Escape from Locke:
British Political Economists on Tax Incidence
Takuo Dome*

Abstract (JEL classification numbers: B12 and H22)
The development of political economy in Britain in the second half of theeighteenth and the early nineteenth centuries was characterized by an
attempt to escape from Locke’s theorem that all taxes would finally fall on
the rent of land and his proposal of a single tax on rent. Although Humeand Steuart rejected Locke’s theorem and proposal, they failed to create asystem of political economy which adequately accounted for capitalistic
reproduction. Smith did produce such a system, but his conclusion
respecting tax incidence did not differ much from Locke’s theorem.
Malthus, in turn, was caught in the contradiction between the Smithian
theory of tax incidence and the Ricardian theory of differential rent.
Ricardo, however, established a system of political economy which
produced a consistent theory of tax incidence which escaped Locke’s
theorem: he succeeded in showing that most taxes would ultimately fall on
profits, not rent. Yet as a very result of his success, Ricardian political
economy prepared a route back to Locke’s proposal, that is a single tax on
rent.

1

1. Introduction
In his pamphlet Some Consideration of the Consequences of the Loweringof Interest, and Raising the Value of Money (1691), John Locke argued asfollows with respect to the incidence of taxation:
It is in vain in a Country whose great Fund is Land, to hope to lay the
publick charge of the Government on any thing else; there at last it willterminate. The Merchant (do what you can) will not bear it, theLabourer cannot, and therefore the Landholder must: And whether hewere best do it, by laying it directly, where it will at last settle, or byletting it come to him by the sinking of his Rents, which when they areonce fallen every one knows are not easily raised again, let him consider(Locke [1691] 1991, 278).
Locke assumed that, because laborers worked at the subsistence level ofwages, they could not bear any taxes, whether direct or indirect. He also
thought that, because merchants earned profits at the minimum level, theywould always pass on any taxes to consumers by raising the price of theircommodities. Consequently, according to Locke, taxation would be bornby landlords and by them alone. As all taxes would finally fall on the rentof land, the taxation system, if it was to be efficient, had to consist in asingle tax on rent.
According to Seligman ([1927] 1969, 101−22), Locke’s theorem that all
taxes would finally fall on rent, as well as his proposal of a single tax,
influenced British writers on taxation in the first half of the eighteenth
century, although his theorem was regarded as implausible and the
proposal as impracticable.1 Following Seligman, historians of economic* Correspondence may be addressed to Professor Takuo Dome, School of Economics,

2

thought as well as fiscal economists have discussed British political
economists’ theories of tax incidence: however, these theories have notalways been examined in terms of Locke’s theorem and proposal. 2
Consequently, whereas Locke’s influence on British political economists
with respect to theories of value, money and international trade − as well as
moral philosophy and political thought − has been energetically discussed, 3
the doctrinal relationship between Locke and British political economists
with respect to tax incidence has hitherto not been clarified.
The purpose of this paper is to show how the development of British
political economy in the second half of the eighteenth and the earlynineteenth centuries was an attempt to escape from Locke’s theorem andproposal. The following sections will discuss Hume’s, Steuart’s, Smith’s,
Malthus’s

andRicardo’s

theoriesoftax

incidence,

and

their

recommendations for a system of taxation. The Ricardian system, which
succeeded in escaping Locke’s theorem, was the culmination of thisOsaka University, Toyonaka, Japan.
1

Petty ([1662] 1997, 40) put forward the antithesis of Locke’s theorem: a land tax

would be shifted on to the price of agricultural produce and ult imately fall on consumers.
On the basis of this theorem, Petty preferred the excise to the land tax (94−95).
According to Seligman ([1927] 1969, 112), Petty’s theorem was not taken seriously by
writers on taxation in the seventeenth and eighteenth centurie s. See also Kennedy [1913]
1970, 80.
2

For works which comprehensively examine British political economists’ theories oftax incidence see, for example, Musgrave 1959 and 1985; Shoup 1960; and O’Brien
1975.
3

For Locke’s contribution to British political economy − particularly with respect to thequantity theory of money − see, for example, Leigh 1974; Vaughn 1980, 31−45; andEltis 1995. For the philosophical break between Locke and the Scottish Enlightenment
see, for example, Winch 1978; Dunn 1983; Mitchell 1986; and Coleman 1995.

3

movement in British political economy. However, contrary to Ricardo’s
intention, his political economy was used to support a single-tax scheme.
Thus the development of British political economy will be char acterized asa successful movement to escape from Locke’s theorem, yet, at the sametime, destined to return his proposal. This conclusion will throw new lightnot only on the history of taxation theory, but also on the intellectual
relationship between Locke and the British political economists.

2. David HumeIn Political Discourses (1752), Hume attacked the view that all taxes
would ultimately fall on the rent of land, criticizing Locke as the founderof this view. He stated:
There is a prevailing opinion, that all taxes, however levied, fall upon
the land at last. Such an opinion may be useful in Britain, by checking
the landed gentlemen, in whose hands our legislature is chiefly lodged,
and making them preserve great regard for trade and industry. But I
must confess, that this principle, tho’ first advanced by a celebrated
writer, has so little appearance of reason, that, were it not for his
authority, it had never been received by anybody (Hume [1752] 1955,
86n).4

4

Locke was, of course, the “celebrated writer”. In the 1770 edition, this passage wasaltered as follows: “It is an opinion, zealously promoted by some political writers, that,since all taxes, as they pretend, fall ultimately upon land, it were better to lay themoriginally there, and abolish every duty upon consumptions. But it is denied, that all
taxes fall ultimately upon land” (Hume [1752] 1955, 86−87). Thus, in the 1770 edition,
Hume more openly criticized both Locke’s proposal and his theorem.

