Ricardo's Principles of Political Economy and Taxations, Part 2
Part 2
Chapter 12
Land-Tax
A land-tax, levied in proportion to the rent of land, and varying with
every variation of rent, is in effect a tax on rent; and as such a tax will
not apply to that land which yields no rent, nor to the produce of that
capital which is employed on the land with a view to profit merely, and
which never pays rent, it will not in any way affect the price of raw
produce, but will fall wholly on the landlords. In no respect would such
a tax differ from a tax on rent. But if a land-tax be imposed on all
cultivated land, however moderate that tax may be, it will be a tax on
produce, and will therefore raise the price of produce. If No. 3 be the
land last cultivated, although it should pay no rent, it cannot, after the
tax, be cultivated, and afford the general rate of profit, unless the price
of produce rise to meet the tax. Either capital will be withheld from that
employment until the price of corn shall have risen, in consequence of
demand, sufficiently to afford the usual profit; or if already employed
on such land, it will quit it, to seek a more advantageous employment.
The tax cannot be removed to the landlord, for by the supposition he
receives no rent. Such a tax may be proportioned to the quality of the
land and the abundance of its produce, and then it differs in no respect
from tithes; or it may be a fixed tax per acre on all land cultivated,
whatever its quality may be.
A land-tax of this latter description would be a very unequal tax, and
would be contrary to one of the four maxims with regard to taxes in
general, to which, according to Adam Smith, all taxes should conform.
The four maxims are as follow:
1. 'The subjects of every state ought to contribute towards the support of
the government, as nearly as possible in proportion to their respective
abilities.
2. 'The tax which each individual is bound to pay ought to be certain
and not arbitrary.
3. 'Every tax ought to be levied at the time, or in the manner in which it
is most likely to be convenient for the contributor to pay it.
4. 'Every tax ought to be so contrived as both to take out and to keep out
of the pockets of the people as little as possible, over and above what it
brings into the public treasury of the State.'
An equal land-tax, imposed indiscriminately and without any regard
to the distinction of its quality, on all land cultivated, will raise the
price of corn in proportion to the tax paid by the cultivator of the land
of the worst quality. Lands of different quality, with the employment of
the same capital, will yield very different quantities of raw produce. If
on the land which yields a thousand quarters of corn with a given
capital, a tax of £100 be laid, corn will rise 2s. per quarter to compensate
the farmer for the tax. But with the same capital on land of a better
quality, 2,000 quarters may be produced, which at 2s. a quarter
advance, would give £200; the tax, however, bearing equally on both
lands will be £100 on the better as well as on the inferior, and
consequently the consumer of corn will be taxed, not only to pay the
exigencies of the State, but also to give to the cultivator of the better
land, £100 per annum during the period of his lease, and afterwards to
raise the rent of the landlord to that amount. A tax of this description
then would be contrary to the fourth maxim of Adam Smith, it would
take out and keep out of the pockets of the people more than what it
brought into the treasury of the State. The taille in France before the
Revolution, was a tax of this description; those lands only were taxed,
which were held by an ignoble tenure, the price of raw produce rose in
proportion to the tax, and therefore they whose lands were not taxed,
were benefited by the increase of their rent. Taxes on raw produce, as
well as tithes, are free from this objection: they raise the price of raw
produce, but they take from each quality of land a contribution in
proportion to its actual produce, and not in proportion to the produce of
that which is the least productive.
From the peculiar view which Adam Smith took of rent, from his not
having observed that much capital is expended in every country, on the
land for which no rent is paid, he concluded that all taxes on the land,
whether they were laid on the land itself in the form of land-tax or tithes,
or on the produce of the land, or were taken from the profits of the
farmer, were all invariably paid by the landlord, and that he was in all
cases the real contributor, although the tax was, in general, nominally
advanced by the tenant. 'Taxes upon the produce of the land,' he says,
'are in reality taxes upon the rent; and though they may be originally
advanced by the farmer, are finally paid by the landlord. When a
certain portion of the produce is to be paid away for a tax, the farmer
computes as well as he can, what the value of this portion is, one year
with another, likely to amount to, and he makes a proportionable
abatement in the rent which he agrees to pay to the landlord. There is no
farmer who does not compute beforehand what the church-tithe, which
is a land-tax of this kind is, one year with another, likely to amount to.'
It is undoubtedly true, that the farmer does calculate his probable
outgoings of all descriptions, when agreeing with his landlord for the
rent of his farm; and if for the tithe paid to the church, or for the tax on
the produce of the land, he were not compensated by a rise in the relative
value of the produce of his farm, he would naturally endeavour to
deduct them from his rent. But this is precisely the question in dispute:
whether he will eventually deduct them from his rent, or be
compensated by a higher price of produce. For the reasons which have
been already given, I cannot have the least doubt but that they would
raise the price of produce, and consequently that Adam Smith has taken
an incorrect view of this important question.
Dr Smith's view of this subject is probably the reason why he has
described 'the tithe, and every other land-tax of this kind, under the
appearance of perfect equality, as very unequal taxes; a certain portion
of the produce being, in different situations, equivalent to a very
different portion of the rent.' I have endeavoured to shew that such taxes
do not fall with unequal weight on the different classes of farmers or
landlords, as they are both compensated by the rise of raw produce, and
only contribute to the tax in proportion as they are consumers of raw
produce. Inasmuch indeed as wages, and through wages, the rate of
profits are affected, landlords, instead of contributing their full share to
such a tax, are the class peculiarly exempted. It is the profits of stock,
from which that portion of the tax is derived which falls on those
labourers, who, from the insufficiency of their funds, are incapable of
paying taxes; this portion is exclusively borne by all those whose income
is derived from the employment of stock, and therefore it in no degree
affects landlords.
It is not to be inferred from this view of tithes, and taxes on the land
and its produce, that they do not discourage cultivation. Every thing
which raises the exchangeable value of commodities of any kind, which
are in very general demand, tends to discourage both cultivation and
production; but this is an evil inseparable from all taxation, and is not
confined to the particular taxes of which we are now speaking.
This may be considered, indeed, as the unavoidable disadvantage
attending all taxes received and expended by the State. Every new tax
becomes a new charge on production, and raises natural price. A portion
of the labour of the country which was before at the disposal of the
contributor to the tax, is placed at the disposal of the State, and cannot
therefore be employed productively. This portion may become so large,
that sufficient surplus may not be left to stimulate the exertions of those
who usually augment by their savings the capital of the State. Taxation
has happily never yet in any free country been carried so far as instantly
from year to year to diminish its capital. Such a state of taxation could
not be long endured; or if endured, it would be constantly absorbing so
much of the annual produce of the country as to occasion the most
extensive scene of misery, famine, and depopulation.
'A land-tax,' says Adam Smith, 'which, like that of Great Britain, is
assessed upon each district according to a certain invariable canon,
though it should be equal at the time of its first establishment,
necessarily becomes unequal in process of time, according to the
unequal degrees of improvement or neglect in the cultivation of the
different parts of the country. In England the valuation according to
which the different counties and parishes were assessed to the land-tax
by the 4th, William and Mary, was very unequal, even at its first
establishment. This tax, therefore, so far offends against the first of the
four maxims above mentioned. It is perfectly agreeable to the other
three. It is perfectly certain. The time of payment for the tax being the
same as that for the rent, is as convenient as it can be to the contributor.
Though the landlord is in all cases the real contributor, the tax is
commonly advanced by the tenant, to whom the landlord is obliged to
allow it in the payment of the rent.'
If the tax be shifted by the tenant not on the landlord but on the
consumer, then if it be not unequal at first, it can never become so; for
the price of produce has been at once raised in proportion to the tax, and
will afterwards vary no more on that account. It may offend, if unequal,
as I have attempted to shew that it will, against the fourth maxim above
mentioned, but it will not offend against the first. It may take more out
of the pockets of the people than it brings into the public treasury of the
State, but it will not fall unequally on any particular class of
contributors. M. Say appears to me to have mistaken the nature and
effects of the English land-tax, when he says, 'Many persons attribute to
this fixed valuation, the great prosperity of English agriculture. That it
has very much contributed to it there can be no doubt. But what should
we say to a Government, which, addressing itself to a small trader,
should hold this language: "With a small capital you are carrying on a
limited trade, and your direct contribution is in consequence very small.
Borrow and accumulate capital; extend your trade, so that it may
procure you immense profits; yet you shall never pay a greater
contribution. Moreover, when your successors shall inherit your profits,
and shall have further increased them, they shall not be valued higher to
them than they are to you; and your successors shall not bear a greater
portion of the public burdens."
'Without doubt this would be a great encouragement given to
manufactures and trade; but would it be just? Could not their
advancement be obtained at any other price? In England itself, has not
manufacturing and commercial industry made even greater progress,
since the same period, without being distinguished with so much
partiality? A landlord by his assiduity, economy, and skill, increases
his annual revenue by 5,000 francs. If the State claim of him the fifth
part of his augmented income, will there not remain 4,000 francs of
increase to stimulate his further exertions?'
M. Say supposes, 'A landlord by his assiduity, economy and skill, to
increase his annual revenue by 5,000 francs;, but a landlord has no
means of employing his assiduity, economy and skill on his land, unless
he farms it himself. and then it is in quality of capitalist and farmer that
he makes the improvement, and not in quality of landlord. It is not
conceivable that he could so augment the produce of his farm by any
peculiar skill on his part, without first increasing the quantity of capital
employed upon it. If he increased the capital, his larger revenue might
bear the same proportion to his increased capital, as the revenue of all
other farmers to their capitals.
If M. Say's suggestion were followed, and the State were to claim the
fifth part of the augmented income of the farmer, it would be a partial
tax on farmers, acting on their profits, and not affecting the profits of
those in other employments. The tax would be paid by all lands, by those
which yielded scantily as well as by those which yielded abundantly;
and on some lands there could be no compensation for it by deduction
from rent, for no rent is paid. A partial tax on profits never falls on the
trade on which it is laid, for the trader will either quit his employment,
or remunerate himself for the tax. Now those who pay no rent could be
recompensed only by a rise in the price of produce, and thus would M.
Say's proposed tax fall on the consumer, and not either on the landlord
or farmer.
If the proposed tax were increased in proportion to the increased
quantity, or value, of the gross produce obtained from the land, it would
differ in nothing from tithes, and would equally be transferred to the
consumer. Whether then it fell on the gross or on the net produce of land,
it would be equally a tax on consumption, and would only affect the
landlord and farmer in the same way as other taxes on raw produce.
If no tax whatever had been laid on the land, and the same sum had
been raised by any other means, agriculture would have flourished at
least as well as it has done; for it is impossible that any tax on land can
be an encouragement to agriculture; a moderate tax may not, and
probably does not, greatly prevent, but it cannot encourage production.
The English Government has held no such language as M. Say has
supposed. It did not promise to exempt the agricultural class and their
successors from all future taxation, and to raise the further supplies
which the State might require, from the other classes of society; it said
only, 'in the mode we will no further burthen the land; but we retain to
ourselves the most perfect liberty of making you pay, under some other
form, your full quota to the future exigencies of the State.'
Speaking of taxes in kind, or a tax of a certain proportion of the
produce, which is precisely the same as tithes, M. Say says, 'This mode
of taxation appears to be the most equitable; there is, however, none
which is less. so. it totally leaves out of consideration the advances made
by the producer; it is proportioned to the gross, and not to the net
revenue. Two agriculturists cultivate different kinds of raw produce:
one cultivates corn on middling land, his expenses amounting annually
on an average to 8,000 francs: the raw produce from his lands sells for
12,000 francs; he has then a net revenue of 4,000 francs.
'His neighbour has pasture or wood land, which brings in every year a
like sum of 12,000 francs, but his expenses amount only to 2,000 francs.
He has therefore on an average a net revenue of 10,000 francs.
'A law ordains that a twelfth of the produce of all the fruits of the
earth be levied in kind, whatever they may be. From the first is taken in
consequence of this law, corn of the value of 1,000 francs; and from the
second, hay, cattle, or wood, of the same value of 1,000 francs. What has
happened? From the one, a quarter of his net income, 4,000 francs, has
been taken; from the other, whose income was 10,000 francs, a tenth only
has been taken. Income is the net profit which remains after replacing
the capital exactly in its former state. Has a merchant an income equal
to all the sales which he makes in the course of a year? certainly not; his
income only amounts to the excess of his sales above his advances, and it
is on this excess only that taxes on income should fall.'
