on the ways in which government actions can affect incentives for private citizens to work, save, and invest. Part of this new approach was the curve shown in Figure A, a graph that has become known as the Laffer curve after the American economist, Arthur Laffer, who first drew it. 

      Supply-side economists contended that tax rates in the US had expanded beyond point b in Figure A, so that a reduction in tax rates would increase tax revenues. This argument was put to the test in the early 1980s when the president at the time (Ronald Reagan) initiated a 25 percent cut in personal income tax rates.  The results of this policy did not meet optimistic supply-side projections. Instead, as predicted by most mainstream economists who were suspicious of these claims, tax revenues fell in real terms, causing large shortfalls between government expenditures and revenues during most the 1980s, during which time gross federal US debt almost tripled. 

      The argument that the Reagan tax cuts would lead to higher tax revenues is now widely seen as an expensive mistake. But the modern version of Ibn Khaldun's theory is far from fully discredited. All economists recognize its potential validity, with empirical studies suggesting that tax revenues and tax rates begin to move inversely in the range of a 70 percent tax rate.7 Also, recent debates over tax rates have brought a greater awareness of how public policy can affect private economic incentives. In a world where national borders are becoming less important), governments must keep tax rates relatively low or face the loss of investment, jobs, and tax revenues to other countries. Ibn Khaldun's original insight - made over 600 years ago - therefore continues to act as an important constraint on governments, in a world far different than his own. 

      Questions 
      1. The debate over US taxes in the 1970s and early 1980s centered on different conceptions of where the curve in Figure A reaches its peak. Explain this disagreement with the aid of two roughly sketched diagrams. 
      2. For each type of tax listed below, explain a possible scenario that would make the downward-sloping portion of the curve in Figure A (from points b to c) relevant:  
       a. personal income taxes 
       b. corporate income taxes 
       c. sales taxes 

      Notes 
      1. Quoted in Charles Issawi, An Arab Philosophy of History (London: John Murray, 1950), p. ix 
      2. Quoted in ibid, pp. 92-93. 
      3. Cyropaedia (London: Heinemann, 1914), vol 2, viii, ii:5, p. 333; cited in M. I. Finley, "Aristotle and Economic Analysis" in Studies in Ancient Society, ed. M. I. Finley (London: Routledge, 1974), p. 27. 
      4. The Muquaddimah, trans. Franz Rosenthal (New York: Pantheon, 1958), vol. 2, p. 244. 
      5. Quoted in Issawi, op. cit., pp. 87-88. 
      6. Rosenthal, op. cit., vol. 1, p. 341. 
      7. Charles E. Stuart, "Swedish Tax Rates, Labor Supply, and Tax Revenues," in Journal of Political Economy, vol. 89 (5), October 1981, p. 1020.

       

      by Mark Lovewell