12: Land Tax
A tax placed on land-holdings, commensurate to the amount of rent collected on land, is in effect a tax on rent and its effects would be identical in every respect. If the tax is assessed based on the productive capabilities of the land, it is in effect a tax on produce or a title, and identical in every respect.
The only variation that is unlike other forms of tax is a land tax assessed according to acreage that is collected regardless of the productive potential or profit derived from the land. That is, a tax on land for the mere privilege of owning it.
Ricardo refers to Adam Smith's "four maxims" of taxation:
- A subject ought to contribute to the support of their government as nearly as possible in proportion to the benefits they derive from government.
- The amount of taxes should be certain and not arbitrary
- The tax should be levied in a manner that it is most convenient for the subject to pay it
- The state should take from its subjects as little as possible, in considering every tax the subject is made to pay.
Ricardo goes to some length to suggest ways in which a land tax that considers only acreage, rather than productivity of land, violates all but the second of these principles in its indifference to the value that the landowner derives from the property, which is especially burdensome to the owner of lands that are not as productive.
He also points out another flaw in Smith's thinking about land taxes in general: the assumption that they are visited on anyone but the consumer is incorrect, as the landlord and famer consider taxation to be an expense that, like any other, they seek to recover when demanding a price for their goods in the market.
The fact that the consumer bears the burden of taxes does not mean producers are entirely indifferent to it. Taxes are a burden they must bear until their product is sold, and if they expect that the product will sell at a higher price, and in less quantity, they will be less encouraged to produce a given good, estimating that they will not be able to sell it in sufficient price and quantity to recover their expenses.
He later points to a similar flaw in the theory of Say, who likewise misidentifies the producer as the party that bears the expense of taxes on land or on produce. Though his analysis does seem to imply that a tax on landowners that does not consider production encourages them to make productive use of their land, if only to generate sufficient profit to pay the taxes.
However, Ricardo maintains that taxation can never encourage production. Decreasing taxes may seem to have that effect, but it is not a matter of "encouragement" as it is "less discouragement" that makes production at a lower price more profitable.
He considers Say's suggestion of a tax that demands some proportion of the produce - in effect, seizing a fixed percentage of everyone's crop, regardless of the amount they have produced - to be "the most equitable." Say also proposes a modification that accounts for expenses, such that producers are taxed on their profits only, as an adjustment to promote equity in sharing the burden of taxation.
Ricardo pokes a few holes in this notion, most notably that it does not consider the return on capital or the rent of land - but ultimately it is of little concern. This scheme for taxation, as any other scheme, is merely creative accounting and the practical consequence of taxation falls again on the consumers who purchase goods rather than those who produce them.