M. Say's error in the above passage lies in supposing that because the
value of the produce of one of these two farms, after reinstating the
capital, is greater than the value of the produce of the other, on that
account the net income of the cultivators will differ by the same
amount. The net income of the landlords and tenants together of the
wood land, may be much greater than the net income of the landlords
and tenants of the corn land; but it is on account of the difference of
rent, and not on account of the difference in the rate of profit. M. Say
has wholly omitted the consideration of the different amount of rent,
which these cultivators would have to pay. There cannot be two rates of
profit in the same employment, and therefore when the value of produce
is in different proportions to capital, it is the rent which will differ, and
not the profit. Upon what pretence would one man with a capital of
2,000 francs, be allowed to obtain a net profit of 10,000 francs from its
employment, whilst another, with a capital of 8,000 francs, would only
obtain 4,000 francs? Let M. Say make a due allowance for rent; let him
further allow for the effect which such a tax would have on the prices of
these different kinds of raw produce, and he will then perceive that it is
not an unequal tax, and further that the producers themselves will no
otherwise contribute to it, than any other class of consumers.
Chapter 13
Taxes on Gold
The rise in the price of commodities, in consequence of taxation or of
difficulty of production, will in all cases ultimately ensue; but the
duration of the interval, before the market price will conform to the
natural price, must depend on the nature of the commodity, and on the
facility with which it can be reduced in quantity. If the quantity of the
commodity taxed could not be diminished, if the capital of the farmer or
of the hatter for instance, could not be withdrawn to other employments,
it would be of no consequence that their profits were reduced below the
general level by means of a tax; unless the demand for their
commodities should increase, they would never be able to elevate the
market price of corn and of hats up to their increased natural price.
Their threats to leave their employments, and remove their capitals to
more favoured trades, would be treated as an idle menace which could
not be carried into effect; and consequently the price would not be
raised by diminished production. Commodities, however, of all
descriptions can be reduced in quantity, and capital can be removed
from trades which are less profitable to those which are more so, but
with different degrees of rapidity. In proportion as the supply of a
particular commodity can be more easily reduced, without
inconvenience to the producer, the price of it will more quickly rise
after the difficulty of its production has been increased by taxation, or
by any other means. Corn being a commodity indispensably necessary
to every one, little effect will be produced on the demand for it in
consequence of a tax, and therefore the supply would not probably be
long excessive, even if the producers had great difficulty in removing
their capitals from the land. For this reason, the price of corn will
speedily be raised by taxation, and the farmer will be enabled to transfer
the tax from himself to the consumer.
If the mines which supply us with gold were in this country, and if
gold were taxed, it could not rise in relative value to other things, till its
quantity were reduced. This would be more particularly the case, if gold
were used exclusively for money. It is true that the least productive
mines, those which paid no rent, could no longer be worked, as they
could not afford the general rate of profits till the relative value of gold
rose, by a sum equal to the tax. The quantity of gold, and, therefore, the
quantity of money would be slowly reduced: it would be a little
diminished in one year, a little more in another, and finally its value
would be raised in proportion to the tax; but in the interval, the
proprietors or holders, as they would pay the tax, would be the sufferers,
and not those who used money. If out of every 1,000 quarters of wheat in
the country, and every 1,000 produced in future, Government should
exact 100 quarters as a tax, the remaining 900 quarters would exchange
for the same quantity of other commodities that 1,000 did before; but if
the same thing took place with respect to gold, if of every £1,000 money
now in the country, or in future to be brought into it, Government could
exact £100 as a tax, the remaining £900 would purchase very little more
than £900 purchased before. The tax would fall upon him, whose
property consisted of money, and would continue to do so till its
quantity were reduced in proportion to the increased cost of its
production caused by the tax.
This, perhaps, would be more particularly the case with respect to a
metal used for money, than any other commodity; because the demand
for money is not for a definite quantity, as is the demand for clothes, or
for food. The demand for money is regulated entirely by its value, and
its value by its quantity. If gold were of double the value, half the
quantity would perform the same functions in circulation, and if it were
of half the value, double the quantity would be required. If the market
value of corn be increased one tenth by taxation, or by difficulty of
production, it is doubtful whether any effect whatever would be
produced on the quantity consumed, because every man's want is for a
definite quantity, and, therefore, if he has the means of purchasing, he
will continue to consume as before: but for money, the demand is
exactly proportioned to its value. No man could consume twice the
quantity of corn, which is usually necessary for his support, but every
man purchasing and selling only the same quantity of goods, may be
obliged to employ twice, thrice, or any number of times the same
quantity of money.
The argument which I have just been using, applies only to those
states of society in which the precious metals are used for money, and
where paper credit is not established. The metal gold, like all other
commodities, has its value in the market ultimately regulated by the
comparative facility or difficulty of producing it; and although from its
durable nature, and from the difficulty of reducing its quantity, it does
not readily bend to variations in its market value, yet that difficulty is
much increased from the circumstance of its being used as money. If the
quantity of gold in the market for the purpose of commerce only, were
10,000 ounces, and the consumption in our manufactures were 2,000
ounces annually, it might be raised one fourth, or 25 per cent in its
value, in one year, by withholding the annual supply; but if in
consequence of its being used as money, the quantity employed were
100,000 ounces, it would not be raised one fourth in value in less than
ten years. As money made of paper may be readily reduced in quantity,
its value, though its standard were gold, would be increased as rapidly
as that of the metal itself would be increased, if the metal, by forming a
very small part of the circulation, had a very slight connexion with
money.
If gold were the produce of one country only, and it were used
universally for money, a very considerable tax might be imposed on it,
which would not fall on any country, except in proportion as they used
it in manufactures, and for utensils; upon that portion which was used
for money, though a large tax might be received, nobody would pay it.
This is a quality peculiar to money. All other commodities of which
there exists a limited quantity, and which cannot be increased by
competition, are dependent for their value, on the tastes, the caprice,
and the power of purchasers; but money is a commodity which no
country has any wish or necessity to increase: no more advantage results
from using twenty millions, than from using ten millions of currency. A
country might have a monopoly of silk, or of wine, and yet the prices of
silks and wine might fall, because from caprice or fashion, or taste,
cloth and brandy might be preferred, and substituted; the same effect
might in a degree take place with gold, as far as its use is confined to
manufactures: but while money is the general medium of exchange, the
demand for it is never a matter of choice, but always of necessity. you
must take it in exchange for your goods, and, therefore, there are no
limits to the quantity which may be forced on you by foreign trade, if it
fall in value; and no reduction to which you must not submit, if it rise.
You may, indeed, substitute paper money, but by this you do not, and
cannot lessen the quantity of money, for that is regulated by the value of
the standard for which it is exchangeable; it is only by the rise of the
price of commodities, that you can prevent them from being exported
from a country where they are purchased with little money, to a country
where they can be sold for more, and this rise can only be effected by an
importation of metallic money from abroad, or by the creation or
addition of paper money at home. If then the King of Spain, supposing
him to be in exclusive possession of the mines, and gold alone to be used
for money, were to lay a considerable tax on gold, he would very much
raise its natural value; and as its market value in Europe is ultimately
regulated by its natural value in Spanish America, more commodities
would be given by Europe for a given quantity of gold. But the same
quantity of gold would not be produced in America, as its value would
only be increased in proportion to the diminution of quantity
consequent on its increased cost of production. No more goods then
would be obtained in America, in exchange for all their gold exported,
than before; and it may be asked, where then would be the benefit to
Spain and her Colonies? The benefit would be this, that if less gold were
produced, less capital would be employed in producing it; the same
value of goods from Europe would be imported by the employment of
the smaller capital, that was before obtained by the employment of the
larger; and, therefore, all the productions obtained by the employment
of the capital withdrawn from the mines, would be a benefit which
Spain would derive from the imposition of the tax, and which she could
not obtain in such abundance, or with such certainty, by possessing the
monopoly of any other commodity whatever. From such a tax, as far as
money was concerned, the nations of Europe would suffer no injury
whatever; they would have the same quantity of goods, and
consequently the same means of enjoyment as before, but these goods
would be circulated with a less quantity, because a more valuable
money.
If in consequence of the tax, only one tenth of the present quantity of
gold were obtained from the mines, that tenth would be of equal value
with the ten tenths now produced. But the King of Spain is not
exclusively in possession of the mines of the precious metals; and if he
were, his advantage from their possession, and the power of taxation,
would be very much reduced by the limitation of demand and
consumption in Europe, in consequence of the universal substitution, in
a greater or less degree, of paper money. The agreement of the market
and natural prices of all commodities, depends at all times on the
facility with which the supply can be increased or diminished. In the
case of gold, houses, and labour, as well as many other things, this effect
cannot, under some circumstances, be speedily produced. But it is
different with those commodities which are consumed and reproduced
from year to year, such as hats, shoes, corn, and cloth; they may be
reduced, if necessary, and the interval cannot be long before the supply
is contracted in proportion to the increased charge of producing them.
A tax on raw produce from the surface of the earth, will, as we have
seen, fall on the consumer, and will in no way affect rent; unless, by
diminishing the funds for the maintenance of labour, it lowers wages,
reduces the population, and diminishes the demand for corn. But a tax
on the produce of gold mines must, by enhancing the value of that
metal, necessarily reduce the demand for it, and must therefore
necessarily displace capital from the employment to which it was
applied. Notwithstanding then, that Spain would derive all the benefits
which I have stated from a tax on gold, the proprietors of those mines
from which capital was withdrawn would lose all their rent. This would
be a loss to individuals, but not a national loss; rent being not a creation,
but merely a transfer of wealth: the King of Spain, and the proprietors of
the mines which continued to be worked, would together receive not
only all that the liberated capital produced, but all that the other
proprietors lost.
Suppose the mines of the 1st, 2nd, and 3rd quality to be worked, and to
produce respectively 100, 80, and 70 pounds weight of gold, and
therefore the rent of No. 1 to be thirty pounds, and that of No. 2 ten
pounds. Suppose now the tax to be seventy pounds of gold per annum on
each mine worked; and consequently that No. 1 alone could be
profitably worked; it is evident that all rent would immediately
disappear. Before the imposition of the tax, out of the 100 pounds
produced on No. 1, a rent was paid of thirty pounds, and the worker of
the mine retained seventy, a sum equal to the produce of the least
productive mine. The value, then, of what remains to the capitalist of
the mine No. 1, must be the same as before, or he would not obtain the
common profits of stock; and, consequently, after paying seventy out of
his 100 pounds for tax, the value of the remaining thirty must be as great
as the value of seventy was before, and therefore the value of the whole
hundred as great as 233 pounds before. Its value might be higher, but it
could not be lower, or even this mine would cease to be worked. Being a
monopolised commodity, it could exceed its natural value, and then it
would pay a rent equal to that excess; but no funds would be employed
in the mine, if it were below this value. In return for one third of the
labour and capital employed in the mines, Spain would obtain as much
gold as would exchange for the same, or very nearly the same quantity
of commodities as before. She would be richer by the produce of the two
thirds liberated from the mines. If the value of the 100 pounds of gold
should be equal to that of the 250 pounds extracted before; the King of
Spain's portion, his seventy pounds, would be equal to 175 at the former
value: a small part of the King's tax only would fall on his own subjects,
the greater part being obtained by the better distribution of capital.
The account of Spain would stand thus:
Formerly produced:
Gold 250 pounds, of the value of (suppose)... 10,000 yards of cloth.
Now produced:
By the two capitalists who quitted the mines, the same value as 140
pounds of gold formerly exchanged for; equal to... 5,600 yards of cloth
By the capitalist who works the mine, No. 1, thirty pounds of gold,
increased in value, as 1 to 2 1/2, and therefore now of the value of...
3,000 yards of cloth.
Tax to the King seventy pounds, increased also in value as 1 to 2 1/2,
and therefore now of the value of... 7,000 yards of cloth.
15,600
Of the 7,000 received by the King, the people of Spain would contribute
only 1,400, and 5,600 would be pure gain, effected by the liberated
capital.
