16: Taxes on Wages
A tax on wages collected from the employer is an expense that will lead to an increased cost of producing goods, and an increased price of goods in the market. If it is collected of the employee, it will decrease the purchasing power he gains by working, requiring him to demand a higher wage of his employer to cover his living expenses, having the same effect. Ultimately, a tax on wages leads to an increase price of goods in the market.
Seen in this way, the tax on wages is the same as a tax on profits - as wages to an employee are the same as profits to the producer.
Ricardo refers to Adam Smith, who sees things much the same way: the worker will seek a wage that will cover his necessities and such luxuries as to which he has become accustomed; and while he can sacrifice luxury items for want of an opportunity to earn a desired wage, he cannot accept less than what is needed for his subsistence for an extended period of time, or he will perish.
He refers to a "Mr. Buchanan" who refutes Smith, suggesting that the wages of labor are not money, but purchasing power, and that there is no necessary connection between the price of labor an the price of food - the laborer can downscale, first giving up luxuries, then considering cheaper ways to obtain necessities, and finally making do with a lesser amount of what is cheapest. Ricardo acknowledges that in crises in which there is little food and widespread hunger, this is sometimes so, but it does not constitute a general rule. While men can make do for quite a period of time, it is generally because they expects the situation to improve - were it not for that hope, they would emigrate or perish.
However, failing some gross error, the relationship is such that the basic necessities will always be affordable to the most menial classes, given that their labor is requisite to the manufacture of them. (EN: In a sense, the wages of workers represent the share of the product they keep for themselves, and only what they produce in excess can be sold to any other person.)
Further, the aggregated level of need and the aggregate capacity for production are both correlated to the number of the population. This serves as a rebuttal to Malthusianism, in that a population does not outstrip its production, but constitutes its production, and is encouraged to grow where necessities are plentiful and atrophy where necessities are scarce.
While the quantity of any commodity can be adjusted in reaction to the price of that commodity, manufacturing more or less according to the price offered, the amount of labor in a given market does not react in the same way: where demand for labor diminishes in a fixed population, the laborers still exist and still need a means to provide for themselves, and vice-versa. Thus increasing taxes on labor increases the price of goods, decreases the amount of labor needed to produce them, and increases the poverty in the State.
(EN: This doesn't quite ring true. Primarily, there is the migration of workers to markets where labor is needed and away from markets where it is not. Secondly, there is self-employment: a person who is not employed is not helpless to provide for himself, though he may need to find means of doing so other that being employed by others.)
Also, Ricardo stresses that "it must not be forgotten that the produce of taxes is generally wastefully expended." While funds consumed by taxation are spent back into the domestic economy (in cases where they are not sent abroad), their result is that more money is given for fewer goods than it might have purchased in the hands of a shrewd consumer.
Smith maintains that the effect of a tax on wages is to increase wages by a sum at least equal to the tax, and Ricardo fully agrees, but takes issue with a subsequent consideration: that the rise in the price of goods will necessarily be increase by the tax and an additional measure of profit. That is, if 100p is added to labor cost or a good and the manufacturer seeks a profit of 5%, the price of the good will rise by 105p.
If the price of goods is raised only by the amount needed to pay the tax on labor, the manufacturer would make the same profit in monetary units. And if all manufacturers did the same, their exchange rate of their goods would remain unchanged. So the additional increase is arbitrary rather than mandatory.
(EN: True enough. However, in instances where the manufacturer borrows money to pay his laborers, to be repaid when goods are sold, the additional interest expense accrues and diminishes his profit if he does not recover it from the buyers of his wares. This situation has been overlooked.)
There's a bit more elaboration, quite a bit, dismissing suggestions that the tax on labor might be visited on any other party: the landlord will gain no less rent, nor will the investor accept a lower return on his capital, and the producer will take no less profit to compensate for the increased cost of labor: it invariably ends up added to the price of goods in the market.
(EN: Frankly, it's all a bit tedious at this point and I expect I will skip a good bit of content that reiterates what has been stated rather than continue to regurgitate it. It was likely necessary in Ricardo's time to dismiss misconceptions of various species, but the point has been well made, in and of itself: any tax that is paid by anyone involved in the act of producing a good is an expense that they seek to recoup by raising price demanded.)
There's a bit of a left turn, as Ricardo considers the effects of currency debasement - that everyone has more money, but no-one gets any more in exchange for it.
He then strays into the exportation of precious metals to other nations, suggesting the benefit of this is that the people of one nation enjoy an abundance of goods that contribute to their welfare and well-being while producing nothing in return, much in the nature of a prodigal who squanders his inheritance.
But in essence, this is merely a trade of wealth for value - we expend the wealth we have amassed until we arrive at a point where it is exhausted and we must then become productive again. Meanwhile, the nation to which wealth has been exported now has an inheritance that will, in due course, lead to a period of prodigality and squander. Thus "dead stock" is turned into "active stock" from one nation to the next.
This also points to the inherent problem of paper money that is not backed by bullion: one can print as much of it as one pleases. But even this behavior is limited by the limits of a creditor's patience, and the creditor bears the risk that the paper he has voluntarily accepted will become devoid of any exchange value.
He likens the debasement of paper currency, by printing more than one has the bullion to redeem, to the shaving of coins. So long as the coins are not excessively shaven, they will continue to be accepted as if they still had the full weight of their legend - and the party who holds the coin, having accepted it from someone else, at the time the coin is weighed and its devaluation is discovered bears the loss of value.
Returning to prodigality, its sole practical disadvantages is in the weakening of the productive capital of a nation. Where goods are obtained for wealth rather than in exchange of other goods, fields are not ploughed, factories not built, workers not trained, etc., such that when the wealth has been exhausted, the productive capabilities have been significantly diminished.
Swinging back to the topic of taxes in general, Matthew Decker's theory of accumulation is considered: that taxes are compounded for complex products. Where you purchase cotton, the price includes taxes on the farmer who grew the crop. Where you purchase an article of clothing, the price includes the taxes of the tailor, the weaver, the spinner, and the farmer, each of whom prices the material sold to the next to include the taxes they have paid.
(EN: It's an interesting point, which may be the basis of vertical integration: if one company did everything from raising cotton to selling clothes, it would enjoy significant tax advantages and be able to offer goods at a lower price.)
Something cannot be made from nothing, and ultimately the coffers of the state are filled with coin taken from the pockets of its subjects. Ultimately, all of this is sleight-of-hand as to the levying of taxes serves to placate or pander to the citizens, giving them the illusion that the cost of government is borne by someone other than themselves.