Taxes are an economic gameplay mechanic in Empire: Total War.
Tax is the percentage of money the player get from each region's region wealth (made up of town wealth which can increase or decrease over time dependent on buildings and government type, and towns). In the Grand Campaign the tax rates can be increased or decreased, as well as fully exempting regions from tax.
Decreasing or increasing the tax for either upper or lower classes increases or decreases their happiness/public order. In addition tax rate can also affect other things. The more the upper classes are taxed, the slower town wealth grows, and it can easily start to decrease town wealth.
Likewise, the more the lower classes are taxed, the slower the population grows and the slower new towns grow. This means that when settling the Americas or India as a European nation, it may be a good idea to turn the theatre's tax rates down, as there are many small, poor regions in these theatres which will generally not start with a town, and so taxing them too heavily could result in completely erasing the town wealth - which can mean that no money is made from tax.