If the tax, instead of being a fixed sum per mine worked, were a
certain portion of its produce, the quantity would not be immediately
reduced in consequence. If a half, a fourth, or a third of each mine were
taken for the tax, it would nevertheless be the interest of the proprietors
to make their mines yield as abundantly as before; but if the quantity
were not reduced, but only a part of it transferred from the proprietor to
the king, its value would not rise; the tax would fall on the people of the
colonies, and no advantage would be gained. A tax of this kind would
have the effect that Adam Smith supposes taxes on raw produce would
have on the rent of land - it would fall entirely on the rent of the mine. If
pushed a little further, indeed, the tax would not only absorb the whole
rent, but would deprive the worker of the mine of the common profits of
stock, and he would consequently withdraw his capital from the
production of gold. If still further extended, the rent of still better mines
would be absorbed, and capital would be further withdrawn; and thus
the quantity would be continually reduced, and its value raised, and the
same effects would take place as we have already pointed out; a part of
the tax would be paid by the people of the Spanish colonies, and the
other part would be a new creation of produce, by increasing the power
of the instrument used as a medium of exchange.
Taxes on gold are of two kinds, one on the actual quantity of gold in
circulation, the other on the quantity that is annually produced from the
mines. Both have a tendency to reduce the quantity, and to raise the
value of gold; but by neither will its value be raised till the quantity is
reduced, and therefore such taxes will fall for a time, until the supply is
diminished, on the proprietors of money, but ultimately that part which
will permanently fall on the community, will be paid by the owner of
the mine in the reduction of rent, and by the purchasers of that portion
of gold, which is used as a commodity contributing to the enjoyments of
mankind, and not set apart exclusively for a circulating medium.
Chapter 14
Taxes on Houses
There are also other commodities besides gold which cannot be
speedily reduced in quantity; any tax on which will therefore fall on the
proprietor, if the increase of price should lessen the demand.
Taxes on houses are of this description; though laid on the occupier,
they will frequently fall by a diminution of rent on the landlord. The
produce of the land is consumed and reproduced from year to year, and
so are many other commodities; as they may therefore be speedily
brought to a level with the demand, they cannot long exceed their
natural price. But as a tax on houses may be considered in the light of an
additional rent paid by the tenant, its tendency will be to diminish the
demand for houses of the same annual rent, without diminishing their
supply. Rent will therefore fall, and a part of the tax will be paid
indirectly by the landlord.
'The rent of a house,' says Adam Smith,, may be distinguished into
two parts, of which the one may very properly be called the building
rent, the other is commonly called the ground rent. The building rent is
the interest or profit of the capital expended in building the house. In
order to put the trade of a builder upon a level with other trades, it is
necessary that this rent should be sufficient first to pay the same interest
which he would have got for his capital, if he had lent it upon good
security and, secondly, to keep the house in constant repair, or what
comes to the same thing, to replace within a certain term of years the
capital which had been employed in building it.' 'If in proportion to the
interest of money, the trade of the builder affords at any time a much
greater profit than this, it will soon draw so much capital from other
trades, as will reduce the profit to its proper level. If it affords at any
time much less than this, other trades will soon draw so much capital
from it as will again raise that profit. Whatever part of the whole rent of
a house is over and above what is sufficient for affording this reasonable
profit, naturally goes to the ground rent; and where the owner of the
ground, and the owner of the building, are two different persons, it is in
most cases completely paid to the former. In country houses, at a
distance from any great town, where there is a plentiful choice of
ground, the ground rent is scarcely any thing, or no more than what the
space upon which the house stands, would pay employed in agriculture.
In country villas, in the neighbourhood of some great town, it is
sometimes a good deal higher, and the peculiar conveniency, or beauty
of situation, is there frequently very highly paid for. Ground rents are
generally highest in the capital, and in those particular parts of it,
where there happens to be the greatest demand for houses, whatever be
the reason for that demand, whether for trade and business, for pleasure
and society, or for mere vanity and fashion.' A tax on the rent of houses
may either fall on the occupier, on the ground landlord, or on the
building landlord. In ordinary cases it may be presumed, that the whole
tax would be paid both immediately and finally by the occupier.
If the tax be moderate, and the circumstances of the country such, that
it is either stationary or advancing, there would be little motive for the
occupier of a house to content himself with one of a worse description.
But if the tax be high, or any other circumstances should diminish the
demand for houses, the landlord's income would fall, for the occupier
would be partly compensated for the tax by a diminution of rent. It is,
however, difficult to say, in what proportions that part of the tax, which
was saved by the occupier by a fall of rent, would fall on the building
rent and the ground rent. It is probable that, in the first instance, both
would be affected; but as houses are, though slowly, yet certainly
perishable, and as no more would be built, till the profits of the builder
were restored to the general level, building rent would, after an interval,
be restored to its natural price. As the builder receives rent only whilst
the building endures, he could pay no part of the tax, under the most
disastrous circumstances, for any longer period.
The payment of this tax, then, would ultimately fall on the occupier
and ground landlord, but, 'in what proportion, this final payment would
be divided between them,' says Adam Smith, 'it is not perhaps very easy
to ascertain. The division would probably be very different in different
circumstances, and a tax of this kind might, according to those different
circumstances, affect very unequally both the inhabitant of the house,
and the owner of the ground.'(25*)
Adam Smith considers ground rents as peculiarly fit subjects for
taxation. 'Both ground rents, and the ordinary rent of land,' he says, 'are
a species of revenue, which the owner in many cases enjoys, without any
care or attention of his own. Though a part of this revenue should be
taken from him, in order to defray the expenses of the State, no
discouragement will thereby be given to any sort of industry. The
annual produce of the land and labour of the society, the real wealth and
revenue of the great body of the people, might be the same after such a
tax as before. Ground rents, and the ordinary rent of land are, therefore,
perhaps, the species of revenue, which can best bear to have a peculiar
tax imposed upon them.' It must be admitted that the effects of these
taxes would be such as Adam Smith has described; but it would surely
be very unjust, to tax exclusively the revenue of any particular class of a
community. The burdens of the State should be borne by all in
proportion to their means: this is one of the four maxims mentioned by
Adam Smith, which should govern all taxation. Rent often belongs to
those who, after many years of toil, have realised their gains, and
expended their fortunes in the purchase of land or houses; and it
certainly would be an infringement of that principle which should ever
be held sacred, the security of property, to subject it to unequal taxation.
It is to be lamented, that the duty by stamps, with which the transfer of
landed property is loaded, materially impedes the conveyance of it into
those hands, where it would probably be made most productive. And if
it be considered, that land, regarded as a fit subject for exclusive
taxation, would not only be reduced in price, to compensate for the risk
of that taxation, but in proportion to the indefinite nature and uncertain
value of the risk, would become a fit subject for speculations, partaking
more of the nature of gambling, than of sober trade, it will appear
probable, that the hands into which land would in that case be most apt
to fall, would be the hands of those, who possess more of the qualities of
the gambler, than of the qualities of the sober-minded proprietor, who is
likely to employ his land to the greatest advantage.
Chapter 15
Taxes on Profits
Taxes on those commodities, which are generally denominated
luxuries, fall on those only who make use of them. A tax on wine is paid
by the consumer of wine. A tax on pleasure horses, or on coaches, is paid
by those who provide for themselves such enjoyments, and in exact
proportion as they provide them. But taxes on necessaries do not affect
the consumers of necessaries, in proportion to the quantity that may be
consumed by them, but often in a much higher proportion. A tax on
corn, we have observed, not only affects a manufacturer in the
proportion that he and his family may consume corn, but it alters the
rate of profits of stock, and therefore also affects his income. Whatever
raises the wages of labour, lowers the profits of stock; therefore every tax
on any commodity consumed by the labourer, has a tendency to lower
the rate of profits.
A tax on hats will raise the price of hats; a tax on shoes, the price of
shoes; if this were not the case, the tax would be finally paid by the
manufacturer; his profits would be reduced below the general level, and
he would quit his trade. A partial tax on profits will raise the price of the
commodity on which it falls: a tax, for example, on the profits of the
hatter, would raise the price of hats; for if his profits were taxed, and not
those of any other trade, his profits, unless he raised the price of his hats,
would be below the general rate of profits, and he would quit his
employment for another.
In the same manner, a tax on the profits of the farmer would raise the
price of corn; a tax on the profits of the clothier, the price of cloth; and
if a tax in proportion to profits were laid on all trades, every commodity
would be raised in price. But if the mine, which supplied us with the
standard of our money, were in this country, and the profits of the miner
were also taxed, the price of no commodity would rise, each man would
give an equal proportion of his income, and every thing would be as
before.
If money be not taxed, and therefore be permitted to preserve its value,
whilst every thing else is taxed, and is raised in value, the hatter, the
farmer, and clothier, each employing the same capitals, and obtaining
the same profits, will pay the same amount of tax. If the tax be £100, the
hats, the cloth, and the corn, will each be increased in value £100. If the
hatter gains by his hats £1,100, instead of £1,000, he will pay £100 to
Government for the tax; and therefore will still have £1,000 to lay out on
goods for his own consumption. But as the cloth, corn, and all other
commodities, will be raised in price from the same cause, he will not
obtain more for his £1,000 than he before obtained for £910, and thus
will he contribute by his diminished expenditure to the exigencies of the
State; he will, by the payment of the tax, have placed a portion of the
produce of the land and labour of the country at the disposal of
Government, instead of using that portion himself. If instead of
expending his £1,000, he adds it to his capital, he will find in the rise of
wages, and in the increased cost of the raw material and machinery, that
his saving of £1,000 does not amount to more than a saving of £910
amounted to before.
If money be taxed, or if by any other cause its value be altered, and all
commodities remain precisely at the same price as before, the profits of
the manufacturer and farmer will also be the same as before, they will
continue to be £1,000; and as they will each have to pay £100 to
Government, they will retain only £900, which will give them a less
command over the produce of the land and labour of the country,
whether they expend it in productive or unproductive labour. Precisely
what they lose, Government will gain. In the first case the contributor to
the tax would, for £1,000, have as great a quantity of goods as he before
had for £910; in the second, he would have only as much as he before
had for £900, for the price of goods would remain unaltered, and he
would have only £900 to expend. This proceeds from the difference in
the amount of the tax; in the first case it is only an eleventh of his
income, in the second it is a tenth; money in the two cases being of a
different value.
But although, if money be not taxed, and do not alter in value, all
commodities will rise in price, they will not rise in the same proportion;
they will not after the tax bear the same relative value to each other
which they did before the tax. In a former part of this work, we discussed
the effects of the division of capital into fixed and circulating, or rather
into durable and perishable capital, on the prices of commodities. We
shewed that two manufacturers might employ precisely the same
amount of capital, and might derive from it precisely the same amount
of profits, but that they would sell their commodities for very different
sums of money, according as the capitals they employed were rapidly,
or slowly, consumed and reproduced. The one might sell his goods for
£4,000, the other for £10,000, and they might both employ £10,000 of
capital, and obtain 20 per cent profit or £2,000. The capital of one might
consist for example, of £2,000 circulating capital, to be reproduced, and
£8,000 fixed, in buildings and machinery; the capital of the other, on the
contrary, might consist of £8,000 of circulating, and of only £2,000
fixed capital in machinery and buildings. Now, if each of these persons
were to be taxed ten per cent on his income, or £200, the one, to make his
business yield him the general rate of profit, must raise his goods from
£10,000 to £10,200; the other would also be obliged to raise the price of
his goods from £4,000 to £4,200. Before the tax, the goods sold by one of
these manufacturers were 2 1/2 times more valuable than the goods of
the other; after the tax they will be 2.42 times more valuable: the one
kind will have risen two per cent; the other five per cent: consequently a
tax upon income, whilst money continued unaltered in value, would
alter the relative prices and value of commodities. This would be true
also, if the tax instead of being laid on the profits, were laid on the
commodities themselves: provided they were taxed in proportion to the
value of the capital employed on their production, they would rise
equally, whatever might be their value, and therefore they would not
preserve the same proportion as before. A commodity, which rose from
ten to eleven thousand pounds, would not bear the same relation as
before, to another which rose from 2 to £3,000. If under these
circumstances, money rose in value, from whatever cause it might
proceed, it would not affect the prices of commodities in the same
proportion. The same cause which would lower the price of one from
£10,200 to £10,000 Or less than two per cent would lower the price of the
other from £4,200 to £4,000 or 4 3/4 per cent. If they fell in any different
proportion, profits would not be equal; for to make them equal, when the
price of the first commodity was £10,000, the price of the second should
be £4,000; and when the price of the first was £10,200, the price of the
other should be £4,200.