4

Hume thought that, if a tax was imposed on a commodity, merchants
could not easily raise the price of the commodity taxed because thedomestic price would be limited by the price in the foreign market. Humeimplicitly assumed either that the merchants earned a greater profit than theminimum level, or that they had other sources of revenue. Suppose that themerchants were able to raise the price. If the commodity taxed was aluxury good, the consumers would have to pay the tax. If the commodity
was a necessary good consumed by laborers, they would either consumeless or work harder, or do both, as long as the rise in the price wasmoderate. This assumed either that laborers received a wage above thesubsistence level, or that they had leisure hours; wages would not rise inthese circumstances. Consequently, a tax on a commodity would not fall on
landlords alone: it would fall on merchants, rich consumers or laborers,
depending on whether the price and wages could rise. Thus Hume refuted
Locke’s theorem, which was the logical foundation of his single-tax
proposal.
Hume preferred indirect taxes to direct taxes. Whereas direct taxes werecompulsory and apt to be arbitrary, indirect taxes were voluntary andchecked by markets. He concluded:
The best taxes are those which are levied upon consumptions, especiallythose of luxury; because such taxes are less felt by the people. They
seem to be, in some measure, voluntary; since a man may chuse how far
he will use the commodity which is taxed: They naturally produce
sobriety and frugality, if judiciously imposed: And being confoundedwith the natural price of the commodity, they are scarcely perceived by
the consumers. Their only disadvantage is, that they are expensive in thelevying.

5

Taxes upon possessions are levied without expence; but have every
other disadvantage. Most states, however, are obliged to have recourse
to them, in order to supply the deficiencies of the other (85).
To Hume, taxes on luxuries were desirable, not only because they were
voluntary taxes, but also because they would fall equally on richconsumers, who were composed of landlords and the moneyed interest.
Although the moneyed interest earned profits from their business activities,
their “revenues in the funds are a sure resource for themselves and theirfamilies” (94).5 In September 1766, Hume quarreled with Turgot about asingle tax on rent. Turgot supported Locke’s theorem and proposal on thebasis of the Physiocratic assumption that land alone furnished the net
product. Hume argued that taxes had to be born not only by landlords but
also by the moneyed interest:
I beg you also to consider, that, besides the Proprietors of Land and thelabouring Poor, there is in every civilised Community a very large and avery opulent Body who employ their Stocks in Commerce and who
enjoy a great Revenue from their giving Labour to the poorer sort. …
Now it is very just, that these should pay for the Support of theCommunity, which can only be where Taxes are lay’d on Consumptions(209).

5

Hume’snotionofthemoneyedinterest

may

best

be

described

as“merchants-cum-stockholders”. However, Winch argues that “[t]he conflict foreseen by
Hume was more dramatic, but it seems important to stress that he was speaking ofconflict between the landed and moneyed interests, rather than between the landed andmerchant interests”, and that “there are no grounds for equating the merchant andmoneyed interests” (1978, 128).

6

Whereas landlords could not hide their land from inspectors, themoneyed interest could hide their property more easily: they could also
export it to foreign countries in order to escape direct taxes. Thus taxes onproperty would produce inequality between the two classes. For this reason,
Hume concluded that “[d]uties upon consumption are more equal and easy
than those upon possessions” (97).
Having refuted Locke’s theorem and proposal, Hume recommended
taxes on luxuries because they were equal in that they would fall on bothlandlords and the moneyed interest. However, his theory of tax incidence
was not derived from a consistent system of political economy: he simply
followed the then prevailing view that whereas the land tax would fall on
landlords, customs and excise would fall on consumers.6 The developmentof a theory of tax incidence consistently derived from a system of political
economy was left to two Scottish political economists, Steuart and Smith.

3. Sir James Steuart
In the final substantive chapter of An Inquiry into the Principles of
Political Oeconomy (1767), Steuart proposed to replace the land tax with ageneral sales tax:
I shall propose a tax, which would fill up the place of every other; andcould it be levied, would be the best perhaps ever thought of. It is a tax,
at so much per cent. upon the sale of every commodity (Steuart [1767]
1998, 4:247).

6

For this prevailing view at the end of the seventeenth and in the first half of theeighteenth centuries see Kennedy [1913] 1970, 80−81 and Seligman [1927] 1969,
110−22.

7

The idea for Steuart’s general sales tax should be credited partly to Charles
Davenant, who , although accepting Locke’s theorem, rejected a single tax
on rent. Davenant proposed to finance the War of the Spanish Succession
by extending the excise (Davenant 1695, 159 and [1698] 1967, 1:143).7
The general sales tax might also be seen as a revival of Walpole’s Excise
Bill of 1733.8 Thus, although Steuart did not directly refer to Locke on thequestion of taxation, his proposal of a general sales tax might be located in
the anti-Lockean tradition. 9 However, in contrast to his predecessors,
Steuart attempted to derive his conclusion consistently from a systematic
account of political economy. 10
7Steuart often referred to Davenant’s works on public debt and taxation, stating, forinstance,that “[i]n his treatise of ways and means, article excises, where he issearching for expedients to provide money for the war, he plainly shews a thoroughknowledge of this imposition” ([1767] 1998, 4:20). However, Steuart thought thatdifficulties with the excise “engaged Davenant to propose having recourse to theland-property and poll-taxes, for raising, within the year, the sums required for carrying
on the war” (4:20).
8

