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In my setting there is a colonial empire that has industrialized and extracts wealth from its urban holdings with the sale of tax collecting privileges to the highest bidder in a manner analogous to the Roman Publicani. They also have a monopoly on the sale of alcohol and opium in the same way the Chinese dynasties often had monopolies on salt and iron. My only concern is that if this is revenue stream is actually enough to support the financial needs of a state.

Other key points:

• Technology level is analogous to 1870’s Western Europe/United States

•Gold standard is used.

•Ruling ideology is mercantilist in its economic understanding.

•State needs to support a standing army of decent size and equipment (half a million strong and equipped in 1870’s standard)

•Rural areas are taxed differently as the land is either owned by collaborating local elites or colonists who are taxed on a very modest percentage of their total production. (The amount is often token from more powerful collaborating elites) the rural population is around 80 million.

• Total urban population is 20 million split between five cities.

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    $\begingroup$ Could X% of Y be equal to Z, where all values are fictional and whatever the author wants them to be? I say yes, or barely yes, or no, or sometimes. $\endgroup$ Commented Aug 2, 2022 at 20:37
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    $\begingroup$ since we have no idea what the financial needs, taxes, or production of your state this is unanswerable. you might get an answer if you ask what the pros and cons of the system are, but that is a history stack question. $\endgroup$ Commented Aug 2, 2022 at 20:57
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    $\begingroup$ I disagree, I think it's possible to answer given a look across the real life economies of 1870-like countries and taking a few speculative guesses. There's no point of banning speculative guesses on this site, that's all we do here. $\endgroup$ Commented Aug 3, 2022 at 1:11
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    $\begingroup$ "sale of tax collecting privileges to the highest bidder" is basically what landlords are $\endgroup$ Commented Aug 3, 2022 at 12:30
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    $\begingroup$ @Halfthawed this isn't speculative guessing, this is how to "spelgl" hunt "moom" on grasslands, without telling us anything about either species, The answer is however you want because you have no real constraints but those you have not defined. It is a textbook example of being too vague. We don't even know what the population density or how trade dependent the state is. $\endgroup$ Commented Aug 3, 2022 at 13:25

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Not possible, not even remotely possible

The basic idea behind tax farming is that the Farmer General advances to the Treasury the estimated tax income, with the hope that the real tax amount will be higher than the estimate, so that he can cover his expenses and make a profit.

  • The Grand Vizier is happy because he gets the estimated tax amount in cash upfront with minimum hassle, and he doesn't have to pay a small army of tax collectors.

  • The Farmer General most usually is happy because he makes a tidy profit.

Everywhere and everywhen tax farming was a thing, taxes were extremely low by modern standards. The point being that the tax Farmer General must be able to advance the estimated tax amount; in pre-modern states with their ridiculously precarious tax base this was just about possible for very very wealthy individuals, but in a modern-ish state it is not really imaginable anybody being so rich as to be able to advance the estimated amount of tax income.

For example, the tax revenue of the United Kingdom in 1870 was some 50 million real gold-standard pounds sterling; that would be about 6.6 trillion paper pounds in 2022 money. And the United Kingdom did not have anywhere near half a million soldiers sitting idle and being fed, clothed and paid to play with expensive toys. In fact, the United Kingdom had very low taxes compared to other European powers, which actually did have to maintain large armies. Can you imagine anybody being able advance 6.6 trillion pounds cash?

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  • $\begingroup$ Actually, according to Wikipedia, just their army was 185 thousand strong. Adding in the navy (for which I can't easily find a number), I wouldn't be surprised if the total reached a quarter million men. $\endgroup$ Commented Aug 3, 2022 at 16:21
  • $\begingroup$ @jaskij: Which is still nowhere near the half million men requested by the question. $\endgroup$ Commented Aug 3, 2022 at 16:23
  • $\begingroup$ I'd say quarter million is in the same ballpark as half a million, depends on how you look at it. That said, their population was at 30 million, time and a half of what OP requests. $\endgroup$ Commented Aug 3, 2022 at 16:26
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A rough guess says absolutely not

Let's break down some ratios. The population, as you gave it, is of 20 million with a standing army of .5 million, or a 40:1 ratio for a standing army.