The consideration of this fact will lead to the understanding of a very
important principle, which, I believe, has never been adverted to. It is
this; that in a country where no taxation subsists, the alteration in the
value of money arising from scarcity or abundance will operate in an
equal proportion on the prices of all commodities; that if a commodity
of £1,000 value rise to £1,200, or fall to £800, a commodity of £10,000
value will rise to £1 2,000 or fall to £8,000; but in a country where prices
are artificially raised by taxation, the abundance of money from an
influx, or the exportation and consequent scarcity of it from foreign
demand, will not operate in the same proportion on the prices of all
commodities; some it will raise or lower 5, 6, or 12 per cent, others 3, 4,
or 7 per cent. If a country were not taxed, and money should fall in
value, its abundance in every market would produce similar effects in
each. If meat rose 20 per cent, bread, beer, shoes, labour, and every
commodity, would also rise 20 per cent; it is necessary they should do
so, to secure to each trade the same rate of profits. But this is no longer
true when any of these commodities is taxed; if in that case they should
all rise in proportion to the fall in the value of money, profits would be
rendered unequal; in the case of the commodities taxed, profits would be
raised above the general level, and capital would be removed from one
employment to another, till an equilibrium of profits was restored,
which could only be, after the relative prices were altered.
Will not this principle account for the different effects, which it was
remarked were produced on the prices of commodities, from the altered
value of money during the Bank-restriction? It was objected to those
who contended that the currency was at that period depreciated, from
the too great abundance of the paper circulation, that, if that were the
fact, all commodities ought to have risen in the same proportion; but it
was found that many had varied considerably more than others, and
thence it was inferred that the rise of prices was owing to something
affecting the value of commodities, and not to any alteration in the
value of the currency. It appears, however, as we have just seen, that in a
country where commodities are taxed, they will not all vary in price in
the same proportion, either in consequence of a rise or of a fall in the
value of currency.
If the profits of all trades were taxed, excepting the profits of the
farmer, all goods would rise in money value, excepting raw produce.
The farmer would have the same corn income as before, and would sell
his corn also for the same money price; but as he would be obliged to
pay an additional price for all the commodities, except corn, which he
consumed, it would be to him a tax on expenditure. Nor would he be
relieved from this tax by an alteration in the value of money, for an
alteration in the value of money might sink all the taxed commodities to
their former price, but the untaxed one would sink below its former
level; and, therefore, though the farmer would purchase his
commodities at the same price as before, he would have less money with
which to purchase them.
The landlord, too, would be precisely in the same situation, he would
have the same corn, and the same money-rent as before, if all
commodities rose in price, and money remained at the same value; and
he would have the same corn, but a less money-rent, if all commodities
remained at the same price: so that in either case, though his income
were not directly taxed, he would indirectly contribute towards the
money raised.
But suppose the profits of the farmer to be also taxed, he then would be
in the same situation as other traders: his raw produce would rise, so that
he would have the same money revenue, after paying the tax, but he
would pay an additional price for all the commodities he consumed, raw
produce included.
His landlord, however, would be differently situated, he would be
benefited by the tax on his tenant's profits, as he would be compensated
for the additional price at which he would purchase his manufactured
commodities, if they rose in price; and he would have the same money
revenue, if in consequence of a rise in the value of money, commodities
sold at their former price. A tax on the profits of the farmer, is not a tax
proportioned to the gross produce of the land, but to its net produce,
after the payment of rent, wages, and all other charges. As the
cultivators of the different kinds of land, No. 1, 2 and 3, employ
precisely the same capitals, they will get precisely the same profits,
whatever may be the quantity of gross produce, which one may obtain
more than the other. and consequently they will be all taxed alike.
Suppose the gross produce of the land of the quality No. 1 to be 180 qrs.,
that of No. 2, 170 qrs., and of No. 3, 160, and each to be taxed 10
quarters, the difference between the produce of No. 1, No. 2 and No. 3,
after paying the tax, will be the same as before; for if No. 1 be reduced to
170, No. 2 to 160, and No. 3 to 150 qrs; the difference between 3 and 1
will be as before, 20 qrs.; and of No. 3 and No. 2, 10 qrs. If, after the tax,
the prices of corn and of every other commodity should remain the same
as before, money rent as well as corn rent, would continue unaltered; but
if the price of corn, and every other commodity should rise in
consequence of the tax, money rent will also rise in the same proportion.
If the price of corn were £4 per quarter, the rent of No. 1 would be £80,
and that of No. 2, £40; but if corn rose five per cent, or to £4 4s., rent
would also rise five per cent, for twenty quarters of corn would then be
worth £84, and ten quarters £42; so that in every case the landlord will
be unaffected by such a tax. A tax on the profits of stock always leaves
corn rent unaltered, and therefore money rent varies with the price of
corn; but a tax on raw produce, or tithes, never leaves corn rent
unaltered, but generally leaves money rent the same as before. In
another part of this work I have observed, that if a land-tax of the same
money amount, were laid on every kind of land in cultivation, without
any allowance for difference of fertility, it would be very unequal in its
operation, as it would be a profit to the landlord of the more fertile
lands. It would raise the price of corn in proportion to the burden borne
by the farmer of the worst land; but this additional price being obtained
for the greater quantity of produce yielded by the better land, farmers of
such land would be benefited during their leases, and afterwards, the
advantage would go to the landlord in the form of an increase of rent.
The effect of an equal tax on the profits of the farmer is precisely the
same; it raises the money rent of the landlords, if money retains the same
value; but as the profits of all other trades are taxed as well as those of
the farmer, and consequently the prices of all goods, as well as corn, are
raised, the landlord loses as much by the increased money price of the
goods and corn on which his rent is expended, as he gains by the rise of
his rent. If money should rise in value, and all things should, after a tax
on the profits of stock, fall to their former prices, rent also would be the
same as before. The landlord would receive the same money rent, and
would obtain all the commodities on which it was expended at their
former price; so that under all circumstances he would continue
untaxed.(26*)
This circumstance is curious. By taxing the profits of the farmer you
do not burthen him more than if you exempted his profits from the tax,
and the landlord has a decided interest that his tenants' profits should be
taxed, as it is only on that condition that he himself continues really
untaxed.
A tax on the profits of capital would also affect the stockholder if all
commodities were to rise in proportion to the tax, although his dividends
continued untaxed; but if, from the alteration in the value of money, all
commodities were to sink to their former price, the stock-holder would
pay nothing towards the tax; he would purchase all his commodities at
the same price, but would still receive the same money dividend.
If it be agreed, that by taxing the profits of one manufacturer only, the
price of his goods would rise, to put him on an equality with all other
manufacturers; and that by taxing the profits of two manufacturers, the
prices of two descriptions of goods must rise, I do not see how it can be
disputed, that by taxing the profits of all manufacturers, the prices of
all goods would rise, provided the mine which supplied us with money,
were in this country, and continued untaxed. But as money, or the
standard of money, is a commodity imported from abroad, the prices of
all goods could not rise; for such an effect could not take place without
an additional quantity of money,(27*) which could not be obtained in
exchange for dear goods, as was shewn on page 124. If, however, such a
rise could take place, it could not be permanent, for it would have a
powerful influence on foreign trade. In return for commodities
imported, those dear goods could not be exported, and therefore we
should for a time continue to buy, although we ceased to sell; and should
export money, or bullion, till the relative prices of commodities were
nearly the same as before. It appears to me absolutely certain, that a well
regulated tax on profits, would ultimately restore commodities both of
home and foreign manufacture, to the same money price which they
bore before the tax was imposed.
As taxes on raw produce, tithes, taxes on wages, and on the necessaries
of the labourer, will, by raising wages, lower profits, they will all,
though not in an equal degree, be attended with the same effects.
The discovery of machinery, which materially improves home
manufactures, always tends to raise the relative value of money, and
therefore to encourage its importation. All taxation, all increased
impediments, either to the manufacturer, or the grower of commodities,
tend, on the contrary, to lower the relative value of money, and therefore
to encourage its exportation.
Chapter 16
Taxes on Wages
TAXES on wages will raise wages, and therefore will diminish the rate
of the profits of stock. We have already seen that a tax on necessaries
will raise their prices, and will be followed by a rise of wages. The only
difference between a tax on necessaries, and a tax on wages is, that the
former will necessarily be accompanied by a rise in the price of
necessaries, but the latter will not; towards a tax on wages,
consequently, neither the stock-holder, the landlord, nor any other class
but the employers of labour will contribute. A tax on wages is wholly a
tax on profits, a tax on necessaries is partly a tax on profits, and partly a
tax on rich consumers. The ultimate effects which will result from such
taxes then, are precisely the same as those which result from a direct tax
on profits.
'The wages of the inferior classes of workmen,' says Adam Smith, 'I
have endeavoured to shew in the first book, are every where necessarily
regulated by two different circumstances; the demand for labour, and
the ordinary or average price of provisions. The demand for labour,
according as it happens to be either increasing, stationary, or declining,
or to require an increasing, stationary, or declining population,
regulates the subsistence of the labourer, and determines in what degree
it shall be either liberal, moderate, or scanty. The ordinary or average
price of provisions determines the quantity of money which must be
paid to the workman, in order to enable him, one year with another, to
purchase this liberal, moderate, or scanty subsistence. While the
demand for labour, and the price of provisions, therefore, remain the
same, a direct tax upon the wages of labour can have no other effect than
to raise them somewhat higher than the tax.'
To the proposition, as it is here advanced by Dr Smith, Mr Buchanan
offers two objections. First, he denies that the money wages of labour are
regulated by the price of provisions; and secondly, he denies that a tax
on the wages of labour would raise the price of labour. On the first point,
Mr Buchanan's argument is as follows, page 59:, The wages of labour, it
has already been remarked, consist not in money, but in what money
purchases, namely, provisions and other necessaries; and the allowance
of the labourer out of the common stock, will always be in proportion to
the supply. Where provisions are cheap and abundant, his share will be
the larger; and where they are scarce and dear, it will be the less. His
wages will always give him his just share, and they cannot give him
more. It is an opinion, indeed, adopted by Dr Smith and most other
writers, that the money price of labour is regulated by the money price
of provisions, and that when provisions rise in price, wages rise in
proportion. But it is clear that the price of labour has no necessary
connexion with the price of food, since it depends entirely on the supply
of labourers compared with the demand. Besides, it is to be observed,
that the high price of provisions is a certain indication of a deficient
supply, and arises in the natural course of things, for the purpose of
retarding the consumption. A smaller supply of food, shared among the
same number of consumers, will evidently leave a smaller portion to
each, and the labourer must bear his share of the common want. To
distribute this burden equally, and to prevent the labourer from
consuming subsistence so freely as before, the price rises. But wages it
seems must rise along with it, that he may still use the same quantity of
a scarcer commodity; and thus nature is represented as counteracting
her own purposes: first, raising the price of food, to diminish the
consumption, and afterwards, raising wages to give the labourer the
same supply as before.'
In this argument of Mr Buchanan, there appears to me to be a great
mixture of truth and error. Because a high price of provisions is
sometimes occasioned by a deficient supply, Mr Buchanan assumes it as
a certain indication of deficient supply. He attributes to one cause
exclusively, that which may arise from many. It is undoubtedly true,
that in the case of a deficient supply, a smaller quantity will be shared
among the same number of consumers, and a smaller portion will fall to
each. To distribute this privation equally, and to prevent the labourer
from consuming subsistence so freely as before, the price rises. It must,
therefore, be conceded to Mr Buchanan, that any rise in the price of
provisions, occasioned by a deficient supply, will not necessarily raise
the money wages of labour, as the consumption must be retarded; which
can only be effected by diminishing the power of the consumers to
purchase. But, because the price of provisions is raised by a deficient
supply, we are by no means warranted in concluding, as Mr Buchanan
appears to do, that there may not be an abundant supply, with a high
price; not a high price with regard to money only, but with regard to all
other things.
