science

Tax farming

Tax farming is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Tax farming rather than just read about it. In short: Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contractor. It is most commonly used in public finance, where governments (the lessors) lease or assign the right to collect and retain the whole of the tax revenue to a private fin…

Key takeaways

Tax farming belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Tax farming to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Tax farming from memory before moving on to harder problems.

Reference excerpt

Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contractor. It is most commonly used in public finance, where governments (the lessors) lease or assign the right to collect and retain the whole of the tax revenue to a private financier (the farmer), who is charged with paying fixed sums (sometimes called "rents", but with a different meaning from the common modern term) into the treasury. Farming in this sense has nothing to do with agriculture, other than in a metaphorical sense.

Etymology There are two possible origins for farm.

Derivation from classical Latin Some sources derive "farm" with its French version ferme, most notably used in the context of the Fermiers Generaux, from the mediaeval Latin firma, meaning "a fixed agreement, contract", ultimately from the classical Latin adjective firmus, firma, firmum, meaning "firm, strong, stout, steadfast, immoveable, sure, to be relied upon". The modern agricultural sense of the word stems from the same origin, in that a medieval land-"holder" (no-one "owned" land but the king himself under his allodial title) under feudal land tenure might let it (i.e. lease it out) under a contract as a going concern (not as a sub-infeudated fee), that is to say as a unit producing a revenue stream, together with its workers and livestock, for exploitation by a tenant who was licensed by the contract, or firma, to keep all the revenue he could extract from the holding in exchange for fixed rents. Thus the rights to the revenue stream produced by the land had been farmed by the lessor. Because this was the form of the farming transaction most known to popular society, the word "farmer" became synonymous with a tenant of an agricultural holding.

Derivation from Old English According to other sources, the word farm comes from Middle English ferme ("farm, rent, revenue; revenue collected from a farmer; factor, stewardship, meal, feast"), from Old English feorm, farm ("provision, stores of food, supplies, possessions; provisions supplied to the king or a lord by a tenant or vassal; rent, feast, benefit, asylum"), from Proto-Germanic *firmō, *firχumō ("means of living, subsistence"), from Proto-Indo-European *perkwu- ("life, strength, force"). It is related to other Old English words such as feormehām ("farm"), feormere ("purveyor, grocer"), feormian ("to provision, sustain"), and feorh ("life, spirit"). The Old English word is stated by these sources as having unusually been borrowed by Medieval Latin as firma or ferma and to have provided the Old French ferme "farm", Occitan ferma "farm". This is refuted by those sources which state firma to derive from classical Latin firmus. The word continued the same senses of "rent, farmed office, source of revenue, feast". The meaning "rent, fixed payment", which was already present in the Old English word, was further strengthened due to the word's resemblance to the unrelated (so say these sources) Latin firmus ("firm, solid"), and firmitas ("security, firmness").

Valuation of a farm The tenant of a farm can only make a profit after carefully assessing its value. While modern financial management theory employs scientific formulae for such calculations, astute financiers of the past would have understood them well, whether done mentally or by making marks in the sand. To determine the maximum rent they are willing to pay, the tenant estimates the long-term average yearly gross value of the revenue stream, based on past records and accounts, adjusting for any new circumstances affecting the future. They then deduct a risk element and a discount for the time value of money. The risk is related to the possibility of some debts forming the revenue stream being defaulted on or paid late, leading to variability in the revenue. The resulting figure becomes the maximum rent the tenant offers to the farm's lessor. The tenant's profit is the excess of revenues extracted from the farm, less the rents, administration, levying, and collection expenses. The tenant's skills lie in negotiating a favorable rent by overstating the riskiness of the cash flow stream and effectively managing the assigned debts as a skilled debt-collector and manager. They must ensure their ability to enforce debt payments, including resorting to legal action and paying standard fees for bringing a lawsuit under the government authority that is the farm's lessor. The tenant acts as a principal, not the lessor's agent.

Historical use

Roman Empire

Tax farming was originally a Roman practice whereby the burden of tax collection was reassigned by the Roman State to private individuals or groups. In essence, these individuals or groups paid the taxes for a certain area and for a certain period of time and then attempted to cover their outlay by collecting money or saleable goods from the people within that area. The system was set up by Gaius Gracchus in 123 BC primarily to increase the efficiency of tax collection within Rome itself but the system quickly spread to the Provinces. Within the Roman Empire, these private individuals and groups which collected taxes in lieu of the bid (i.e. rent) they had paid to the state were known as publicani, of whom the best known is the disciple of Jesus, Matthew the Apostle, a publicanus in the village of Capernaum in the province of Galilee. The system was widely abused, and reforms were enacted by Augustus and Diocletian.

Feudal England Medieval English kings frequently made grants "in fee-farm", a form of feudal tenure. An example is the following writ of King William II (1087–1100) granting a hundred court to be held in fee-farm by Thorney Abbey:

William, king of the English, to all the sheriffs and barons of Huntingdonshire, greeting. Know that I have granted the Hundred of Normancross to the abbot and monks of Thorney to be held in fee-farm for an annual rent of 100 shillings which I order them to pay to my sheriff at Huntingdon. And I forbid any of my officers to do them injury or insult in respect of this.

Medieval Egypt The Chief Rabbi of Egypt, Sar Shalom ben Moses was accused of tax farming, which led to his excommunication by Maimonides.

Ottoman Empire

… excerpt ends here. Continue reading the full article.

Worked examples

Example 1 — a first encounter with Tax farming

Start with the simplest possible case. Write down what Tax farming claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Tax farming before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Tax farming ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Tax farming

In research: Tax farming appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Tax farming in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Tax farming is common in secondary-school and first-year university syllabi. It links to neighbouring topics History of taxation, Land tenure, Public finance, so understanding it makes those chapters shorter.
In everyday life: Look for Tax farming outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Tax farming in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Tax farming means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Tax farming out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Tax farming in simple terms?

Why does Tax farming matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Tax farming?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Tax farming.