Front Page Titles (by Subject) CHAPTER XV.: TAXES ON PROFITS. - The Works of David Ricardo (McCulloch ed.)
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CHAPTER XV.: TAXES ON PROFITS. - David Ricardo, The Works of David Ricardo (McCulloch ed.) 
The Works of David Ricardo. With a Notice of the Life and Writings of the Author, by J.R. McCulloch (London: John Murray, 1888).
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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 100l., the hats, the cloth, and the corn, will each be increased in value 100l. If the hatter gains by his hats 1,100l., instead of 1000l., he will pay 100l. to Government for the tax; and therefore will still have 1000l. 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 1000l. than he before obtained for 910l., 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 1000l., 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 1000l. does not amount to more than a saving of 910l. 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 1000l.; and as they will each have to pay 100l. to Government, they will retain only 900l., 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 1000l., have as great a quantity of goods as he before had for 910l.; in the second, he would have only as much as he before had for 900l., for the price of goods would remain unaltered, and he would have only 900l. 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 showed 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 4000l., the other for 10,000l., and they might both employ 10,000l. of capital, and obtain 20 per cent. profit, or 2000l. The capital of one might consist, for example, of 2000l. circulating capital, to be reproduced, and 8000l. fixed, in buildings and machinery; the capital of the other, on the contrary, might consist of 8000l. of circulating, and of only 2000l. fixed capital in machinery and buildings. Now, if each of these persons were to be taxed 10 per cent. on his income, or 200l., the one to make his business yield him the general rate of profit, must raise his goods from 10,000l. to 10,200l.; the other would also be obliged to raise the price of his goods from 4000l. to 4,200l. Before the tax, the goods sold by one of these manufacturers were 2½ 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 2000l. to 3000l. 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 10,200l. to 10,000l. or less than two per cent., would lower the price of the other from 4,200l. to 4000l. or 4¾ 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 10,000l., the price of the second should be 4000l.; and when the price of the first was 10,200l., the price of the other should be 4,200l.
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 1000l. value rise to 1,200l., or fall to 800l., a commodity of 10,000l. value will rise to 12,000l. or fall to 8000l.; 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 rendeted 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, Nos. 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 4l. per quarter, the rent of No. 1 would be 80l., and that of No. 2, 40l., but if corn rose five per cent., or to 4l. 4s., rent would also rise five per cent., for twenty quarters of corn would then be worth 84l., and ten quarters 42l.; 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.∗
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 stock-holder, 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,† which could not be obtained in exchange for dear goods, as was shown in page 57. 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.
[∗]That the profits of the farmer only should be taxed, and not the profits of any other capitalist, would be highly beneficial to landlords. It would, in fact, be a tax on the consumers of raw produce, partly for the benefit of the State, and partly for the benefit of landlords.
[†]On further consideration, I doubt whether any more money would be required to circulate the same quantity of commodities, if their prices be raised by taxation, and not by difficulty of production. Suppose 100,000 quarters of corn to be sold in a certain district, and in a certain time, at 4l. per quarter, and that in consequence of a direct tax of 8s. per quarter, corn rises to 4l. 8s., the same quantity of money, I think, and no more, would be required to circulate this corn at the increased price. If I before purchased 11 quarters at 4l., and, in consequence of the tax, am obliged to reduce my consumption to 10 quarters, I shall not require more money, for in all cases I shall pay 44l. for my corn. The public would, in fact, consume one-eleventh less, and this quantity would be consumed by Government. The money necessary to purchase it, would be derived from the 8s. per quarter, to be received from the farmers in the shape of a tax, but the amount levied would at the same time be paid to them for their corn; therefore the tax is in fact a tax in kind, and does not make it necessary that any more money should be used, or, if any, so little, that the quantity may be safely neglected.