The natural price of commodities, which always ultimately governs
their market price, depends on the facility of production; but the
quantity produced is not in proportion to that facility. Although the
lands, which are now taken into cultivation, are much inferior to the
lands in cultivation three centuries ago, and, therefore, the difficulty of
production is increased, who can entertain any doubt, but that the
quantity produced now, very far exceeds the quantity then produced?
Not only is a high price compatible with an increased supply, but it
rarely fails to accompany it. If, then, in consequence of taxation, or of
difficulty of production, the price of provisions be raised, and the
quantity be not diminished, the money wages of labour will rise; for, as
Mr Buchanan has justly observed, 'The wages of labour consist not in
money, but in what money purchases, namely, provisions and other
necessaries; and the allowance of the labourer out of the common stock,
will always be in proportion to the supply.'
With respect to the second point, whether a tax on the wages of labour
would raise the price of labour, Mr Buchanan says, 'After the labourer
has received the fair recompense of his labour, how can he have recourse
on his employer, for what he is afterwards compelled to pay away in
taxes? There is no law or principle in human affairs to warrant such a
conclusion. After the labourer has received his wages, they are in his
own keeping, and he must, as far as he is able, bear the burthen of
whatever exactions he may ever afterwards be exposed to: for he has
clearly no way of compelling those to reimburse him, who have already
paid him the fair price of his work.' Mr Buchanan has quoted, with
great approbation, the following able passage from Mr Malthus's work
on population, which appears to me completely to answer his objection. '
The price of labour, when left to find its natural level, is a most
important political barometer, expressing the relation between the
supply of provisions, and the demand for them, between the quantity to
be consumed, and the number of consumers; and, taken on the average,
independently of accidental circumstances, it further expresses, clearly,
the wants of the society respecting population; that is, whatever may be
the number of children to a marriage necessary to maintain exactly the
present population, the price of labour will be just sufficient to support
this number, or be above it, or below it, according to the state of the real
funds, for the maintenance of labour, whether stationary, progressive, or
retrograde. Instead, however, of considering it in this light, we consider
it as something which we may raise or depress at pleasure, something
which depends principally on his Majesty's justices of the peace. When
an advance in the price of provisions already expresses that the demand
is too great for the supply, in order to put the labourer in the same
condition as before, we raise the price of labour, that is, we increase the
demand, and are then much surprised, that the price of provisions
continues rising. In this, we act much in the same manner, as if, when
the quicksilver in the common weather glass, stood at stormy, we were to
raise it by some forcible pressure to settled fair, and then be greatly
astonished that it continued raining.'
'The price of labour will express, clearly, the wants of the society
respecting population;, it will be just sufficient to support the
population, which at that time the state of the funds for the maintenance
of labourers, requires. If the labourer's wages were before only adequate
to supply the requisite population, they will, after the tax, be inadequate
to that supply, for he will not have the same funds to expend on his
family. Labour will, therefore, rise, because the demand continues, and
it is only by raising the price, that the supply is not checked.
Nothing is more common, than to see hats or malt rise when taxed;
they rise because the requisite supply would not be afforded if they did
not rise: so with labour, when wages are taxed, its price rises, because if
it did not, the requisite population would not be kept up. Does not Mr
Buchanan allow all that is contended for, when he says, that 'were he
(the labourer) indeed reduced to a bare allowance of necessaries, he
would then suffer no further abatement of his wages, as he could not on
such conditions continue his race?' Suppose the circumstances of the
country to be such, that the lowest labourers are not only called upon to
continue their race, but to increase it; their wages would be regulated
accordingly. Can they multiply in the degree required, if a tax takes
from them a part of their wages, and reduces them to bare necessaries?
It is undoubtedly true, that a taxed commodity will not rise in
proportion to the tax, if the demand for it diminish, and if the quantity
cannot be reduced. If metallic money were in general use, its value
would not for a considerable time be increased by a tax, in proportion to
the amount of the tax, because at a higher price, the demand would be
diminished, and the quantity would not be diminished; and
unquestionably the same cause frequently influences the wages of
labour; the number of labourers cannot be rapidly increased or
diminished in proportion to the increase or diminution of the fund
which is to employ them; but in the case supposed, there is no necessary
diminution of demand for labour, and if diminished, the demand does
not abate in proportion to the tax. Mr Buchanan forgets that the fund
raised by the tax, is employed by Government in maintaining labourers,
unproductive indeed, but still labourers. If labour were not to rise when
wages are taxed, there would be a great increase in the competition for
labour, because the owners of capital, who would have nothing to pay
towards such a tax, would have the same funds for employing labour;
whilst the Government who received the tax would have an additional
fund for the same purpose. Government and the people thus become
competitors, and the consequence of their competition is a rise in the
price of labour. The same number of men only will be employed, but
they will be employed at additional wages. If the tax had been laid at
once on the people of capital, their fund for the maintenance of labour
would have been diminished in the very same degree that the fund of
Government for that purpose had been increased; and therefore there
would have been no rise in wages; for though there would be the same
demand, there would not be the same competition. If when the tax were
levied, Government at once exported the produce of it as a subsidy to a
foreign State, and if therefore these funds were devoted to the
maintenance of foreign, and not of English labourers, such as soldiers,
sailors, &c. &c.; then, indeed, there would be a diminished demand for
labour, and wages might not increase, although they were taxed; but the
same thing would happen if the tax had been laid on consumable
commodities, on the profits of stock, or if in any other manner the same
sum had been raised to supply this subsidy. less labour could be
employed at home. In one case wages are prevented from rising, in the
other they must absolutely fall. But suppose the amount of a tax on
wages were, after being raised on the labourers, paid gratuitously to
their employers, it would increase their money fund for the maintenance
of labour, but it would not increase either commodities or labour. It
would consequently increase the competition amongst the employers of
labour, and the tax would be ultimately attended with no loss either to
master or labourer. The master would pay an increased price for labour;
the addition which the labourer received would be paid as a tax to
government, and would be again returned to the masters. It must,
however, not be forgotten, that the produce of taxes is generally
wastefully expended, they are always obtained at the expense of the
people's comforts and enjoyments, and commonly either diminish
capital or retard its accumulation. By diminishing capital they tend to
diminish the real fund destined for the maintenance of labour. and
therefore to diminish the real demand for it. Taxes then, generally, as far
as they impair the real capital of the country, diminish the demand for
labour, and therefore it is a probable, but not a necessary, nor a peculiar
consequence of a tax on wages, that though wages would rise, they
would not rise by a sum precisely equal to the tax.
Adam Smith, as we have seen, has fully allowed that the effect of a tax
on wages, would be to raise wages by a sum at least equal to the tax, and
would be finally, if not immediately, paid by the employer of labour.
Thus far we fully agree; but we essentially differ in our views of the
subsequent operation of such a tax.
'A direct tax upon the wages of labour, therefore,, says Adam Smith,
'though the labourer might perhaps pay it out of his hand, could not
properly be said to be even advanced by him; at least if the demand for
labour and the average price of provisions remained the same after the
tax as before it. In all such cases, not only the tax but something more
than the tax, would in reality be advanced by the person who
immediately employed him. The final payment would in different cases
fall upon different persons. The rise which such a tax might occasion in
the wages of manufacturing labour, would be advanced by the master
manufacturer, who would be entitled and obliged to charge it with a
profit, upon the price of his goods. The rise which such a tax might
occasion in country labour, would be advanced by the farmer, who, in
order to maintain the same number of labourers as before, would be
obliged to employ a greater capital. In order to get back this greater
capital, together with the ordinary profits of stock, it would be
necessary that he should retain a larger portion, or what comes to the
same thing, the price of a larger portion, of the produce of the land, and
consequently that he should pay less rent to the landlord. The final
payment of this rise of wages would in this case fall upon the landlord,
together with the additional profits of the farmer who had advanced it.
In all cases a direct tax upon the wages of labour must, in the long run,
occasion both a greater reduction in the rent of land, and a greater rise
in the price of manufactured goods, than would have followed, from the
proper assessment of a sum equal to the produce of the tax, partly upon
the rent of land, and partly upon consumable commodities.' Vol. iii. p.
337. In this passage it is asserted that the additional wages paid by
farmers will ultimately fall on the landlords, who will receive a
diminished rent; but that the additional wages paid by manufacturers
will occasion a rise in the price of manufactured goods, and will
therefore fall on the consumers of those commodities.
Now, suppose a society to consist of landlords, manufacturers,
farmers and labourers, the labourers, it is agreed, would be recompensed
for the tax; - but by whom? - who would pay that portion which did not
fall on the landlords? - the manufacturers could pay no part of it; for if
the price of their commodities should rise in proportion to the additional
wages they paid, they would be in a better situation after than before the
tax. If the clothier, the hatter, the shoe-maker, &c., should be each able
to raise the price of their goods 10 per cent, - supposing 10 per cent to
recompense them completely for the additional wages they paid, - if, as
Adam Smith says, 'they would be entitled and obliged to charge the
additional wages with a profit upon the price of their goods,, they could
each consume as much as before of eaCh other's goods, and therefore
they would pay nothing towards the tax. If the clothier paid more for his
hats and shoes, he would receive more for his cloth, and if the hatter
paid more for his cloth and shoes, he would receive more for his hats. All
manufactured commodities then would be bought by them with as much
advantage as before, and inasmuch as corn would not be raised in price
which is Dr Smith's supposition whilst they had an additional sum to
lay out upon its purchase, they would be benefited, and not injured by
such a tax.
If then neither the labourers nor the manufacturers would contribute
towards such a tax; if the farmers would be also recompensed by a fall of
rent, landlords alone must not only bear its whole weight, but they must
also contribute to the increased gains of the manufacturers. To do this,
however, they should consume all the manufactured commodities in the
country, for the additional price charged on the whole mass is little
more than the tax originally imposed on the labourers in manufactures.
Now it will not be disputed that the clothier, the hatter, and all other
manufacturers, are consumers of each other's goods; it will not be
disputed that labourers of all descriptions consume soap, cloth, shoes,
candles, and various other commodities; it is therefore impossible that
the whole weight of these taxes should fall on landlords only.
But if the labourers pay no part of the tax, and yet manufactured
commodities rise in price, wages must rise, not only to compensate them
for the tax, but for the increased price of manufactured necessaries,
which, as far as it affects agricultural labour, will be a new cause for the
fall of rent; and, as far as it affects manufacturing labour, for a further
rise in the price of goods. This rise in the price of goods will again
operate on wages, and the action and re-action first of wages on goods,
and then of goods on wages, will be extended without any assignable
limits. The arguments by which this theory is supported, lead to such
absurd conclusions, that it may at once be seen that the principle is
wholly indefensible.
All the effects which are produced on the profits of stock and the
wages of labour, by a rise of rent and a rise of necessaries, in the natural
progress of society, and increasing difficulty of production, will
equally follow from a rise of wages. in consequence of taxation; and,
therefore, the enjoyments of the labourer, as well as those of his
employers, will be curtailed by the tax; and not by this tax particularly,
but by every other which should raise an equal amount, as they would
all tend to diminish the fund destined for the maintenance of labour.
The error of Adam Smith proceeds in the first place from supposing,
that all taxes paid by the farmer must necessarily fall on the landlord, in
the shape of a deduction from rent. On this subject, I have explained
myself most fully, and I trust that it has been shewn, to the satisfaction
of the reader, that since much capital is employed on the land which
pays no rent, and since it is the result obtained by this capital which
regulates the price of raw produce, no deduction can be made from rent;
and, consequently, either no remuneration will be made to the farmer
for a tax on wages, or if made, it must be made by an addition to the
price of raw produce.
If taxes press unequally on the farmer, he will be enabled to raise the
price of raw produce, to place himself on a level with those who carry on
other trades; but a tax on wages, which would not affect him more than
it would affect any other trade, could not be removed or compensated by
a high price of raw produce; for the same reason which should induce
him to raise the price of corn, namely, to remunerate himself for the tax,
would induce the clothier to raise the price of cloth, the shoemaker,
hatter, and upholsterer, to raise the price of shoes, hats, and furniture.
If they could all raise the price of their goods, so as to remunerate
themselves, with a profit, for the tax; as they are all consumers of each
other's commodities, it is obvious that the tax could never be paid; for
who would be the contributors if all were compensated?
