On the Effects of Taxation
on the Rent of Land
David Ricardo
[Extracts from On The Principles of Political
Economy and Taxation, published in 1817]
A land-tax, levied in proportion to the rent of land, and varying
with every variation of rent, is in effect a tax on rent; and as such
a tax will not apply to that land which yields no rent, nor to the
produce of that capital which is employed on the land with a view to
profit merely, and which never pays rent, it will not in any way
affect the price of raw produce, but will fall wholly on the
landlords. In no respect would such a tax differ from a tax on rent.
But if a land-tax be imposed on all cultivated land, however moderate
that tax may be, it will be a tax on produce, and will therefore raise
the price of produce. If No. 3 be the land last cultivated, although
it should pay no rent, it cannot, after the tax, be cultivated, and
afford the general rate of profit, unless the price of produce rise to
meet the tax. Either capital will be withheld from that employment
until the price of corn shall have risen, in consequence of demand,
sufficiently to afford the usual profit; or if already employed on
such land, it will quit it, to seek a more advantageous employment.
The tax cannot be removed to the landlord, for by the supposition he
receives no rent. Such a tax may be proportioned to the quality of the
land and the abundance of its produce, and then it differs in no
respect from tithes; or it may be a fixed tax per acre on all land
cultivated, whatever its quality may be.
A land-tax of this latter description would be a very unequal tax,
and would be contrary to one of the four maxims with regard to taxes
in general, to which, according to Adam Smith, all taxes should
conform. The four maxims are as follow:
1. 'The subjects of every state ought to contribute towards the
support of the government, as nearly as possible in proportion to
their respective abilities.
2. 'The tax which each individual is bound to pay ought to be certain
and not arbitrary.
3. 'Every tax ought to be levied at the time, or in the manner in
which it is most likely to be convenient for the contributor to pay
it.
4. 'Every tax ought to be so contrived as both to take out and to
keep out of the pockets of the people as little as possible, over and
above what it brings into the public treasury of the State.'
An equal land-tax, imposed indiscriminately and without any regard to
the distinction of its quality, on all land cultivated, will raise the
price of corn in proportion to the tax paid by the cultivator of the
land of the worst quality. Lands of different quality, with the
employment of the same capital, will yield very different quantities
of raw produce.
There is no farmer who does not compute beforehand what the
church-tithe, which is a land-tax of this kind is, one year with
another, likely to amount to.' It is undoubtedly true, that the farmer
does calculate his probable outgoings of all descriptions, when
agreeing with his landlord for the rent of his farm; and if for the
tithe paid to the church, or for the tax on the produce of the land,
he were not compensated by a rise in the relative value of the produce
of his farm, he would naturally endeavour to deduct them from his
rent. But this is precisely the question in dispute: whether he will
eventually deduct them from his rent, or be compensated by a higher
price of produce. For the reasons which have been already given, I
cannot have the least doubt but that they would raise the price of
produce, and consequently that Adam Smith has taken an incorrect view
of this important question.
M. Say supposes, 'A landlord by his assiduity, economy and skill, to
increase his annual revenue by 5,000 francs;, but a landlord has no
means of employing his assiduity, economy and skill on his land,
unless he farms it himself. and then it is in quality of capitalist
and farmer that he makes the improvement, and not in quality of
landlord. It is not conceivable that he could so augment the produce
of his farm by any peculiar skill on his part, without first
increasing the quantity of capital employed upon it. If he increased
the capital, his larger revenue might bear the same proportion to his
increased capital, as the revenue of all other farmers to their
capitals.
M. Say's error in the above passage lies in supposing that because
the value of the produce of one of these two farms, after reinstating
the capital, is greater than the value of the produce of the other, on
that account the net income of the cultivators will differ by the same
amount. The net income of the landlords and tenants together of the
wood land, may be much greater than the net income of the landlords
and tenants of the corn land; but it is on account of the difference
of rent, and not on account of the difference in the rate of profit.