In the following statement, Steuart was probably referring to the failure of Walpole’s

Excise Bill: “The scheme of a general excise was pushed with too much vivacity, wasmade a matter of party, was ill-timed, and the people nowise prepared for it; hence it willbe the more difficult to bring about at another time, without the greatest precautions”([1767] 1998, 1:30). For his praise of Walpole see 1:85.
9

Steuart’s references to Locke were confined to the subject of money. See Steuart[1767] 1998, 2:77, 242, 281 and 289.
10

Seligman states that the “fullest discussion of the incidence of taxation before Adam

Smith is to be found in the works of Sir James Steuart” ([1927] 1969, 117−18). Seligman,however, does not discuss how Steuart’s theory of tax incidence was used in his
macroeconomic theory of taxation. Yang (1994, 226−73) attempts to integrate Steuart’s
microeconomic theory of tax incidence and his macroeconomic theory of taxation andpublic debt: he shows that the macroeconomic effects of a tax on output, the price level

8The actors involve d in Steuart’s system were landlords, the moneyedinterest, the industrious classes and a statesman (government). The
industrious classes were composed of farmers, manufacturers andmerchants. Landlords rented their land to farmers, receiving rent.11 The
moneyed interest − composed of bankers, usurers, stockholders andstockbrokers − lent money to landlords, the industrious classes and thegovernment, receiving interest.12 Government was assumed to participate
in the economy through its policies relating to trade, money and finance. It
must be stressed that, in Steuart’s system, money was not only a means tofacilitate exchange: it also created an effectual demand for commodities,
consequently creating demand for the work of the industrious classes(Steuart [1767] 1998, 1:51−52).13
The farmers produced food and raw materials. Manufacturers produced
necessities of life as well as luxuries. In producing manufactures, they used

and the rate of interest all depend on whether the tax shifts onto the price.
11

Brewer states that, in Steuart’s system, “the theory of rent is not discussed at all, while

farmer’s incomes are not divided into wages and profits” (1997, 7), and that Steuart, as
well as Hume, was thinking of a system of agriculture mainly dominated by independent
farmers.
12

Akhtar argues that, in Steuart’s system, “the rate of interest is determined by thedemand for loanable funds and the quantity of money available for lending” (1979, 292).
According to Brewer (1997, 13), Steuart and Hume assumed that merchants borrowed
money, whereas farmers and manufacturers did not.
13

Steuart used the term “effectual demand” as follows: “Now because it is the effectual

demand, as I may call it, which makes the husbandman labour for the sake of theequivalent, and because this demand increases, by the multiplication of those who havean equivalent to give, therefore I say that multiplication is the cause, and agriculture theeffect” ([1767] 1998, 1:134). Thus Steuart defined effectual demand as a person’s
demand when supported by purchasing power − in another word, money.

9

agricultural products as raw materials (4:146−48). It is unclear whether
agricultural production used manufactured products, such as tools andmachines. Farmers, manufacturers and merchants were self-employed or
employed by others. Wages of labor were “regulated by the demand for thework, and the competition among the workmen to be employed in
producing it” (4:161). The price of necessities influenced the money-wage
rate. Although Steuart referred to the labor market, this did not mean that
he understood, as a typical phenomenon in modern commercial society, theemergence and accumulation of capital which regularly gained surplus
value through employing wage-labor. As Meek (1958, 294) points out,
capitalistic reproduction is not clearly explained in Steuart’s system.14
Consumers were divided into two classes: idle consumers andindustrious consumers. People who could not draw back indirect taxes on
consumption by raising the price of their commodities or services were
defined as idle consumers (Steuart [1767] 1998, 4:204−205). Landlords
belonged to this category. Although Steuart did not state this explicitly, the14

Many Steuart scholars support Meek’s view in this respect: Eltis thinks that, in Steuart,“Smith’s perception that ‘stock’ influences the demand for labour is lacking” (1986, 68);
Skinner (1988, 136) argues that the distinction between rent, profits and wages, as well
as between land, labor and capital, was less obvious in Steuart’s system than in Smith’s;
Doujon argues that Steuart’s system “lacked a conception of man which gave major
impetus to the ideology of economic development” (1994, 506); Brewer points out that“neither Hume nor Steuart had a notion of classes based on different types of income,when neither had a developed theory of wages, profits or rent” (1997, 7). In contrast,
Perelman argues that the “connection between the creation of a wide-spread wage labour
relationship and the social division of labor was essential to the work of Steuart” (1983,
469). Nevertheless Perelman acknowledges that Steuart “did not sense the full potentialof capital” (482). Here I accept the standard interpretation that Steuart’s understanding of
the capital-labor relationship was incomplete.