I hope, then, that I have succeeded in shewing, that any tax which
shall have the effect of raising wages, will be paid by a diminution of
profits, and, therefore, that a tax on wages is in fact a tax on profits.
This principle of the division of the produce of labour and capital
between wages and profits, which I have attempted to establish, appears
to me so certain, that excepting in the immediate effects, I should think
it of little importance whether the profits of stock, or the wages of
labour, were taxed. By taxing the profits of stock, you would probably
alter the rate at which the funds for the maintenance of labour increase,
and wages would be disproportioned to the state of that fund, by being
too high. By taxing wages, the reward paid to the labourer would also be
disproportioned to the state of that fund, by being too low. In the one
case by a fall, and in the other by a rise in money wages, the natural
equilibrium between profits and wages would be restored. A tax on
wages, then, does not fall on the landlord, but it falls on the profits of
stock: it does not 'entitle and oblige the master manufacturer to charge
it with a profit on the prices of his goods,' for he will be unable to
increase their price, and therefore he must himself wholly and without
compensation pay such a tax.(28*)
If the effect of taxes on wages be such as I have described, they do not
merit the censure cast upon them by Dr Smith. He observes of such
taxes, 'These, and some other taxes of the same kind, by raising the price
of labour, are said to have ruined the greater part of the manufactures of
Holland. Similar taxes, though not quite so heavy, take place in the
Milanese, in the states of Genoa, in the duchy of Modena, in the duchies
of Parma, Placentia, and Guastalla, and in the ecclesiastical states. A
French author of some note, has proposed to reform the finances of his
country, by substituting in the room of other taxes, this most ruinous of
all taxes. "There is nothing so absurd," says Cicero, "which has not
sometimes been asserted by some philosophers.", And in another place
he says: 'taxes upon necessaries, by raising the wages of labour,
necessarily tend to raise the price of all manufactures, and consequently
to diminish the extent of their sale and consumption.' They would not
merit this censure, even if Dr Smith's principle were correct, that such
taxes would enhance the prices of manufactured commodities; for such
an effect could be only temporary, and would subject us to no
disadvantage in our foreign trade. If any cause should raise the price of
a few manufactured commodities, it would prevent or check their
exportation; but if the same cause operated generally on all, the effect
would be merely nominal, and would neither interfere with their
relative value, nor in any degree diminish the stimulus to a trade of
barter, which all commerce, both foreign and domestic, really is.
I have already attempted to shew, that when any cause raises the
prices of all commodities, the effects are nearly similar to a fall in the
value of money. If money falls in value, all commodities rise in price;
and if the effect is confined to one country, it will affect its foreign
commerce in the same way as a high price of commodities caused by
general taxation; and, therefore, in examining the effects of a low value
of money confined to one country, we are also examining the effects of a
high price of commodities confined to one country. Indeed, Adam
Smith was fully aware of the resemblance between these two cases, and
consistently maintained that the low value of money, or, as he calls it, of
silver in Spain, in consequence of the prohibition against its
exportation, was very highly prejudicial to the manufactures and
foreign commerce of Spain. 'But that degradation in the value of silver,
which being the effect either of the peculiar situation, or of the political
institutions of a particular country, takes place only in that country, is a
matter of very great consequence, which, far from tending to make any
body really richer, tends to make every body really poorer. The rise in
the money price of all commodities, which is in this case peculiar to that
country, tends to discourage more or less every sort of industry which is
carried on within it, and to enable foreign nations, by furnishing almost
all sorts of goods for a smaller quantity of silver than its own workmen
can afford to do, to undersell them not only in the foreign, but even in
the home market.' Vol. ii. page 278.
One, and I think the only one, of the disadvantages of a low value of
silver in a country, proceeding from a forced abundance, has been ably
explained by Dr Smith. If the trade in gold and silver were free, 'the
gold and silver which would go abroad, would not go abroad for
nothing, but would bring back an equal value of goods of some kind or
another. Those goods, too, would not be all matters of mere luxury and
expense, to be consumed by idle people, who produce nothing in return
for their consumption. As the real wealth and revenue of idle people
would not be augmented by this extraordinary exportation of gold and
silver, so would neither their consumption be augmented by it. Those
goods would, probably the greater part of them, and certainly some part
of them, consist in materials, tools, and provisions, for the employment
and maintenance of industrious people, who would reproduce with a
profit, the full value of their consumption. A part of the dead stock of
the society would thus be turned into active stock, and would put into
motion a greater quantity of industry than had been employed before.'
By not allowing a free trade in the precious metals when the prices of
commodities are raised, either by taxation, or by the influx of the
precious metals, you prevent a part of the dead stock of the society from
being turned into active stock - you prevent a greater quantity of
industry from being employed. But this is the whole amount of the evil;
an evil never felt by those countries where the exportation of silver is
either allowed or connived at.
The exchanges between countries are at par only, whilst they have
precisely that quantity of currency which in the actual situation of
things they should have to carry on the circulation of their commodities.
If the trade in the precious metals were perfectly free, and money could
be exported without any expense whatever, the exchanges could be no
otherwise in every country than at par. If the trade in the precious
metals were perfectly free, if they were generally used in circulation,
even with the expenses of transporting them, the exchange could never
in any of them deviate more from par, than by these expenses. These
principles, I believe, are now no where disputed. If a country used paper
money, not exchangeable for specie, and, therefore, not regulated by
any fixed standard, the exchanges in that country might deviate from
par, in the same proportion as its money might be multiplied beyond
that quantity which would have been allotted to it by general
commerce, if the trade in money had been free, and the precious metals
had been used, either for money, or for the standard of money.
If by the general operations of commerce, 10 millions of pounds
sterling, of a known weight and fineness of bullion, should be the
portion of England, and 10 millions of paper pounds were substituted,
no effect would be produced on the exchange; but if by the abuse of the
power of issuing paper money, 11 millions of pounds should be
employed in the circulation, the exchange would be 9 per cent against
England; if 12 millions were employed, the exchange would be 16 per
cent; and if 20 millions, the exchange would be 50 per cent against
England. To produce this effect it is not, however, necessary that paper
money should be employed: any cause which retains in circulation a
greater quantity of pounds than would have circulated, if commerce
had been free, and the precious metals of a known weight and fineness
had been used, either for money, or for the standard of money, would
exactly produce the same effects. Suppose that by clipping the money,
each pound did not contain the quantity of gold or silver which by law
it should contain, a greater number of such pounds might be employed
in the circulation, than if they were not clipped. If from each pound one
tenth were taken away, 11 millions of such pounds might be used instead
of 10; if two tenths were taken away, 12 millions might be employed;
and if one half were taken away, 20 millions might not be found
superfluous. If the latter sum were used instead of 10 millions, every
commodity in England would be raised to double its former price, and
the exchange would be 50 per cent against England; but this would
occasion no disturbance in foreign commerce, nor discourage the
manufacture of any one commodity. If, for example, cloth rose in
England from £20 to £40 per piece, we should just as freely export it
after as before the rise, for a compensation of 50 per cent would be made
to the foreign purchaser in the exchange; so that with £20 of his money,
he could purchase a bill which would enable him to pay a debt of £40 in
England. In the same manner if he exported a commodity which cost
£20 at home, and which sold in England for £40 he would only receive
£20, for £40 in England would only purchase a bill for £20 on a foreign
country. The same effects would follow from whatever cause 20 millions
could be forced to perform the business of circulation in England, if 10
millions only were necessary. If so absurd a law, as the prohibition of
the exportation of the precious metals, could be enforced, and the
consequence of such prohibition were to force 1 millions of good
pounds, fresh from the mint, instead of 10, into circulation, the
exchange would be 9 per cent against England; if 12 millions, 16 per
cent; and if 20 millions, 50 per cent against England. But no
discouragement would be given to the manufactures of England; if
home commodities sold at a high price in England, so would foreign
commodities; and whether they were high or low would be of little
importance to the foreign exporter and importer, whilst he would, on the
one hand, be obliged to allow a compensation in the exchange when his
commodities sold at a dear rate, and would receive the same
compensation, when he was obliged to purchase English commodities at
a high price. The sole disadvantage, then, which could happen to a
country from retaining, by prohibitory laws, a greater quantity of gold
and silver in circulation than would otherwise remain there, would be
the loss which it would sustain from employing a portion of its capital
unproductively, instead of employing it productively. In the form of
money this capital is productive of no profit; in the form of materials,
machinery, and food, for which it might be exchanged, it would be
productive of revenue, and would add to the wealth and the resources of
the State. Thus then, I hope, I have satisfactorily proved, that a
comparatively low price of the precious metals, in consequence of
taxation, or, in other words, a generally high price of commodities,
would be of no disadvantage to a State, as a part of the metals would be
exported, which, by raising their value, would again lower the prices of
commodities. And further, that if they were not exported, if by
prohibitory laws they could be retained in a country, the effect on the
exchange would counterbalance the effect of high prices. If, then, taxes
on necessaries and on wages would not raise the prices of all
commodities on which labour was expended, they cannot be condemned
on such grounds; and moreover, even if the opinion given by Adam
Smith, that they would have such an effect were well founded, they
would be in no degree injurious on that account. They would be
objectionable for no other reason than those which might be justly urged
against taxes of any other description.
The landlords, as such, would be exempted from the burden of the tax;
but as far as they directly employed labour in the expenditure of their
revenues, by supporting gardeners, menial servants, &c. they would be
subject to its operation.
It is undoubtedly true, that 'taxes upon luxuries have no tendency to
raise the price of any other commodities, except that of the commodities
taxed;, but it is not true, 'that taxes upon necessaries, by raising the
wages of labour, necessarily tend to raise the price of all manufactures.'
It is true, that 'taxes upon luxuries are finally paid by the consumers of
the commodities taxed, without any retribution. They fall indifferently
upon every species of revenue, the wages of labour, the profits of stock,
and the rent of land;, but it is not true, 'that taxes upon necessaries, so
far as they affect the labouring poor, are finally paid partly by
landlords in the diminished rent of their lands, and partly by rich
consumers, whether landlords or others, in the advanced price of
manufactured goods;' for, so far as these taxes affect the labouring poor,
they will be almost wholly paid by the diminished profits of stock, a
small part only being paid by the labourers themselves in the
diminished demand for labour, which taxation of every kind has a
tendency to produce.
It is from Dr Smith's erroneous view of the effect of those taxes, that
he has been led to the conclusion, that 'the middling and superior ranks
of people, if they understood their own interest, ought always to oppose
all taxes upon the necessaries of life, as well as all direct taxes upon the
wages of labour.' This conclusion follows from his reasoning, 'that the
final payment of both one and the other falls altogether upon
themselves, and always with a considerable overcharge. They fall
heaviest upon the landlords,(29*) who always pay in a double capacity;
in that of landlords, by the reduction of their rent, and in that of rich
consumers, by the increase of their expense. The observation of Sir
Matthew Decker, that certain taxes are, in the price of certain goods,
sometimes repeated and accumulated four or five times, is perfectly just
with regard to taxes upon the necessaries of life. In the price of leather,
for example, you must pay, not only for the tax upon the leather of your
own shoes, but for a part of that upon those of the shoemaker and the
tanner. You must pay, too, for the tax upon the salt, upon the soap, and
upon the candles, which those workmen consume while employed in
your service, and for the tax upon the leather, which the saltmaker, the
soap-maker, and the candle-maker consume, while employed in their
service.'
Now as Dr Smith does not contend that the tanner, the saltmaker, the
soap-maker, and the candle-maker, will either of them be benefited by
the tax on leather, salt, soap, and candles; and as it is certain, that
Government will receive no more than the tax imposed, it is impossible
to conceive, that more can be paid by the public upon whomsoever the
tax may fall. The rich consumers may, and indeed will, pay for the poor
consumer, but they will pay no more than the whole amount of the tax;
and it is not in the nature of things, that 'the tax should be repeated and
accumulated four or five times.'
