Front Page Titles (by Subject) CHAPTER XVI.: TAXES ON WAGES. - The Works of David Ricardo (McCulloch ed.)
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CHAPTER XVI.: TAXES ON WAGES. - 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 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 show in the first book, are everywhere 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 workmen, 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 burden 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 shoemaker, &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, but 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 shown, 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 showing, 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.∗
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 show, 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. p. 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 nowhere 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 20l. to 40l. 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 20l. of his money, he could purchase a bill which would enable him to pay a debt of 40l. in England. In the same manner, if he exported a commodity which cost 20l. at home, and which sold in England for 40l., he would only receive 20l., for 40l. in England would only purchase a bill for 20l. 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 11 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,∗ 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 salt-maker, the soap-maker, and the candle-maker consume, while employed in their service.”
Now as Dr Smith does not contend that the tanner, the salt-maker, 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 100l., and that he would pay it directly, if the tax were laid on income, on wine, or on any other luxury, he would suffer no injury if, by the taxation of necessaries, he should be only called upon for the payment of 25l., 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 burden-some 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 1000l. per annum, and I am called upon for 100l. 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 100l. per annum more for my corn, and to the same amount abate in my demand for wine, furniture, or any other luxury.∗ 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.∗
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 100l. on wine, because by paying a tax of that amount I have enabled Government to expend 100l. 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 5l. for the enjoyment which a horse affords, who would not pay 10l. or 20l. 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.”
[∗]M. Say appears to have imbibed the general opinion on this subject. Speaking of corn, he says, “thence it results, that its price influences the price of all other commodities. A farmer, a manufacturer, or a merchant, employs a certain number of workmen, who all have occasion to consume a certain quantity of corn. If the price of corn rises, he is obliged to raise, in an equal proportion, the price of his productions.” Vol. i. p. 255.
[∗]So far from this being true, they would scarcely affect the landlords and stockholder.
[∗]M. Say says, “that the tax added to the price of a commodity, raises its price. Every increase in the price of a commodity, necessarily reduces the number of those who are able to purchase it, or at least the quantity they will consume of it.” This is by no means a necessary consequence. I do not believe, that if bread were taxed, the consumption of bread would be diminished, more than if cloth, wine, or soap were taxed.
[∗]The following remark of the same author appears to me equally erroneous: “When a high duty is laid on cotton, the production of all those goods of which cotton is the basis is diminished. If the total value added to cotton in its various manufactures, in a particular country, amounted to 100 millions of francs per annum, and the effect of the tax was, to diminish the consumption one half, then the tax would deprive that country every year of 50 millions of francs, in addition to the sum received by Government.” Vol. ii. p. 314.