10moneyed interest must also be classified as idle consumers, because they
did not have the power to alter the rate of interest in line with the taxes
they had to pay. People who could draw back consumption taxes − people
who consumed onl y for the purpose of maintaining their subsistence andbusiness − were defined as industrious consumers.
On the basis of this system, Steuart demonstrated a difference in theincidence of direct taxes and indirect taxes, which he called them“cumulative taxes” and “proportional taxes” respectively. A proportional
tax would always raise the price of the commodity taxed (4:155). Hence,
the burden of the tax would be carried by the consumers, not by the
producers of the commodity. If the commodity taxed was a luxury good,the consumers could not shift the burden on to others. If the commodity
taxed was a production good, producers who used the commodity taxed
would raise the price of the commodity they produced: consequently, theproportional tax would ultimately fall on the people who consumed thefinal product (4:144−49). If a tax was imposed on a necessary good, idle
consumers would have to carry the burden of the tax by spending moremoney on necessities. By contrast, the industrious classes could draw backa proportional tax by raising the price of their work.15 Thus the idle
consumers ultimately carried the burden of a proportional tax (4:148).
In contrast to proportional taxes, cumulative taxes were assumed to“affect the possessions, income, and profits of every individual, without
putting it in their power to draw them back in any way whatever;
15

Although Steuart did not think that the price of work was directly determined by theprice of necessities, he acknowledged that “the price of the market [for work] may in agreat measure be influenced by the price of subsistence” ([1767] 1998, 4:163), and that“the industrious man, who enjoys neither superfluity or idleness, may and can augment
the price of his work in proportion” (4:176).

11

consequently, such taxes tend very little towards enhancing the price ofcommodities” (4:150). Because people could not shift the burden of
cumulative taxes onto others, lower-class people would be harmed most
severely by such taxes.
A land tax was the least objectionable tax in the category of cumulative
taxes. Although it was an unequal tax (4:215), landlords usually had
enough income and property to pay such a tax. The English land tax at thistime was imposed on the fixed value of land at a rate of between one
shilling and four shillings per pound. Because Steuart thought that a land
tax levied in proportion to rent or the value of land would discourage theimprovement of land, he proposed that the then current valuation should be
fixed for at least a hundred years (4:232−33).16
If a land tax was an unobjectionable tax because paid by idle consumers,
so was a tax levied on the interest of money. However, Steuart did notthink it possible to obtain a revenue through a tax on the interest of money(4:194). In contrast to landlords, moneyed men could avoid a direct tax bysending money to foreign countries. An outflow of money from thecommon domestic market would constitute a fatal blow to the developmentof the economy. Cumulative taxes should not be imposed on the profits of
the industrious classes, because the greater part of such profits would be
invested (4:196).
Thus cumulative taxes would distress the lower classes; impede theimprovement of land; lead to the export of money to foreign countries; andreduce capital in the hands of the industrious classes. Consequently,
16

To Steuart, the tithe proposed by the Marechal de Voauban for France was the worstof all taxes which might be imposed on the income of land. He thought that a tithe
imposed in proportion to the total product of land − not to rent − would place anexcessive burden on landlords (4:222).

12

cumulative taxes would check the growth of national wealth. For thesereasons, Steuart recommended taxes on consumption in preference to taxes
on property (4:182).17
Public money obtained through taxes would be spent not only on thesalaries of public servants and the interest due to public creditors, but also
on giving employment to the industrious classes − particularly
manufacturers. It might also be used for bounties on the exportation of
manufactures, and to relieve manufacturers should the price of their work
fall below the level of subsistence (1:285−86). An increase in demand for
manufacturers’ work would increase demand for agricultural products andcommercial services. At the same time demand for land would increase,and improvement of land be promoted: consequently, the income produced
from the rent of land would rise. Demand for money would increase
because of the increase in taxes and the expansion of markets: the revenueof the moneyed interest would increase. Thus taxation had ademand-creating effect, which would advance national prosperity.
However, for Steuart, such a result held true only with respect toproportional taxes. He did not think that cumulative taxes would maintainthe consumption of those who would have to pay the taxes.18 Cumulative
taxes would fall on every class of society, and in particular distress the17

Steuart thought that proportional taxes would form the basis of the taxation system

under a limited monarchy, whereas cumulative taxes would form the basis of the system
under an absolute monarchy (2:33). In general he preferred proportional taxes,
considering them more suitable to the development of a liberal and commercial society.
18

Steuart argued: “I cannot discover the shadow of a reason, to conclude that taking

arbitrarily away from some individuals, a part of their gains by cumulative taxes … mustin any respect imply an incitement in the consumers to demand more” (4:211). However,
he did not explain clearly why proportional taxes alone would maintain consumption.

13

industrious classes, who would not be able to afford to maintain their levelof consumption. In contrast, proportional taxes would fall on idle
consumers alone, who would be able to afford to maintain their level ofconsumption after paying the taxes − they could pay taxes by using
hoarded money, by reducing consumption of imported luxuries, or by
converting fixed property into money (4:212). In these cases, government
expenditure financed by taxation could create new a demand for the workof manufacturers.
Why did Steuart propose to abolish the land tax and establish a generalsales tax? He recognized that “the landlord, cæteris paribus, who pays aland tax, as well as his proportion upon his consumption, is more hardly
dealt with than the proprietor of the other branch of solid property, thefunds, who pays his proportion only of the last” (4:100). A cumulative tax
on the income of the moneyed interest would fail to balance the land tax,
because moneyed men could avoid such a direct tax by sending theirmoney to foreign countries. The inequality of the land tax violated
Steuart’s principle that “the load of all impositions may be equallydistributed upon every class of a people who enjoys superfluity” (4:100).
Thus, although Steuart considered the land tax as the least objectionable ofcumulative taxes, he proposed to abolish it in order to maintain the balance
between the landlords and the moneyed interest, who together constituted
the class of idle consumers. In compensation, he proposed to extend
proportional taxes as far as possible, hence his recommendation of ageneral sales tax.
Thus, following Hume, Steuart rejected Locke’s theorem that all taxes
would fall on landlords alone: whereas direct taxes would fall on everyclass of society, indirect taxes would fall on the moneyed interest as well as
landlords. He also rejected Locke’s proposal for a single tax on rent,
14

recommending its antithesis, namely, a general sales tax. Steuart’s theoryof tax incidence was founded on a more systematic account of political
economy than Hume’s. However, his view that indirect taxes would always
raise the price of the commodity taxed, whereas direct taxes would neverbe shifted on to the price, seems arbitrary. It was also arbitrary to assume
that idle consumers would maintain their level of consumption when taxes
were imposed on their consumption, whereas they would not do so in thecase of taxes on property or income. In Steuart’s system, because thecapital-labor relationship was not the central feature, the incidence oftaxation was not considered within the framework of capitalistic
reproduction. The attempt to establish a more general theory of tax
incidence on the basis of capitalistic reproduction was taken up by Smith.19