A system of taxation may be defective; more may be raised from the
people, than what finds its way into the coffers of the State, as a part, in
consequence of its effect on prices, may possibly be received by those
who are benefited by the peculiar mode in which taxes are laid. Such
taxes are pernicious, and should not be encouraged; for it may be laid
down as a principle, that when taxes operate justly, they conform to the
first of Dr Smith's maxims, and raise from the people as little as possible
beyond what enters into the public treasury of the State. M. Say says,
'others offer plans of finance, and propose means for filling the coffers
of the sovereign, without any charge to his subjects. But unless a plan of
finance is of the nature of a commercial undertaking, it cannot give to
Government more than it takes away, either from individuals or from
Government itself, under some other form. Something cannot be made
out of nothing, by the stroke of a wand. In whatever way an operation
may be disguised, whatever forms we may constrain a value to take,
whatever metamorphosis we may make it undergo, we can only have a
value by creating it, or by taking it from others. The very best of all
plans of finance is to spend little, and the best of all taxes is, that which
is the least in amount.'
Dr Smith uniformly, and I think justly, contends, that the labouring
classes cannot materially contribute to the burdens of the State. A tax on
necessaries, or on wages, will therefore be shifted from the poor to the
rich: if then the meaning of Dr Smith is, 'that certain taxes are in the
price of certain goods sometimes repeated, and accumulated four or five
times,' for the purpose only of accomplishing this end, namely, the
transference of the tax from the poor to the rich, they cannot be liable to
censure on that account.
Suppose the just share of the taxes of a rich consumer to be £100 and
that he would pay it directly, if the tax were laid on income, on wine, or
no any other luxury; he would injury if by the taxation of necessaries, he
should be only called upon for the payment of £25, as far as his own
consumption of necessaries, and that of his family was concerned, but
should be required to repeat this tax three times, by paying an
additional price for other commodities to remunerate the labourers, or
their employers, for the tax which they have been called upon to
advance. Even in that case the reasoning is inconclusive: for if there be
no more paid than what is required by Government; of what importance
can it be to the rich consumer, whether he pay the tax directly, by
paying an increased price for an object of luxury, or indirectly, by
paying an increased price for the necessaries and other commodities he
consumes? If more be not paid by the people, than what is received by
Government, the rich consumer will only pay his equitable share; if
more is paid, Adam Smith should have stated by whom it is received,
but his whole argument is founded in error, for the prices of
commodities would not be raised by such taxes.
M. Say does not appear to me to have consistently adhered to the
obvious principle, which I have quoted from his able work; for in the
next page, speaking of taxation, he says, 'When it is pushed too far, it
produces this lamentable effect, it deprives the contributor of a portion
of his riches, without enriching the State. This is what we may
comprehend, if we consider that every man's power of consuming,
whether productively or not, is limited by his income. He cannot then be
deprived of a part of his income, without being obliged proportionally
to reduce his consumption. Hence arises a diminution of demand for
those goods, which he no longer consumes, and particularly for those on
which the tax is imposed. From this diminution of demand, there results
a diminution of production, and consequently of taxable commodities.
The contributor then will lose a portion of his enjoyments; the producer
a portion of his profits; and the treasury, a portion of its receipts.'
M. Say instances the tax on salt in France, previous to the revolution;
which, he says, diminished the production of salt by one half. If,
however, less salt was consumed, less capital was employed in
producing it; and, therefore, though the producer would obtain less
profit on the production of salt, he would obtain more on the production
of other things. If a tax, however burdensome it may be, falls on
revenue, and not on capital, it does not diminish demand, it only alters
the nature of it. It enables Government to consume as much of the
produce of the land and labour of the country, as was before consumed
by the individuals who contribute to the tax, an evil sufficiently great
without overcharging it. If my income is £1,000 per annum, and I am
called upon for £100 per annum for a tax, I shall only be able to demand
nine tenths of the quantity of goods, which I before consumed, but I
enable Government to demand the other tenth. If the commodity taxed
be corn, it is not necessary that my demand for corn should diminish, as
I may prefer to pay £100 per annum more for my corn, and to the same
amount abate in my demand for wine, furniture, or any other
luxury.(30*) Less capital will consequently be employed in the wine or
upholstery trade, but more will be employed in manufacturing those
commodities, on which the taxes levied by Government will be
expended.
M. Say says that M. Turgot, by reducing the market dues on fish (les
droits d'entrée et de halle sur la marée) in Paris one half, did not
diminish the amount of their produce, and that consequently, the
consumption of fish must have doubled. He infers from this, that the
profits of the fisherman and those engaged in the trade, must also have
doubled, and that the income of the country must have increased, by the
whole amount of these increased profits; and by giving a stimulus to
accumulation, must have increased the resources of the State.(31*)
Without calling in question the policy, which dictated this alteration
of the tax, I have my doubts, whether it gave any great stimulus to
accumulation. If the profits of the fisherman and others engaged in the
trade, were doubled in consequence of more fish being consumed,
capital and labour must have been withdrawn from other occupations to
engage them in this particular trade. But in those occupations capital
and labour were productive of profits, which must have been given up
when they were withdrawn. The ability of the country to accumulate,
was only increased by the difference between the profits obtained in the
business in which the capital was newly engaged, and those obtained in
that from which it was withdrawn.
Whether taxes be taken from revenue or capital, they diminish the
taxable commodities of the State. If I cease to expend £100 on wine,
because by paying a tax of that amount I have enabled Government to
expend £100 instead of expending it myself, one hundred pounds worth
of goods are necessarily withdrawn from the list of taxable commodities.
If the revenue of the individuals of a country be 10 millions, they will
have at least 10 millions worth of taxable commodities. If by taxing
some, one million be transferred to the disposal of Government, their
revenue will still be nominally 10 millions, but they will remain with
only nine millions worth of taxable commodities. There are no
circumstances under which taxation does not abridge the enjoyments of
those on whom the taxes ultimately fall, and no means by which those
enjoyments can again be extended, but the accumulation of new
revenue.
Taxation can never be so equally applied, as to operate in the same
proportion on the value of all commodities, and still to preserve them at
the same relative value. It frequently operates very differently from the
intention of the legislature, by its indirect effects. We have already seen,
that the effect of a direct tax on corn and raw produce, is, if money be
also produced in the country, to raise the price of all commodities, in
proportion as raw produce enters into their composition, and thereby to
destroy the natural relation which previously existed between them.
Another indirect effect is, that it raises wages, and lowers the rate of
profits; and we have also seen, in another part of this work, that the
effect of a rise of wages, and a fall of profits, is to lower the money
prices of those commodities which are produced in a greater degree by
the employment of fixed capital.
That a commodity, when taxed, can no longer be so profitably
exported, is so well understood, that a drawback is frequently allowed
on its exportation, and a duty laid on its importation. If these drawbacks
and duties be accurately laid, not only on the commodities themselves,
but on all which they may indirectly affect, then, indeed, there will be
no disturbance in the value of the precious metals. Since we could as
readily export a commodity after being taxed as before, and since no
peculiar facility would be given to importation, the precious metals
would not, more than before, enter into the list of exportable
commodities.
Of all commodities, none are perhaps so proper for taxation, as those
which, either by the aid of nature or art, are produced with peculiar
facility. With respect to foreign countries, such commodities may be
classed under the head of those which are not regulated in their price by
the quantity of labour bestowed, but rather by the caprice, the tastes,
and the power of the purchasers. If England had more productive tin
mines than other countries, or if, from superior machinery or fuel, she
had peculiar facilities in manufacturing cotton goods, the prices of tin,
and of cotton goods, would still in England be regulated by the
comparative quantity of labour and capital required to produce them,
and the competition of our merchants would make them very little
dearer to the foreign consumer. Our advantage in the production of these
commodities might be so decided, that probably they could bear a very
great additional price in the foreign market, without very materially
diminishing their consumption. This price they never could attain,
whilst competition was free at home, by any other means but by a tax on
their exportation. This tax would fall wholly on foreign consumers, and
part of the expenses of the Government of England would be defrayed,
by a tax on the land and labour of other countries. The tax on tea, which
at present is paid by the people of England, and goes to aid the expenses
of the Government of England, might, if laid in China, on the
exportation of the tea, be diverted to the payment of the expenses of the
Government of China.
Taxes on luxuries have some advantage over taxes on necessaries. They
are generally paid from income, and therefore do not diminish the
productive capital of the country. If wine were much raised in price in
consequence of taxation, it is probable that a man would rather forego
the enjoyments of wine, than make any important encroachments on his
capital, to be enabled to purchase it. They are so identified with price,
that the contributor is hardly aware that he is paying a tax. But they
have also their disadvantages. First, they never reach capital, and on
some extraordinary occasions it may be expedient that even capital
should contribute towards the public exigencies; and secondly, there is
no certainty as to the amount of the tax, for it may not reach even
income. A man intent on saving, will exempt himself from a tax on
wine, by giving up the use of it. The income of the country may be
undiminished, and yet the State may be unable to raise a shilling by the
tax.
Whatever habit has rendered delightful, will be relinquished with
reluctance, and will continue to be consumed notwithstanding a very
heavy tax; but this reluctance has its limits, and experience every day
demonstrates that an increase in the nominal amount of taxation, often
diminishes the produce. One man will continue to drink the same
quantity of wine, though the price of every bottle should be raised three
shillings, who would yet relinquish the use of wine rather than pay four.
Another will be content to pay four, yet refuse to pay five shillings. The
same may be said of other taxes on luxuries: many would pay a tax of £5
for the enjoyment which a horse affords, who would not pay £10 or £20.
It is not because they cannot pay more, that they give up the use of wine
and of horses, but because they will not pay more. Every man has some
standard in his own mind by which he estimates the value of his
enjoyments, but that standard is as various as the human character. A
country whose financial situation has become extremely artificial by
the mischievous policy of accumulating a large national debt, and a
consequently enormous taxation, is particularly exposed to the
inconvenience attendant on this mode of raising taxes. After visiting
with a tax the whole round of luxuries; after laying horses, carriages,
wine, servants, and all the other enjoyments of the rich, under
contribution; a minister is induced to have recourse to more direct taxes,
such as income and property taxes, neglecting the golden maxim of M.
Say, 'that the very best of all plans of finance is to spend little, and the
best of all taxes is that which is the least in amount.'
Chapter 17
Taxes on Other Commodities than Raw Produce
ON the same principle that a tax on corn would raise the price of corn, a
tax on any other commodity would raise the price of that commodity. If
the commodity did not rise by a sum equal to the tax, it would not give
the same profit to the producer which he had before, and he would
remove his capital to some other employment.
The taxing of all commodities, whether they be necessaries or
luxuries, will, while money remains at an unaltered value, raise their
prices by a sum at least equal to the tax.(32*) A tax on the manufactured
necessaries of the labourer would have the same effect on wages as a tax
on corn, which differs from other necessaries only by being the first and
most important on the list; and it would produce precisely the same
effects on the profits of stock and foreign trade. But a tax on luxuries
would have no other effect than to raise their price. It would fall wholly
on the consumer, and could neither increase wages nor lower profits.
Taxes which are levied on a country for the purpose of supporting war,
or for the ordinary expenses of the State, and which are chiefly devoted
to the support of unproductive labourers, are taken from the productive
industry of the country; and every saving which can be made from such
expenses will be generally added to the income, if not to the capital of
the contributors. When, for the expenses of a year's war, twenty millions
are raised by means of a loan, it is the twenty millions which are
withdrawn from the productive capital of the nation. The million per
annum which is raised by taxes to pay the interest of this loan, is merely
transferred from those who pay it to those who receive it, from the
contributor to the tax, to the national creditor. The real expense is the
twenty millions, and not the interest which must be paid for it.(33*)
Whether the interest be or be not paid, the country will neither be richer
nor poorer. Government might at once have required the twenty millions
in the shape of taxes; in which case it would not have been necessary to
raise annual taxes to the amount of a million. This, however, would not
have changed the nature of the transaction. An individual instead of
being called upon to pay £100 per annum, might have been obliged to
pay £2,000 once for all. It might also have suited his convenience rather
to borrow this £2,000, and to pay £100 per annum for interest to the
lender, than to spare the larger sum from his own funds. In one case it is
a private transaction between A and B, in the other Government
guarantees to B the payment of interest to be equally paid by A. If the
transaction had been of a private nature, no public record would be kept
of it, and it would be a matter of comparative indifference to the
country whether A faithfully performed his contract to B, or unjustly
retained the £100 per annum in his own possession. The country would
have a general interest in the faithful performance of a contract, but
with respect to the national wealth, it would have no other interest than
whether A or B would make this £100 most productive; but on this
question it would neither have the right nor the ability to decide. It
might be possible, that if A retained it for his own use, he might
squander it unprofitably, and if it were paid to B, he might add it to his
capital, and employ it productively. And the converse would also be
possible; B might squander it, and A might employ it productively.