M. Say has wholly omitted the consideration of the different amount of
rent, which these cultivators would have to pay. There cannot be two
rates of profit in the same employment, and therefore when the value
of produce is in different proportions to capital, it is the rent
which will differ, and not the profit. ...
Let M. Say make a due allowance for rent; let him further allow for
the effect which such a tax would have on the prices of these
different kinds of raw produce, and he will then perceive that it is
not an unequal tax, and further that the producers themselves will no
otherwise contribute to it, than any other class of consumers. ...But
as a tax on houses may be considered in the light of an additional
rent paid by the tenant, its tendency will be to diminish the demand
for houses of the same annual rent, without diminishing their supply.
Rent will therefore fall, and a part of the tax will be paid
indirectly by the landlord. 'The rent of a house,' says Adam Smith,,
may be distinguished into two parts, of which the one may very
properly be called the building rent, the other is commonly called the
ground rent. The building rent is the interest or profit of the
capital expended in building the house. In order to put the trade of a
builder upon a level with other trades, it is necessary that this rent
should be sufficient first to pay the same interest which he would
have got for his capital, if he had lent it upon good security and,
secondly, to keep the house in constant repair, or what comes to the
same thing, to replace within a certain term of years the capital
which had been employed in building it.' 'If in proportion to the
interest of money, the trade of the builder affords at any time a much
greater profit than this, it will soon draw so much capital from other
trades, as will reduce the profit to its proper level. If it affords
at any time much less than this, other trades will soon draw so much
capital from it as will again raise that profit. Whatever part of the
whole rent of a house is over and above what is sufficient for
affording this reasonable profit, naturally goes to the ground rent;
and where the owner of the ground, and the owner of the building, are
two different persons, it is in most cases completely paid to the
former.
In country houses, at a distance from any great town, where there is
a plentiful choice of ground, the ground rent is scarcely any thing,
or no more than what the space upon which the house stands, would pay
employed in agriculture. In country villas, in the neighbourhood of
some great town, it is sometimes a good deal higher, and the peculiar
conveniency, or beauty of situation, is there frequently very highly
paid for. Ground rents are generally highest in the capital, and in
those particular parts of it, where there happens to be the greatest
demand for houses, whatever be the reason for that demand, whether for
trade and business, for pleasure and society, or for mere vanity and
fashion.' A tax on the rent of houses may either fall on the occupier,
on the ground landlord, or on the building landlord. In ordinary cases
it may be presumed, that the whole tax would be paid both immediately
and finally by the occupier. If the tax be moderate, and the
circumstances of the country such, that it is either stationary or
advancing, there would be little motive for the occupier of a house to
content himself with one of a worse description. But if the tax be
high, or any other circumstances should diminish the demand for
houses, the landlord's income would fall, for the occupier would be
partly compensated for the tax by a diminution of rent. It is,
however, difficult to say, in what proportions that part of the tax,
which was saved by the occupier by a fall of rent, would fall on the
building rent and the ground rent. It is probable that, in the first
instance, both would be affected; but as houses are, though slowly,
yet certainly perishable, and as no more would be built, till the
profits of the builder were restored to the general level, building
rent would, after an interval, be restored to its natural price.
As the builder receives rent only whilst the building endures, he
could pay no part of the tax, under the most disastrous circumstances,
for any longer period. The payment of this tax, then, would ultimately
fall on the occupier and ground landlord, but, 'in what proportion,
this final payment would be divided between them,' says Adam Smith,
'it is not perhaps very easy to ascertain. The division would probably
be very different in different circumstances, and a tax of this kind
might, according to those different circumstances, affect very
unequally both the inhabitant of the house, and the owner of the
ground.'(25*)
Adam Smith considers ground rents as peculiarly fit subjects for
taxation. 'Both ground rents, and the ordinary rent of land,' he says,
'are a species of revenue, which the owner in many cases enjoys,
without any care or attention of his own. Though a part of this
revenue should be taken from him, in order to defray the expenses of
the State, no discouragement will thereby be given to any sort of
industry. The annual produce of the land and labour of the society,
the real wealth and revenue of the great body of the people, might be
the same after such a tax as before. Ground rents, and the ordinary
rent of land are, therefore, perhaps, the species of revenue, which
can best bear to have a peculiar tax imposed upon them.'