4. Adam Smith
Before publishing An Inquiry into the Nature and Causes of the Wealth of
Nations (1776; hereafter Wealth of Nations), Smith had discussed thesubject of taxation in Lectures on Jurisprudence. In contrast to Steuart,
Smith thought that taxation was “in reality one of the causes that the
progress of opulence has been so slow” (Smith [1962−63 and 1766] 1978,529).20 Thus he investigated which taxes might result in “the least loss or
19

Skinner states that “Steuart’s desire to produce a conceptual system whose parts arelinked by common principles shows a certain similarity, as to motive, with that later
articulated by Adam Smith” (1981, 22). This is also true with respect to their theories oftax incidence.
20

Note also Smith’s complaint about taxation: “That the money prices of commodities

have in general been sinking in England for near a century past, and would have sunkmuch more had they not been artificially kept by improper taxes and excises, and bysome unjust monopolies” ([1762−63 and 1766] 1978, 576). Smith did not accept

15

hindrance to the industry of the people” (6), stating that “[i]n general
whatever revenue can be raised most insensibly from the people ought tobe preferr’d” (398).
In Lectures on Jurisprudence, Smith compared taxes on property andtaxes on consumption, stating that “[t]axes upon pos[s]essions arenatural[l]y equal, but those upon consumptions natural[l]y unequal, as they
are sometimes paid by the merchant, sometimes by the consumer, andsometimes by the importer, who must be repaid it by the consumer” (532).
Taxes on property were equal in that they would be proportional to thetaxpayer’s ability to pay: this meant that taxes on property would not bepassed on to other people.21 Although Smith acknowledged that to tax landalone was unjust, he argued that it would be a breach of liberty to inspect
people’s stock and money for the purpose of taxation (533−34).
Taxes on consumption − which would be shifted on to the price − were
unequal, because they were proportional to people’s liberality, not theirability to pay. Nevertheless, taxes on consumption were rarely felt bypeople who paid them. To Smith, this was advantage in that it constituted
the least infringement on liberty. He concluded that “[t]axes upon
consumptions are therefore more eligible than taxes upon possessions, as
they have not so great a tendency to ruin the circumstances of individuals”(533).22
Steuart’s assumption that government expenditure financed by taxes and public debt
would create an effectual demand.
21

It must be noted that Smith’s notion of equality in taxation was different from that ofHume. In Hume’s view a tax was equal when it fell on both landlords and the moneyedinterest.
22

Smith was generally satisfied with the English system of taxation, composed mainlyof taxes on consumption. He stated that, “the English are the best financ[i]ers in Europe,16

Although, in Lectures on Jurisprudence, Smith stated his position withregard to taxes on consumption and taxes on property, it was not until
Wealth of Nations that he put forward a full theory of tax incidence thatwas consistent with his political economy. In Chapter 2, Book 5, heassessed various taxes on the basis of the natural-price system. 23 One ofhis purposes was to examine the Physiocrats’ − and Locke’s − theorem that
all taxes would fall on rent.
A tax upon the rent of land which varies with every variation of the rent ,or which rises and falls according to the improvement or neglect of
cultivation, is recommended by that sect of men of letters in France,
who call themselves the œconomists, as the most equitable of all taxes.
All taxes, they pretend, fall ultimately upon the rent of land, and ought
therefore to be imposed equally upon the fund which must finally pay
them. That all taxes ought to fall as equally as possible upon the fundwhich must finally pay them, is certainly true. But without entering into
the disagreeable discussion of the metaphysical arguments by which
they support their very ingenious theory, it will sufficiently appear fromthe following review, what are the taxes which fall finally upon the rentof the land, and what are those which fall finally upon some other fund
(Smith [1776] 1976, 830).
Smith’s natural-price system was composed of three kinds ofcommodities − raw produce, necessities and luxuries. The actors in his
and their taxes are levied with more propriety than those of any country whatever” (534).
23

Whereas Shoup (1960, 14), Peacock (1975, 565), Lynn ([1976] 1984, 442) and

Musgrave (1976, 309) argue that Smith’s theory of tax incidence is internallyinconsistent, Dome (1998) put forward an interpretation which renders it consistent. The
following part of the section follows this interpretation.

