Why taxation hinders the growth of capital and reduces consumption

Posted in Blog, Liberty and power, Politics

David Ricardo, C19 Economist

In Chapter 8 of his book On the Principles of Political Economy and Taxation (1817) p. 152 David Ricardo reflected on the impact of taxation and concluded: 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 diminution of their former unproductive1 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.

David Ricardo (1772-1823) was born in Londonof parents who had recently emigrated from Amsterdam.  He returned made a large fortune as a stockbroker, and eventually was elected to the UK Parliament; but he also enjoyed reading about economics. He was ultimately inspired by Smith’s The Nature and Causes of the Wealth of Nations, and, using his background in the stock market and his natural incisive ability, actively disagreed with the mercantilist views on gold accumulation and the pricing of gold. He eventually took on some of Smith’s inconsistencies, and in the process developed the role of comparative advantage in international trade. He is one of the early describers of what has become known as “Ricardian equivalence” – the condition that real interest rates are influenced by government spending, but not necessarily by the way the government finances that spending (via borrowing or taxation). His contributions to the economics of rent, monetary theory, and the theory of value influenced economists of his day and since.

On the Principles of Political Economy and Taxation  provides analysis of the allocation of money between capitalists, landowners, and agricultural workers inBritain. Through this analysis, Ricardo came to advocate free trade and oppose Britain’s restrictive Corn laws.  It seems a pity to me the governments of the left so often forget his advice and analysis.  I hope that the current right of centre government in the UK, under the able David’s Cameron’s leadership, will not forget what Ricardo said.