It must be admitted that the effects of these taxes would be such as
Adam Smith has described; but it would surely be very unjust, to tax
exclusively the revenue of any particular class of a community. The
burdens of the State should be borne by all in proportion to their
means: this is one of the four maxims mentioned by Adam Smith, which
should govern all taxation. Rent often belongs to those who, after
many years of toil, have realised their gains, and expended their
fortunes in the purchase of land or houses; and it certainly would be
an infringement of that principle which should ever be held sacred,
the security of property, to subject it to unequal taxation. It is to
be lamented, that the duty by stamps, with which the transfer of
landed property is loaded, materially impedes the conveyance of it
into those hands, where it would probably be made most productive. And
if it be considered, that land, regarded as a fit subject for
exclusive taxation, would not only be reduced in price, to compensate
for the risk of that taxation, but in proportion to the indefinite
nature and uncertain value of the risk, would become a fit subject for
speculations, partaking more of the nature of gambling, than of sober
trade, it will appear probable, that the hands into which land would
in that case be most apt to fall, would be the hands of those, who
possess more of the qualities of the gambler, than of the qualities of
the sober-minded proprietor, who is likely to employ his land to the
greatest advantage.
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.
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.(26*)
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 shoe-maker, &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,
and 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.
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. The following argument of
M. Say is founded on the same views as Mr Buchanan's: 'The quantity of
wine or corn which a piece of land will produce, will remain nearly
the same, whatever may be the tax with which it is charged. The tax
may take away a half, or even three-fourths of its net produce, or of
its rent if you please, yet the land would nevertheless be cultivated
for the half or the quarter not absorbed by the tax. The rent, that is
to say the landlord's share, would merely be somewhat lower. The
reason of this will be perceived, if we consider, that in the case
supposed, the quantity of produce obtained from the land, and sent to
market, will remain nevertheless the same. On the other hand the
motives on which the demand for the produce is founded, continue also
the same. 'Now, if the quantity of produce supplied, and the quantity
demanded, necessarily continue the same, notwithstanding the
establishment or the increase of the tax, the price of that produce
will not vary; and if the price do not vary, the consumer will not pay
the smallest portion of this tax. 'Will it be said that the farmer, he
who furnishes labour and capital, will, jointly with the landlord,
bear the burden of this tax? certainly not; because the circumstance
of the tax has not diminished the number of farms to be let, nor
increased the number of farmers. Since in this instance also the
supply and demand remain the same, the rent of farms must also remain
the same. The example of the manufacturer of salt, who can only make
the consumers pay a portion of the tax, and that of the landlord who
cannot reimburse himself in the smallest degree, prove the error of
those who maintain, in opposition to the economists, that all taxes
fall ultimately on the consumer.' - Vol. ii. p. 338. If the tax 'took
away half, or even three-fourths of the net produce of the land,' and
the price of produce did not rise, how could those farmers obtain the
usual profits of stock who paid very moderate rents, having that
quality of land which required a much larger proportion of labour to
obtain a given result, than land of a more fertile quality? If the
whole rent were remitted, they would still obtain lower profits than
those in other trades, and would therefore not continue to cultivate
their land, unless they could raise the price of its produce. If the
tax fell on the farmers, there would be fewer farmers disposed to hire
farms; if it fell on the landlord, many farms would not be let at all,
for they would afford no rent. But from what fund would those pay the
tax who produce corn without paying. any rent?
