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 100_l._, the hats, the cloth, and the corn, will each be increased in
value 100_l._ If the hatter gain by his hats 1100_l._, instead of
1000_l._, he will pay 100_l._ to Government for the tax; and therefore
will still have 1000_l._ 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 1000_l._ than
he before obtained for 910_l._, 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 1000_l._, 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 1000_l._ does
not amount to more than a saving of 910_l._ 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 1000_l._; and as they will each have to pay
100_l._ to Government, they will retain only 900_l._, 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 1000_l._, have as great a quantity of
goods as he before had for 910_l._; in the second, he would have only as
much as he before had for 900_l._ 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 4000_l._, the other for 10,000_l._, and they might
both employ 10,000_l._ of capital, and obtain 20 per cent. profit, or
2000_l._ The capital of one might consist for example of 2000_l._
circulating capital, to be reproduced, and 8000_l._ fixed, in buildings
and machinery; the capital of the other on the contrary might consist of
8000_l._ of circulating, and of only 2000_l._ fixed capital in machinery
and buildings. Now if each of these persons were to be taxed 10 per
cent. on his income, or 200_l._, the one, to make his business yield him
the general rate of profit, must raise his goods from 10,000_l._ to
10,200_l._; the other would also be obliged to raise the price of his
goods from 4000_l._ to 4200_l._ Before the tax, the goods sold by one of
these manufacturers were 2-1/2 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 3000_l._ 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 10,200_l._ to 10,000_l._ or less than 2 per
cent., would lower the price of the other from 4200_l._ to 4000_l._ 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 10,000_l._, the price of the second should be 4000_l._;
and when the price of the first was 10,200_l._, the price of the other
should be 4200_l._
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 1000_l._ value rise to 1200_l._, or fall to 800_l._, a commodity of
10,000_l._ value will rise to 12,000_l._ or fall to 8000_l._; 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.
Will not this principle account for the different effects, which it was
remarked were produced on the prices of commodities, from the altered
value of money during the Bank-restriction? It was objected to those who
contended that the currency was at that period depreciated, from the too
great abundance of the paper circulation, that, if that were the fact,
all commodities ought to have risen in the same proportion; but it was
found that many had varied considerably more than others, and thence it
was inferred that the rise of prices was owing to something affecting
the value of commodities, and not to any alteration in the value of the
currency. It appears however, as we have just seen, that in a country
where commodities are taxed, they will not all vary in price in the same
proportion, either in consequence of a rise or of a fall in the value of
currency.
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. As the
cultivators of the different kinds of land, No. 1, 2, and 3, employ
precisely the same capitals, they will get precisely the same profits,
whatever may be the quantity of gross produce, which one may obtain more
than the other; and consequently they will be all taxed alike. Suppose
the gross produce of the land of the quality No. 1, to be 180 qrs., that
of No. 2, 170 qrs., and of No 3, 160, and each to be taxed 10 quarters,
the difference between the produce of No. 1, No. 2, and No. 3, after
paying the tax, will be the same as before; for if No. 1 be reduced to
170, No. 2 to 160, and No. 3 to 150 qrs.; the difference between 3 and 1
will be as before, 20 qrs.; and of No. 3 and No. 2, 10 qrs. If after the
tax the prices of corn and of every other commodity should remain the
same as before, money rent as well as corn rent, would continue
unaltered; but if the price of corn, and every other commodity should
rise in consequence of the tax, money rent will also rise in the same
proportion. If the price of corn were 4_l._ per quarter, the rent of No.
1 would have been 80_l._, and that of No. 2, 40_l._; but if corn rose
ten per cent., or to 4_l._ 8_s._, rent would also rise ten per cent.,
for twenty quarters of corn would then be worth 88_l._, and ten quarters
44_l._; so that in every case the landlord will be unaffected by such a
tax. 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.
A tax on the profits of stock would also affect the stockholder, if all
commodities were to rise in proportion to the tax; but if from the
alteration in the value of money, all commodities were to sink to their
former price, the stockholder would pay nothing towards the tax; he
would purchase all his commodities at the same price, but would still
receive the same money dividend.
If it be agreed, that by taxing the profits of one manufacturer only,
the price of his goods would rise, to put him on an equality with all
other manufacturers; and that by taxing the profits of two
manufacturers, the prices of two descriptions of goods must rise, I do
not see how it can be disputed, that by taxing the profits of all
manufacturers, the prices of all goods would rise, provided the mine
which supplied us with money, were in the country taxed. But as money,
or the standard of money, is a commodity imported from abroad, the
prices of all goods could not rise; for such an effect could not take
place without an additional quantity of money, which could not be
obtained in exchange for dear goods, as was shewn in page 108. If
however, such a rise could take place, it could not be permanent, for it
would have a powerful influence on foreign trade. In return for
commodities imported, those dear goods could not be exported, and
therefore we should for a time continue to buy, although we ceased to
sell; and should export money, or bullion, till the relative prices of
commodities were nearly the same as before. It appears to me absolutely
certain, that a well regulated tax on profits, would ultimately restore
commodities both of home and foreign manufacture, to the same money
price which they bore before the tax was imposed.
As taxes on raw produce, tithes, taxes on wages, and on the necessaries
of the labourer, will, by raising wages, lower profits, they will all,
though not in an equal degree, be attended with the same effects.
The discovery of machinery, which materially improves home manufactures,
always tends to raise the relative value of money, and therefore to
encourage its importation. All taxation, all increased impediments,
either to the manufacturer, or the grower of commodities, tend on the
contrary to lower the relative value of money, and therefore to
encourage its exportation.