Ricardo on Taxation

Ricardo on Taxation

The question of taxation continued to occupy a prominent place in the writings of the classical economists. Their contribu­tion, however, was not in a modification or challenge to the basic principles, as was Thomas Paine's, for example, but rather a more elaborate attempt to answer the important question of who ultimately pays the taxes which are levied upon the various sources of income. "Taxes," says Ricardo, "are a portion of the produce of the land and labour 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." He then proceeded to show that taxes paid from revenue were satisfactory in the main, but that taxes paid by capital destroyed the produc­tive efficiency of the nation and led, if continued, to economic ruin. But he added that taxes were not necessarily paid by the person nor the source of income on which they were levied. It was important, therefore, to determine in which cases taxes were and in which they were not shifted to other persons or other revenues. Adam Smith dealt at length with this topic, and Ricardo in most instances does little more than restate Smith's viewpoint, with a critical comment from time to time. Briefly summarized, Ricardo's conclusions as to the incidence of taxation were: a tax on raw materials falls on the consumer but will also diminish profits; a rent or land tax falls on the landlord; taxes on houses are paid in part by the occupier and part by the landlord; taxes on profits will be paid by the consumer, and those on wages by the capitalists. Ricardo added little that was new either as to the general theory of taxation or to the understanding of the relationship of the state to economic life. His opposition to the Corn Laws was a dramatic intervention into public affairs but it followed naturally from his general ideas on trade and wages. One must admit, however, that his explanation of rent became in later years the basis for a revival of the single tax and for pro­posals to nationalize land. His whole theory was based upon an assumption of freedom of economic activity from state inter­vention.

Whatever may have been the outlook of Smith and Ricardo, taxation was beginning to be viewed in relation to humanitarian philosophy. In the first place, all forms of indirect taxes were being called into question, because, as some claimed, it was through indirect taxes that the rich and powerful pushed the burden of supporting the state off on the poor. In the second place, taxation was seen as a tool with which social ends would be achieved or social programs enforced. Both of these issues resolve themselves into a single basic concept, that a more equal distribution of wealth should be achieved in society