It is quite clear that the tax must fall on the consumer. How would
such land, as M. Say describes in the following passage, pay a tax of
one-half or three-fourths of its produce? 'We see in Scotland poor
lands thus cultivated by the proprietor, and which could be cultivated
by no other person. Thus too, we see in the interior provinces of the
United States vast and fertile lands, the revenue of which, alone,
would not be sufficient for the maintenance of the proprietor. These
lands are cultivated nevertheless, but it must be by the proprietor
himself, or, in other words, he must add to the rent, which is little
or nothing, the profits of his capital and industry, to enable him to
live in competence. It is well known that land, though cultivated,
yields no revenue to the landlord when no farmer will be willing to
pay a rent for it: which is a proof that such land will give only the
profits of the capital, and of the industry necessary for its
cultivation.' - Say, Vol. ii. p. 127.
In examining the question of rent, we found, that with every increase
in the supply of corn, and with the consequent fall of its price,
capital would be withdrawn from the poorer land; and land of a better
description, which would then pay no rent, would become the standard
by which the natural price of corn would be regulated.
It has, however, been said, that capital cannot be withdrawn from the
land; that it takes the form of expenses, which cannot be recovered,
such as manuring, fencing, draining, &c., which are necessarily
inseparable from the land. This is in some degree true; but that
capital which consists of cattle, sheep, hay and corn ricks, carts, &c.
may be withdrawn; and it always becomes a matter of calculation,
whether these shall continue to be employed on the land,
notwithstanding the low price of corn, or whether they shall be sold,
and their value transferred to another employment.
Suppose, however, the fact to be as stated, and that no part of the
capital could be withdrawn;(41*) the farmer would continue to raise
corn, and precisely the same quantity too, at whatever price it might
sell; for it could not be his interest to produce less, and if he did
not so employ his capital, he would obtain from it no return whatever.
Corn could not be imported, because he would sell it lower than £3
10s. rather than not sell it at all, and by the supposition the
importer could not sell it under that price. Although then the
farmers, who cultivated land of this quality, would undoubtedly be
injured by the fall in the exchangeable value of the commodity which
they produced, - how would the country be affected? We should have
precisely the same quantity of every commodity produced, but raw
produce and corn would sell at a much cheaper price. The capital of a
country consists of its commodities, and as these would be the same as
before, reproduction would go on at the same rate. This low price of
corn would however only afford the usual profits of stock to the land,
No. 5, which would then pay no rent, and the rent of all better land
would fall: wages would also fall, and profits would rise.
It is true, that the man in possession of a scarce commodity is
richer, if by means of it he can command more of the necessaries and
enjoyments of human life; but as the general stock out of which each
man's riches are drawn, is diminished in quantity, by all that any
individual takes from it, other men's shares must necessarily be
reduced in proportion as this favoured individual is able to
appropriate a greater quantity to himself.
Let water become scarce, says Lord Lauderdale, and be exclusively
possessed by an individual, and you will increase his riches, because
water will then have value; and if wealth be the aggregate of
individual riches, you will by the same means also increase wealth.
You undoubtedly will increase the riches of this individual, but
inasmuch as the farmer must sell a part of his corn, the shoemaker a
part of his shoes, and all men give up a portion of their possessions
for the sole purpose of supplying themselves with water, which they
before had for nothing, they are poorer by the whole quantity of
commodities which they are obliged to devote to this purpose, and the
proprietor of water is benefited precisely by the amount of their
loss. The same quantity of water, and the same quantity of
commodities, are enjoyed by the whole society, but they are
differently distributed. This is, however, supposing rather a monopoly
of water than a scarcity of it. If it should be scarce, then the
riches of the country and of individuals would be actually diminished,
inasmuch as it would be deprived of a portion of one of its
enjoyments. The farmer would not only have less corn to exchange for
the other commodities which might be necessary or desirable to him,
but he, and every other individual, would be abridged in the enjoyment
of one of the most essential of their comforts. Not only would there
be a different distribution of riches, but an actual loss of wealth.
From what has been said, it will be seen that the wealth of a country
may be increased in two ways. it may be increased by employing a
greater portion of revenue in the maintenance of productive labour, -
which will not only add to the quantity, but to the value of the mass
of commodities; or it may be increased, without employing any
additional quantity of labour, by making the same quantity more
productive, - which will add to the abundance, but not to the value of
commodities.
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