Guest Lecture by David Ricardo Jude Wanniski April 8, 2005

Memo To: SSU Students
From: Jude Wanniski
Re: David Ricardo (1772-1823)

Our "guest lecturer" on taxation in this lesson is the famed classical economist David Ricardo, whose 1817 Principles of Political Economy and Taxation belongs in the library of all serious students of economics. (Along with Adam Smith`s Wealth of Nations, Karl Marx' Capital, and Ludwig von Mises' Human Action . (There are at least a dozen others I could recommend, but these are the most valuable in the classical, "supply-side" framework. All four of those mentioned, by the way, were advocates of a gold standard. The lesson today is the fairly short Chapter VIII, "On Taxes," in Ricardo`s 1817 book. Please note how Ricardo warned against excessive taxation, especially the taxation of capital, which is one reason "modern" economists are quick to point out that while Ricardo`s idas were okay for his time, they are now obsolete. Hmmm. 

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On Taxes

Taxes are a portion of the produce of the land and labor of a country placed at the disposal of the government; and are always ultimately paid either from the capital or from the revenue of the country.

We have already shown how the capital of a country is either fixed or circulating, according as it is of a more or less durable nature. It is difficult to define strictly where the distinction between circulating and fixed capital begins; for there are almost infinite degrees in the durability of capital. The food of a country is consumed and reproduced at least once in every year, the clothing of the laborer is probably not consumed and reproduced in less than two years; whilst his house and furniture are calculated to endure for a period of ten or twenty years.

When the annual productions of a country more than replace its annual consumption, it is said to increase its capital; when its annual consumption is not at least replaced by its annual production, it is said to diminish its capital. Capital may therefore be increased by an increased production, or by a diminished unproductive consumption.

If the consumption of the government when increased by the levy of additional taxes be met either by an increased production or by a diminished consumption on the part of the people, the taxes will fall upon revenue, and the national capital will remain unimpaired; but if there be no increased production or diminished unproductive consumption on the part of the people, the taxes will necessarily fall on capital, that is to say, they will impair the fund allotted to productive consumption. [1]

In proportion as the capital of a country is diminished, its productions will be necessarily diminished; and, therefore, if the same unproductive expenditure on the part of the people and of the government continue, with a constantly diminishing annual reproduction, the resources of the people and the state will fall away with the increasing rapidity, and distress and ruin will follow.

Notwithstanding the immense expenditure of the English government during the last twenty years, there can be little doubt but that the increased production on the part of the people has more than compensated for it. The national capital has not merely been unimpaired, it has been greatly increased, and the annual revenue of the people, even after the payment of their taxes, is probably greater at the present time than at any former period of our history.

For the proof of this, we might refer to the increase of population-to the extension of agriculture-to the increase of shipping and manufactures-to the building of docks-to the opening of numerous canals, as well as to many other expensive undertakings; all denoting an increase both of capital and of annual production.

Still, however it is certain that, but for taxation, this increase of capital would have been much greater. There are no taxes which have not a tendency to lessen the power to accumulate. All taxes must either fall on capital or revenue. If they encroach on capital, they must proportionably diminish that fund by whose extent the extent of the productive industry of the country must always be regulated; and if they fall on revenue, they must either lessen accumulation, or force the contributors to save the amount of the tax, by making a corresponding diminuting of their former unproductive consumption of the necessaries and luxuries of life. Some taxes will produce these effects in a much greater degree than others; but the great evil of taxation is to be found, not so much in any selection of its objects, as in the general amount of its effects taken collectively.

Taxes are not necessarily taxes on capital because they are laid on capital; nor on income because they are laid on income. If from my income of £1000 per annum I am required to pay £100, it will really be a tax on my income should I be content with the expenditure of the remaining £900; but it will be a tax on capital if I continue to spend £1000.

The capital from which my income of £1000 is derived may be of the value of £10,000; a tax of one percent on such capital would be £100; but my capital would be unaffected if, after paying this tax, I in like manner contented myself with the expenditure of £900.

The desire which every man has to keep his station in life, and to maintain his wealth at the height which it has once attained, occasions most taxes, whether laid on capital or on income, to be paid from income; and, therefore, as taxation proceeds, or as government increases its expenditure, the annual enjoyments of the people must be diminished, unless they are enabled proportionally to increase their capitals and income. It should be the policy of governments to encourage a disposition to do this in the people, and never to lay such taxes as will inevitably fall on capital; since, by so doing, they impair the funds for the maintenance of labor, and thereby diminish the future production of the country.

In England this policy has been neglected in taxing the probates of wills, in the legacy duty, and in all taxes affecting the transference of property from the dead to the living. If a legacy of £1000 be subject to a tax of £100, the legatee considers his legacy as only £900 and feels no particular motive to save the £100 duty from his expenditure, and thus the capital of the country is diminished; but if he had really received £1000, and had been required to pay £100 as a tax on income, on wine, on horses, or on servants, he would probably have diminished, or rather not increased his expenditure by that sum, and the capital of the country would have been unimpaired.

"Taxes upon the transference of property from the dead to the living," says Adam Smith, "fall finally, as well as immediately, upon the Persons to whom the property is transferred. Taxes on the sale of land fall altogether upon the seller. The seller is almost always under the necessity of selling and must, therefore, take such a price as he can get. The buyer is scarce ever under the necessity of buying, and will, therefore, only give such a price as he likes. He considers what the land will cost him in tax and price together. The more he is obliged to pay in the way of tax, the less he will be disposed to give in the way of price. Such taxes, therefore fall almost always upon a necessitous person, and must, therefore, be very cruel and oppressive." "Stamp duties, and duties upon the registration of bonds and contracts for borrowed money, fall altogether upon the borrower, and in fact are always paid by him. Duties of the same kind upon law proceedings fall upon the suitors. They reduce to both the capital value of the subject in dispute. The more it costs to acquire any property, the less must be the net value of it when acquired. All taxes upon the transference of property of every kind, so far as they diminish the capital value of that property, tend to diminish the funds destined for the maintenance of labor. They are all more or less unthrifty taxes that increase the revenue of the sovereign, which seldom maintains any but unproductive laborers, at the expense of the capital of the people, which maintains none but productive."

But this is not the only objection to taxes on the transference of property; they prevent the national capital from being distributed in the way most beneficial to the community. For the general prosperity there cannot be too much facility given to the conveyance and exchange of all kinds of property, as it is by such means that capital of every species is likely to find its way into the hands of those who will best employ it in increasing the productions of the country. "Why," asks M. Say, "does an individual wish to sell his land? It is because he has another employment in view in which his funds will be more productive. Why does another wish to purchase this same land? It is to employ a capital which brings him in too little, which was unemployed, or the use of which he thinks susceptible of improvement. This exchange will increase the general income, since it increases the income of these parties. But if the charges are so exorbitant as to prevent the exchange, they are an obstacle to this increase of the general income." Those taxes, however, are easily collected; and this by many may be thought to afford some compensation for their injurious effects.

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[1. It must be understood that all the productions of a country are consumed; but it makes the greatest difference imaginable whether they are consumed by those who reproduce or by those who do not reproduce another value. When we say that revenue is saved and added to capital, what we mean is, that the portion of revenue, so said to be added to capital, is consumed by productive instead of unproductive laborers, There can be no greater error than in supposing that capital is increased by nonconsumption. If the price of labor should rise so high that, notwithstanding the increase of capital, no more could be employed, I should say that such increase of capital would be still unproductively consumed.]