Taxes are collected from your citizens in your city every hour, and are set as a percentage of your maximum housing capacity. Taxes are needed to provide you with gold which is used mainly for research, hiring generals and trade. Having higher taxes will make your citizens unhappy, whilst having lower taxes will make citizens happier. The lower your citizen's happiness the less gold you will collect.
Your tax rate will affect your gold income and your current population since the happier citizens are, the more that will stay in your city. Your citizen's happiness = 100 - tax rate + (theatre level * 2). As long as you don't need idle citizens for training your army you can raise your taxes in order to earn more gold.
Hourly gold rate = home capacity * happiness * tax rate