On The Principles of Political Economy, and Taxation

by David Ricardo

CHAPTER XIII.

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 gain by his hats 1100l., 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. 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 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 4200l. 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 2 per cent.; the other 5 per cent.: consequently a tax upon income, whilst money continued unaltered in value, would alter the relative prices and value of commodities. This is true, 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 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 2 per cent., would lower the price of the other from 4200l. to 4000l. 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 10,000l., 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 4200l.

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 1200l., 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 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.