jim.shamlin.com

9: Taxes on Raw Produce

In terms of productive activity, whatever increases the cost of production will also increase the price of the product, and conversely that whatever decreases the cost will decrease the price.

Hence when it comes to raw produce, such as grain, it is clear that the rent of the land, the wages of the laborers, and the cost of the equipment all contribute to the price that will be demanded for the product, and if the proceeds of sale are less than the expense of production, the producer will see no point in continuing to invest his time and money in the activity.

Taxes are no different than any other factor to the producer: regardless of how a tax is levied, it is an expense that must be covered from the proceeds of selling his goods. And if he does not predict that he will be able to cover that expense at the market price of his product, he will not wish to engage in production.

Where taxes are levied on all producers of a good, the effect on producers is to discourage all production, decreasing the amount of goods available in the marketplace until the scarcity of goods results in an increase in price to cover the taxes. The effect on consumers is that they must pay more for fewer goods in general, or to seek out a substitute for the good in question.

Were taxes levied on all producers of all goods, it could be argued that it would not have the same impact on capital investment, all investment in all products being impacted to the same extent, but the effect on consumers is higher prices on all goods across the board, with no opportunity to substitute one for another.

(EN: It seems to me that Ricardo limits this consideration to a single market. Thus, taxes on a domestic good may make foreign goods more appealing, if it is implemented on production rather than on the sale. Taxes on all domestic production will likewise encourage investors to take their money abroad rather than invest it in local producers.)

Where the prices are raised on goods that are necessary to sustaining life, there must be a corresponding increase in the wages of the workers - which is as true of taxes as of any other reason that prices might be raised - but again this increase does not create greater prosperity, merely more money that is used to purchase the same amount of goods.

However, it has been observed that the rise in wages follows an increase in taxes very slowly: goods that exist in the market must be consumed, and replaced with goods made after the new tax was levied, before workers recognize their wages do not have the same purchasing power and seek better wages.

The greatest detriment is visited on long-term contracts: where a landlord is bound to renting land for a fixed sum for a period of some years, or a supplier has bound to an agreement to provide a specific amount at a specific price, they must bear the increased expense and decreased value of their money or breach their covenant. Hence the reason that long-term contracts are seldom signed in times of political uncertainty and instability.

Ricardo returns to basics in terms of the price of goods in the market, indentifying four factors that will affect them most greatly: a sudden and unexpected deficiency in supply; a sudden or gradual increase in demand; a fall in the value of money; and taxation.

A deficiency of supply can be exemplified by a poor harvest that results in a shortage of corn, and its price will increase in the marketplace for want of it. But the rise in price is not arbitrary or unrestricted: it can only rise to a price that some are willing to pay - and even those able to afford the higher price will likely reduce their consumption in favor of cheaper alternatives. The proposal to adjust wages to consumer prices is ineffective: it does not generate more of the good in demand, only gives individuals the means to bid the price even higher. Such legislation is bootless. The only solution to shortage is to increase supply - to import corn to satisfy demand, and produce more in future.

Increased demand for a good can occur, but must generally be the consequence of an increase in wages, which give people the means to demand more of a good. It can occur suddenly, but is more often a gradual effect that builds over time. If supply does not also increase, the good becomes gradually more scarce, increasing its price in the market. This occurs where the production of goods is not flexible, but requires significant investment - such as preparing new fields to grow food crops as population increases at a slower and more steady pace. The price of food must rise, and there must be certainty of continued demand, before the investment will be made to produce it in quantity. When this occurs, supply will increase to satisfy greater demand at a lower price.

A fall in the value of money may arise where the commodity that constitutes money is increased (increased mining production) or from debasement of currency. As a result, money is of lesser value and more of it must be given in exchange for a good, hence the price rises. The quantity of goods in the marketplace is not affected in any way, and other than the amount of money demanded for them, no permanent change is made in the economy, though there is the temporary imbalance until all goods (including labor) have increased to reflect the diminished value of money.

A tax on all goods is the equivalent of a decrease in the value of money, in that the quantity of goods in supply and demand are not altered, but the money-price is increased to cover the additional expense of taxation. (EN: There's a bit more elaboration, which repeats what was noted earlier in this chapter.)