In Francis Fukuyama’s latest book, he talks a lot about the problem of collecting taxes over a wide area. This is one of those processes that we take for granted now, but several hundred years ago it was quite difficult.

In a world with high transportation costs and a lot of output consisting of agricultural products that can spoil, it is not easy to collect taxes on people far away. This fact should limit the size of states. You could argue that the extent of the state is limited by the portability of output. At a certain distance, the cost of collecting taxes exceeds the value of what the ruler gets.

For a relatively short period of time, you can have a large empire, in which you pay troops based on plunder of peripheral areas. However, the momentum of this process eventually reverses. You can expand fairly quickly as you plunder new areas. But once you run out of new places to plunder, you cannot pay your troops, and you collapse. So the Roman empire, the Muslim empire, and the Mongol empire expanded spectacularly and then fragmented pretty quickly and severely.

Fukuyama points out that China had a number of periods where it acted more like a modern state, in that taxes were collected on a regular basis (not just one-time plunder) over a wide area. There were also periods where dynasties collapsed and China became fragmented. However, it is possible that even in the strong-state periods, most of the taxes had to come from areas close to the capital of the empire. The hold of the center on the periphery may have been weak.

Fukuyama points out that as of 1100, in Europe the states were weak. It was difficult for kings to collect taxes from outlying areas. In addition to the problem of transportation and storage, there was the fact that castles were very strong militarily. Feudal lords held a lot of the balance of power.

I think that in the early days of the United States, the central government had limited ability to collect taxes. People could move to the frontier, where the costs of reaching them probably exceeded the revenue that could be taxed from them.

Flash forward to today. There is a lot of output that is portable. Transportation and communication systems are effective. Population density is high. Therefore, it is relatively easy to operate a high-tax state.

Even though tax collection has become relatively easier, I believe that the U.S. has become vastly over-centralized. I suspect that the social costs of the taxes that are collected by the U.S. and other large states exceed the benefits. At some point down the road, the “winners” in the world may not be the U.S. or China or India or Brazil. They may be smaller entities, like Paul Romer’s charter cities. As long as these smaller entities can avoid having too much of their wealth taken at gunpoint by large states, they will achieve higher levels of income.