17

system were landlords, capitalists and wage-laborers, who earned rent,
profits and wages respectively. 24 Whereas necessities and luxuries were
produced by labor alone, the production of raw produce used labor andland. A laborer consumed fixed quantities of raw produce and necessities:
let the quantities be called the “wage basket”. Consequently, money wages
depended on the price of raw produce and of necessities.25 Thus thenatural-price system might be understood to be a system of capitalistic
reproduction.26
In his system, Smith gave exogenously the rate of profit as well as thewage basket. 27 Meanwhile, rent was assumed to be determined24

In contrast to Steuart’s system, the moneyed interest did not play an important role in

Smith’s system.
25

The level of the wage basket depended on the dynamic demand for labor, and the“demand for labour, according as it happens to be either increasing, stationary, or
declining; or to require an increasing, stationary, or declining population, regulates thesubsistence of the labourer, and determines in what degree it shall be, either liberal,
moderate, or scanty” (Smith [1776] 1976, 864). Thus, if the growth rate of the demand
for labor was constant, the level of the wage basket would be static.
26“The natural-price system” corresponds to what O’Brien calls “the profit-equalization

mechanism”. He states that the mechanism “is to be found in Classical economists from
Smith onwards and for the Classical economists it constituted a major tool in the analysis
of tax incidence” (1975, 249). Seligman calls Smith’s and Ricardo’s theory of tax
incidence the “absolute theory”, because they assumed the perfect transferability ofcapital and labour ([1927] 1969, 151).
27

Regarding the natural rate of profit, Smith thought that it was “every where regulatedby the quantity of stock to be employed in proportion to the quantity of the employment,
or of the business which must be done by it” ([1776] 1976, 848). This implied that, if the
proportion between the aggregate quantity of capital and the aggregate demand forcapital was not affected by the price of individual commodities, the natural rate of profit
could be treated as a constant.

18

endogenously: rent was defined as the residual of the price of raw produce
after profits and wages at the natural rates were subtracted (160).28 If theprice of raw produce was chosen as the numéraire, cost-price equations of
raw produce, necessities and luxuries would determine rent, the price ofnecessities, and the price of luxuries respectively. 29 This natural-pricesystem was consistent with Smith’s conclusions with respect to the28

Smith also stated: “Rent, it is to be observed, therefore, enters into the composition of

the price of commodities in a different way from wages and profit. High or low wages
and profit, are the causes of high or low price; high or low rent is the effect of it” (162).
29

These equations can be presented as follows:
1 = (1+t1 )[{1+(1+tp )r}(1+tw)(b 1 +b 2 p 2 )l1 +(1+tR )R],(1)

p 2 = (1+t2 ){1+(1+tp )r}(1+tw)(b 1 +b 2 p 2 )l2 ,(2)

p 3 = (1+t3 ){1+(1+tp )r}(1+tw)(b 1 +b 2 p 2 )l3 .

(3)Equations (1), (2) and (3) are cost-price equations with reference to the sectors of raw
produce, necessities, and luxur ies respectively. The price of raw produce is chosen as thenuméraire: p 2 and p 3 show the natural price of necessities and of luxuries respectively.
The input coefficient of labor into sector i (i=1,2,3) is denoted by li . The natural rate ofprofit and money wages per unit of labor are shown by r and b 1 +b2 p2 respectively: b 1 andb 2 show the wage basket − the quantities of raw produce and necessities consumed by aunit of labor respectively. R denotes the natural rate of rent per unit of raw produce. The
rates of tax levied on raw produce, necessities, and luxuries are shown by t1 , t2 , and t3
respectively: tp , tw and tR denote tax rates imposed on profits, wages and rent respectively.
It must be stressed that r − as well as b 1 and b 2 − is given, whereas R is endogenously
determined. Whereas p 2 is determined exclusively in equation (2), equations (1) and (3)determine R and p 3 respectively, where p2 is known. The comparative statics will show
how a change in tax rates − t1 , t2 , t3 , tw, tp , and tR − influences endogenous variables − R,
p 1 , and p 2 : the results coincide with Smith’s conclusions. For a more precise analysis see
Dome 1998.

19

incidence of various taxes: taxes on raw produce; necessities; luxuries;
wages; profits; and rent.30
Taxes levied on raw produce “are in reality taxes upon rent; and though
they may be originally advanced by the farmer, are finally paid by thelandlord” (836−7). In fact, Smith’s natural-price system signified that a tax
on raw produce would decrease rent, keeping the prices of necessities andluxuries unaltered.
Taxes imposed on the consumption of necessities would raise the wagesof labor, and consequently raise the price of all manufactures: rent would
decrease. Landlords would have to bear the burden of the tax in the form ofa reduction of nominal rent and of a decrease in the real purchasing powerof rent. Capitalists would also have to carry the burden of the tax, although
the rate of profit would not change: they would be able to buy fewer
luxuries because of the rise in the price. Labourers, in contrast, were notinfluenced by taxes on necessities: for their wages would be raised inproportion to any increase in the price of necessities. Thus, stated Smith,“[t]he middling and superior ranks of people, if they understood their own
interest, ought always to oppose all taxes upon the necessities of life, as
well as all direct taxes upon the wages of labour” (873). Meanwhile,30

In order to concentrate on the effects of taxation on prices and rent, I will not consider

the argument that taxation may change the quantity of production of each commodity. It
must be noted, however, that Smith admitted the following possibilities: that a tax on
luxuries might discourage their production ([1776] 1976, 897); that a tax levied onowners of land and capital might retard improvement of the land and remove capital toforeign countries (927−8); and that a tax on wages might reduce the demand for labour(865). The implication is that taxation might alter the production level of an individualcommodity, as well as the aggregate level of production in the long run.

