Taxation
In the Principles a substantial space, organized in ten chapters, and a great deal of attention is devoted to taxation and especially the problem of tax incidence and the impact of taxes on the pace of capital accumulation and economic growth.
Ricardo insisted that “There are no taxes which have not a tendency to lessen the power to accumulate. All taxes must either fall on capital or revenue” (Works I: 152). However, he added, the burden of a tax is not necessarily borne by whoever pays it (Works I: 152). This insight is then illustrated in a number of cases involving both direct and indirect taxes. For example, on the premise that workers are paid a subsistence wage a tax on wages could not be borne by workers: nominal wages would rise leaving real wages constant and the tax would accordingly be shifted to capitalists. A similar reasoning applies to the case in which a tax is laid on wage goods or “necessaries”. The price of the wage goods and as a consequence the nominal wage would increase. Taxes on “luxuries” on the contrary “fall on those only who make use of them” (Works I: 205).In full accordance with his doctrine that rent does not enter the price of commodities Ricardo insisted that “A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers” (Works I: 173). A tax on profits would increase the prices of the products: “if a tax in proportion to profits were laid on all trades, every commodity would be raised in price” (Works I: 205). Depending on the consumption patterns of the different classes of society this would affect their respective members differently. A rise in the price of wage goods would again entail a corresponding adjustment of nominal wages: “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” (Works I: 205), and, as a consequence, the rate of capital accumulation.
Ricardo’s treatment of taxes, while containing numerous interesting ideas and suggestions, is generally not considered the strongest part of his book and is said to suffer from a bad arrangement of the material and an argument that is frequently tied to excessively restrictive assumptions. For more complete treatments of the subject, see Shoup (1960), O’Brien (2004) and Dome (2004).