In 1940, the US census reports a population of 132,164,569. During the full war mobilization over WWII (1941-1945), there were 16,112,566 active soldiers, which admittedly is slightly above an 8:1 ratio. Now, this cost an estimated 341 billion dollars (at the time) which was 74% of the GDP. And this was during the 1940s level of industrialization. So, in the 1940s, it took 74% of the GDP to field an 8:1 ratio. That's not the budget, by the way. That's the GDP. The Gross Domestic Production. ALL the work from ALL the Americans during that time period. That is a catastrophic amount of money.

If we take this as a rule, that means to field an army a fifth the ratio, it would require about 15% of the GDP. The tax-to-GDP ratio, incidentally, in 1870, was 10%. Take a look - 713 million in total revenue, 7,812 million in GDP. In other words, the American economy of 1870 would be incapable of supporting such an army.

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In my setting there is a colonial empire that has industrialized and extracts wealth from its urban holdings with the sale of tax collecting privileges to the highest bidder in a manner analogous to the Roman Publicani. They also have a monopoly on the sale of alcohol and opium in the same way the Chinese dynasties often had monopolies on salt and iron. My only concern is that if this is revenue stream is actually enough to support the financial needs of a state.

Probably not.

The 1870s is pretty much exactly the time that the last countries with urbanized economies with these "pre-modern" tax systems collapsed, in significant part due to lack of state capacity due to insufficient taxation.

The only countries that were spared were those who had a non-urbanized, non-industrial "rent" based economies (either actual farm rentals or natural resources like oil), and resourceless small islands (e.g. in the Caribbean) that had to import some many essentials that customs duties could substitute for other taxes and third-party large nation patrons provided for their military security.

The rare larger and somewhat urban economies that persisted in this kind of approach to taxation at that point, like the dying Ottoman Empire or the final days of the Russian Empire, did collapse shortly thereafter and their collapse was already taking a huge toll that only inertia and a late pace of industrialization sustained for a few more decades.

Governments that failed to reform tax policies invariably fell to revolutionary movements or foreign invaders who did reform tax policies.

Industrialized urban economies are inherently too diversified for a small number of monopolies on dominant factors of production like land or oil to work any longer. Similarly, the amount of uncertainty and non-uniformity that "tax farming" injects into business decision making effectively "kills the goose that lays the golden eggs".

Reform of taxation (and with it, usually, a trade of democratic participation for greater taxation power over the commercial economy) is pretty much an economic necessity in a commercial economy.

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Maybe?

This depends materially on the colonies part of your "colonial empire", which you have unfortunately declined to describe in any detail.

However, historically, among other reasons, a big reason to have colonies at all is to prop up the economy of the colonizing power. If enough wealth can be pumped out of the colonies, almost anything is possible.

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In addition to the excellent answers here, I think the "1870's US technology level" creates a problem also.

The "tax farming" system worked (after a fashion) when the tax farmers could operate with a wide degree of arbitrariness. The conventional complaint about tax farmers, and why they were widely hated, was that in order to meet their quota they would simply seize whatever property they chose, from the subject population, until they were in the black on their bid. This collection method becomes very problematic when the target population possesses revolvers and breech-loading rifles.

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State Control of Gambling is the Answer

Just restrict all gambling to the state, and then use lotteries, sports betting and casinos for revenue on top of what you already have. Run properly these can be incredibly lucrative (even more so than currently) and unlike the almost universally despised tax collectors of the Roman era, they are very popular with the people.

The biggest problems with this approach are:

  1. Financial Burden Skews Low: That is, these are effectively regressive taxes. The question of what kinds of ethical and economic problems regressive taxation causes (even voluntary ones) are matters of extensive debate in modern times, and I will refer you to the Internet for endless sources of opinions and arguments on the subject.

  2. The Perception of Cheating: You cannot allow the impression that this system can be cheated or it will undermine the whole thing.

  3. The Perception of Corruption: Corruption in this case means cheating by the operators (rather than the customers) to benefit themselves. You cannot allow the impression that the system is corrupt. The people must believe that anyone can fairly win.

  4. Actual Corruption: This can severely impact both the efficiency and your profit margin (and usually this is a bigger problem that "actual cheating" by the customers, because the operators tend to be pretty motivated to limit that).

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