20

“[t]axes upon luxuries had no tendency to raise the price of any othercommodities except that of the commodities taxed” (873).31
In contrast to Steuart, Smith showed that some taxes on property andincome − as well as all taxes on consumption − would be shifted on to theprice. For example, a tax imposed directly on wages had the same effect asa tax on necessities. Smith did not think that a tax on wages would be bornby laborers: it would be paid initially by their employers. The employers oflaborers, if they were manufacturers, would raise the price of manufactures.
If they were farmers, however, they would not raise the price of raw
produce; they would pay less rent to the landlords (864−65). Thus theburden of a tax on wages would be incurred by consumers and landlords.
Landlords had to pay the tax on wages and the resulting increase in theprice of necessities in the production of raw produce: they also had to pay
the tax as consumers of necessities and luxuries: capitalists would incur the
tax only as consumers of luxuries.
Smith thought that profits were composed of two elements: the interestof the owners of capital; and the compensation of the users of capital forthe risk and inconvenience of employing capital. The users of capital could
not shift a tax levied on profits to the interest, because the owners of capitalwould export their capital to foreign countries. Consequently, the users ofcapital would pass on the tax to the price of manufactures and to rent
(847−48). Thus a tax on profits had the same effect as taxes on wages andon necessities: rent would decrease, and the price of necessities and ofluxuries would increase.

31

Smith believed that laborers consumed some luxuries as well as raw produce andnecessities (871). However, he did not think that a change in the price of luxuries would
increase the money wages of labor.

21

Smith took it for granted that a tax on the rent of land would be paid bylandlords alone (828−36). By his definition of rent − the residual of theprice of raw produce after subtracting sufficient means to maintain thestock together with the ordinary profits − the landlords could not pass on a
tax to the farmers. The tax would decrease rent, and would not change theprice of necessities and of luxuries.
Smith’s theory of tax incidence can be summarized as follows: (1) a tax
on raw produce would decrease rent, keeping the price of necessities and ofluxuries unaltered; (2) taxes on necessities, on wages, and on profits would
reduce rent, raising the price of necessities and of luxuries; (3) a tax on
luxuries would increase their price, keeping nominal rent and the price ofnecessities unchanged; (4) a tax levied on rent would reduce rent,
maintaining the price of necessities and of luxuries. Thus all taxes, except a
tax on luxuries, would reduce rent. Landlords had to pay taxes on luxuries
as the main consumers of them. As the consumers of luxuries, capitalists
also had to carry the burden not only of taxes on luxuries but also of taxes
on necessities, wages and profits. However, their consumption of luxuries
would be much less than that of landlords. Thus Smith’s theory of tax
incidence identified landlords as the major taxpayers in a state.
In order to judge the desirability of a tax, Smith put forward four
criteria: equality; certainty; convenience; and economy. However, withrespect to equality, Smith stated:
Every tax, it must be observed once for all, which falls finally upon one
only of the three sorts of revenue above -mentioned, is necessarily
unequal, in so far as it does not affect the other two. In the following
examination of different taxes I shall seldom take much futher notice of
this sort of inequality, but shall, in most cases, confine my observations

22

to that inequality which is occasioned by a particular tax falling
unequally even upon that particular sort of private revenue which isaffected by it (825).
Smith did not therefore consider equality between classes, but confined his
examination as to whether a tax would be levied in proportion to the ability
to pay within the context of a specific class.32
The English land tax − although meeting the tests certainty, convenienceand economy − was unequal, because it was fixed in value per acre. In
order for the tax to be equal, it had to be proportionate to rent. However, a
proportional land tax would impinge the improvement of land. This
problem would be solved if the land tax exempted any cost incurred in
improving the land. Thus, following the Physiocrats, Smith suggested avariable land tax, which was “much more proper to be established as aperpetual and unalterable regulation, or as what is called a fundamental lawof commonwealth” (834).
With respect to taxes on consumption, a tax on luxuries was more convenient
than taxes on necessities and raw produce, because a tax on luxuries would be
paid only by the consumers of the commodity taxed (826).33 Thus, although32

Winch notes that Smith’s disregard of equality between classes “not only sets him

apart from the later interest in class distribution associated with the name of David
Ricardo, but distances him from much of the earlier oppositional literature concentratingon conflicts between landowning and moneyed interests” (1978, 137).
33

In a letter to Sir John Sinclair of January 1786, Smith stated: “I dislike all taxes that

may affect the necessary expenses of the poor. They, according to circumstances, either
oppress the people immediately subject to them, or are repaid with great interest by therich, i.e. by their employers in the advanced wages of labour. Taxes on the luxuries of thepoor, upon their beer and other spirituous liquors, for example, as long as they are so
moderate as not to give much temptation to smuggling, I am so far from disapproving,23

Smith was in general satisfied with the existing system of taxation in Britain(899), he suggested to make the land tax proportional to rent and to reduce thebase of indirect taxes to luxuries alone.34

In Wealth of Nations, Smith demonstrated that all taxes would finally
fall on rent, except taxes on luxuries which would be paid mainly bylandlords. Despite his criticism of the Physiocrats’ assumption that
agriculture alone was the source of the net prodct, this conclusion did not
differ much from their − and Locke’s − theorem that all taxes would
ultimately fall on the rent of land.35 Smith’s conclusion was drawn fromhis assumption that in the natural-price system the rate of profit and thewage basket were fixed: this assumption resembled Locke’s that merchants
and laborers earned revenue at the minimum level.36 In contrast to his
favorable attitude towards consumption taxes found in Lectures on
Jurisprudence, Smith, in Wealth of Nations, suggested a variable land tax
in order to equalize the tax. Thus, although Smith produced a consistentsystem of political economy, his theory of tax incidence might be viewe dthat I [l]ook upon them as the best of sumptuary laws” (1977, 327). See also Smith[1776] 1976, 888.
34

This supports Winch’s view regarding central elements of Smith’s taxation policy: “It

was reasonable to ask the rich to pay more than proportionately towards the expenses ofthe sovereign; and it was equally reasonable for those rents which owed their existence
to the security provided by good government to bear a special tax” (1978, 137).
35

McCulloch thought that Smith’s theory of tax incidence was influenced by the

Physiocrats’ assumption: “Quesnay, and even Adam Smith, regarded the rent of land as apeculiar product, originating in and depending upon the special bounty of nature to theagriculturists. But in this they were entirely wrong” ([1845] 1995, 53).
36

Rashid (1998, 106) argues that Smith’s assumption of a fixed real wage can be

attributed to Locke and Decker.