With a view to wealth only, it might be equally or more desirable that A
should or should not pay it; but the claims of justice and good faith, a
greater utility, are not to be compelled to yield to those of a less; and
accordingly, if the State were called upon to interfere, the courts of
justice would oblige A to perform his contract. A debt guaranteed by the
nation, differs in no respect from the above transaction. Justice and
good faith demand that the interest of the national debt should continue
to be paid, and that those who have advanced their capitals for the
general benefit, should not be required to forego their equitable claims,
on the plea of expediency.
But independently of this consideration, it is by no means certain,
that political utility would gain any thing by the sacrifice of political
integrity; it does by no means follow, that the party exonerated from the
payment of the interest of the national debt would employ it more
productively than those to whom indisputably it is due. By cancelling
the national debt, one man's income might be raised from £1,000 to
£1,500, but another man's would be lowered from £1,500 to £1,000.
These two men's incomes now amount to £2,500, they would amount to
no more then. If it be the object of Government to raise taxes, there
would be precisely the same taxable capital and income in one case, as
in the other. It is not, then, by the payment of the interest on the national
debt, that a country is distressed, nor is it by the exoneration from
payment that it can be relieved. It is only by saving from income, and
retrenching in expenditure, that the national capital can be increased;
and neither the income would be increased, nor the expenditure
diminished by the annihilation of the national debt. It is by the profuse
expenditure of Government, and of individuals, and by loans, that the
country is impoverished; every measure, therefore, which is calculated
to promote public and private economy, will relieve the public distress;
but it is error and delusion to suppose, that a real national difficulty can
be removed, by shifting it from the shoulders of one class of the
community, who justly ought to bear it, to the shoulders of another
class, who, upon every principle of equity, ought to bear no more than
their share.
From what I have said, it must not be inferred that I consider the
system of borrowing as the best calculated to defray the extraordinary
expenses of the State. It is a system which tends to make us less thrifty -
to blind us to our real situation. If the expenses of a war be 40 millions
per annum, and the share which a man would have to contribute towards
that annual expense were £100, he would endeavour, on being at once
called upon for his portion, to save speedily the £10O from his income.
By the system of loans, he is called upon to pay only the interest of this
£100, or £5 per annum, and considers that he does enough by saving this
£5 from his expenditure, and then deludes himself with the belief, that
he is as rich as before. The whole nation, by reasoning and acting in this
manner, save only the interest of 40 millions, or two millions; and thus,
not only lose all the interest or profit which 40 millions of capital,
employed productively, would afford, but also 38 millions, the
difference between their savings and expenditure. If, as I before
observed, each man had to make his own loan, and contribute his full
proportion to the exigencies of the State, as soon as the war ceased,
taxation would cease, and we should immediately fall into a natural
state of prices. Out of his private funds, A might have to pay to B
interest for the money he borrowed of him during the war, to enable him
to pay his quota of the expense; but with this the nation would have no
concern.
A country which has accumulated a large debt, is placed in a most
artificial situation; and although the amount of taxes, and the increased
price of labour, may not, and I believe does not, place it under any other
disadvantage with respect to foreign countries, except the unavoidable
one of paying those taxes, yet it becomes the interest of every
contributor to withdraw his shoulder from the burthen, and to shift this
payment from himself to another; and the temptation to remove himself
and his capital to another country, where he will be exempted from such
burthens, becomes at last irresistible, and overcomes the natural
reluctance which every man feels to quit the place of his birth, and the
scene of his early associations. A country which has involved itself in
the difficulties attending this artificial system, would act wisely by
ransoming itself from them, at the sacrifice of any portion of its
property which might be necessary to redeem its debt. That which is
wise in an individual, is wise also in a nation. A man who has £10,000,
paying him an income of £500, out of which he has to pay £100 per
annum towards the interest of the debt, is really worth only £8,000, and
would be equally rich, whether he continued to pay £100 per annum, or
at once, and for only once, sacrificed £2,000. But where, it is asked,
would be the purchaser of the property which he must sell to obtain this
£2,000? the answer is plain: the national creditor, who is to receive this
£2,000, will want an investment for his money, and will be disposed
either to lend it to the landholder, or manufacturer, or to purchase from
them a part of the property of which they have to dispose. To such a
payment the stockholders themselves would largely contribute. This
scheme has been often recommended, but we have, I fear, neither
wisdom enough, nor virtue enough, to adopt it. It must, however, be
admitted, that during peace, our unceasing efforts should be directed
towards paying off that part of the debt which has been contracted
during war; and that no temptation of relief, no desire of escape from
present, and I hope temporary distresses, should induce us to relax in our
attention to that great object.
No sinking fund can be efficient for the purpose of diminishing the
debt, if it be not derived from the excess of the public revenue over the
public expenditure. It is to be regretted, that the sinking fund in this
country is only such in name; for there is no excess of revenue above
expenditure. It ought, by economy, to be made what it is professed to be,
a really efficient fund for the payment of the debt. If, on the breaking
out of any future war, we shall not have very considerably reduced our
debt, one of two things must happen, either the whole expenses of that
war must be defrayed by taxes raised from year to year, or we must, at
the end of that war, if not before, submit to a national bankruptcy; not
that we shall be unable to bear any large additions to the debt; it would
be difficult to set limits to the powers of a great nation; but assuredly
there are limits to the price, which in the form of perpetual taxation,
individuals will submit to pay for the privilege merely of living in their
native country.(34*)
When a commodity is at a monopoly price, it is at the very highest
price at which the consumers are willing to purchase it. Commodities
are only at a monopoly price, when by no possible device their quantity
can be augmented; and when therefore, the competition is wholly on one
side - amongst the buyers. The monopoly price of one period may be
much lower or higher than the monopoly price of another, because the
competition amongst the purchasers must depend on their wealth, and
their tastes and caprices. Those peculiar wines, which are produced in
very limited quantity, and those works of art, which from their
excellence or rarity, have acquired a fanciful value, will be exchanged
for a very different quantity of the produce of ordinary labour,
according as the society is rich or poor, as it possesses an abundance or
scarcity of such produce, or as it may be in a rude or polished state. The
exchangeable value therefore of a commodity which is at a monopoly
price, is nowhere regulated by the cost of production.
Raw produce is not at a monopoly price, because the market price of
barley and wheat is as much regulated by their cost of production, as the
market price of cloth and linen. The only difference is this, that one
portion of the capital employed in agriculture regulates the price of
corn, namely, that portion which pays no rent; whereas, in the
production of manufactured commodities, every portion of capital is
employed with the same results; and as no portion pays rent, every
portion is equally a regulator of price.. corn, and other raw produce, can
be augmented, too, in quantity, by the employment of more capital on
the land, and therefore they are not at a monopoly price. There is
competition among the sellers, as well as amongst the buyers. This is not
the case in the production of those rare wines, and those valuable
specimens of art, of which we have been speaking; their quantity cannot
be increased, and their price is limited only by the extent of the power
and will of the purchasers. The rent of these vineyards may be raised
beyond any moderately assignable limits, because no other land being
able to produce such wines, none can be brought into competition with
them.
The corn and raw produce of a country may, indeed, for a time sell at
a monopoly price; but they can do so permanently only when no more
capital can be profitably employed on the lands, and when, therefore,
their produce cannot be increased. At such time, every portion of land in
cultivation, and every portion of capital employed on the land will
yield a rent, differing, indeed, in proportion to the difference in the
return. At such a time too, any tax which may be imposed on the farmer,
will fall on rent, and not on the consumer. He cannot raise the price of
his corn, because, by the supposition, it is already at the highest price at
which the purchasers will or can buy it. He will not be satisfied with a
lower rate of profits, than that obtained by other capitalists, and,
therefore, his only alternative will be to obtain a reduction of rent, or to
quit his employment.
Mr Buchanan considers corn and raw produce as at a monopoly price,
because they yield a rent: all commodities which yield a rent, he
supposes must be at a monopoly price; and thence he infers, that all
taxes on raw produce would fall on the landlord, and not on the
consumer. 'The price of corn,' he says, 'which always affords a rent,
being in no respect influenced by the expenses of its production, those
expenses must be paid out of the rent; and when they rise or fall,
therefore, the consequence is not a higher or lower price, but a higher or
a lower rent. In this view, all taxes on farm servants, horses, or the
implements of agriculture, are in reality land-taxes; the burden falling
on the farmer during the currency of his lease, and on the landlord,
when the lease comes to be renewed. In like manner all those improved
implements of husbandry which save expense to the farmer, such as
machines for threshing and reaping, whatever gives him easier access to
the market, such as good roads, canals and bridges, though they lessen
the original cost of corn, do not lessen its market price. Whatever is
saved by those improvements, therefore, belongs to the landlord as part
of his rent.'
It is evident that if we yield to Mr Buchanan the basis on which his
argument is built, namely, that the price of corn always yields a rent, all
the consequences which he contends for would follow of course. Taxes
on the farmer would then fall not on the consumer but on rent; and all
improvements in husbandry would increase rent: but I hope I have made
it sufficiently clear, that until a country is cultivated in every part, and
up to the highest degree, there is always a portion of capital employed
on the land which yields no rent, and that it is this portion of capital, the
result of which, as in manufactures, is divided between profits and
wages that regulates the price of corn. The price of corn, then, which
does not afford a rent, being influenced by the expenses of its
production, those expenses cannot be paid out of rent. The consequence
therefore of those expenses increasing, is a higher price, and not a lower
rent.(35*)
It is remarkable that both Adam Smith and Mr Buchanan, who
entirely agree that taxes on raw produce, a land-tax, and tithes, all fall
on the rent of land, and not on the consumers of raw produce, should
nevertheless admit that taxes on malt would fall on the consumer of
beer, and not on the rent of the landlord. Adam Smith's argument is so
able a statement of the view which I take of the subject of the tax on
malt, and every other tax on raw produce, that I cannot refrain from
offering it to the attention of the reader.
'The rent and profits of barley land must always be nearly equal to
those of other equally fertile, and equally well cultivated land. If they
were less, some part of the barley land would soon be turned to some
other purpose; and if they were greater, more land would soon be turned
to the raising of barley. When the ordinary price of any particular
produce of land is at what may be called a monopoly price, a tax upon it
necessarily reduces the rent and profit(36*) of the land which grows it.
A tax upon the produce of those precious vineyards, of which the wine
falls so much short of the effectual demand, that its price is always
above the natural proportion to that of other equally fertile, and equally
well cultivated land, would necessarily reduce the rent and profit of
those vineyards. The price of the wines being already the highest that
could be got for the quantity commonly sent to market, it could not be
raised higher without diminishing that quantity; and the quantity could
not be diminished without still greater loss, because the lands could not
be turned to any other equally valuable produce. The whole weight of
the tax, therefore, would fall upon the rent and profit; properly upon the
rent of the vineyard.' 'But the ordinary price of barley has never been a
monopoly price; and the rent and profit of barley land have never been
above their natural proportion to those of other equally fertile and
equally well cultivated land. The different taxes, which have been
imposed upon malt, beer, and ale, have never lowered the price of
barley; have never reduced the rent and profit of barley land. The price
of malt to the brewer, has constantly risen in proportion to the taxes
imposed upon it; and those taxes, together with the different duties upon
beer and ale, have constantly either raised the price, or, what comes to
the same thing, reduced the quality of those commodities to the
consumer. The final payment of those taxes has fallen constantly upon
the consumer, and not upon the producer.' On this passage Mr Buchanan
remarks, 'A duty on malt never could reduce the price of barley,
because, unless as much could be made of barley by malting it as by
selling it unmalted, the quantity required would not be brought to
market. It is clear, therefore, that the price of malt must rise in
proportion to the tax imposed on it, as the demand could not otherwise
be supplied. The price of barley, however, is just as much a monopoly
price as that of sugar; they both yield a rent, and the market price of
both has equally lost all connexion with the original cost.'
It appears then to be the opinion of Mr Buchanan, that a tax on malt
would raise the price of malt, but that a tax on the barley from which
malt is made, would not raise the price of barley; and, therefore, if malt
is taxed, the tax will be paid by