24

as a step back from Hume and Steuart towards Locke.37 This resulted fromhis theory of distribution, and in particular his theory of rent, which would
be attacked by Ricardo.

5. Thomas Robert Malthus
Malthus’s early references to the incidence of taxation are found in afootnote to the second edition of An Essay on the Principle of Population(1803; hereafter Essay), Book III, Chapter IX, “Of the Definition of Wealth.
Agricultural and Commercial Systems”. 38 Here Malthus criticized the
Physiocrats’ theory of taxation and their proposal for a single tax on rent.
He did not think that all taxation would fall upon the landlords, even if thesurplus produce of the land was assumed to be the sole fund for taxation.
According to Malthus, every man who owned capital in money andreceive d interest “has virtually a mortgage on the land for a certain portionof the surplus produce” (Malthus [1803] 1989, 1:398). Thus Malthus
thought that taxes would fall not only on landlords but also on the moneyedinterest.39
37

Smith did not refer directly to Locke’s theory of tax incidence. His references to

Locke in Wealth of Nations were in the context of a discussion of the theory of money:see Smith [1776] 1976, 60, 353 and 430. In Lectures on Jurisprudence, Smith referred to
Locke’s theory of government: for example, he stated that “Mr. Locke says that when asovereign raises taxes against the will of the people resistance is lawful, but there is nocountry besides England where the people have any vote in the matter” ([1762−63 and
1766] 1978, 435); see also 323.
38

Malthus’s theory of taxation has been neglected. The subject is only occasionallymentioned in, for example, James 1979, Petersen 1979 and Hollander 1997. The only
detailed study is Dome (1997), on which the current section draws.
39

In this regard Hollander states: “Malthus maintained the physiocratic notion that

taxation incidence falls solely on the agricultural surplus, thereby supplementing the25Malthus also thought that in practice “it cannot be doubted that even the
profits of stock and the wages of labour, particularly of professional labour,
pay some taxes on necessaries, and many on luxuries, for a very
considerable time” (1:398). Thus in 1803, in opposition to the Physiocrats’doctrine, Malthus thought that a considerable portion of taxes were in fact
paid from non-rent income. Subsequently this footnote was altered twice,and finally eliminated when Malthus rewrote Chapters VII−X of Book III
for the fifth edition of the Essay (1817).
In the third edition of the Essay (1806), Chapter X of Book III, Malthus
added a footnote which stated that “[t]axes which affect capitals in tradeare almost immediately shifted off on the consumer; but taxes which affectagricultural capital fall, during the current leases, wholly on the farmer”(1:405). Nevertheless, he noted that “the high price of labour or taxes on
agricultural capital ultimately fall on the rent” (1:405). This footnote wasalso removed from the 1817 edition.
In An Inquiry into the Nature and Progress of Rent (1815), Malthus
demonstrated that taxes on agricultural capital could be shifted toconsumers by increasing the price of the product: “every tax, which falls
on agricultural capital, either prevents a proposed improvement, or causes
it to be purchased at a higher price” (Malthus [1815] 1986, 7:141).
However, these effects were only temporary:
When new leases are let, these taxes are generally thrown off upon thelandlord. The farmer so makes his bargain, or ought to make it, as toleave himself, after every expense has been paid, the average profits ofagricultural stock in the actual circumstances of the country, whatevernotion of surplus as net income disposable for capital accumulation …, but insisted on
the empirical fact that surplus cannot be identified with land rent” (1997, 361).

26

they may be, and in whatever manner they may have been affected bytaxes, particularly by so general a one as the property tax. The farmer,
therefore, by paying less rent to his landlord on the renewal of his lease,is relieved from any peculiar pressure, and may go on in the common
routine of cultivation with the common profits (7:141).
Malthus’s opinion with respect to the incidence of taxes levied on
agricultural activities might be summarized as follows: in the short run,they would be paid from profits and wages; in the long run, however, theywould fall on rent . The last paragraph in this pamphlet clearly reveals
Malthus’s fundamental position in relation to tax incidence:
Though it is by no means true, as stated by the Economists, that all taxes
fall on the net rents of the landlords, yet it is certainly true that they are
more frequently taxed both indirectly as well as directly, and have lesspower of relieving themselves, than any other order of the state. And as
they pay, as they certainly do, many of the taxes which fall on thecapital of the farmer and the wages of the labourer, as well as those
directly imposed on themselves; they must necessarily feel it in thediminution of that portion of the whole produce, which under othercircumstances would have fallen to their share. But the degree in which
the different classes of society are affected by taxes, is in itself a copious
subject, belonging to general principles of taxation, and deserves aseparate inquiry (7:145).
Malthus’s theory of tax incidence basically followed that of Smith: mosttaxes − at least taxes relating to agriculture − would ultimately fall on

27

rent.40 However, because Malthus attempted to establish the theory ofdifferential rent − demonstrating the concept of marginal land − he had toadmit that the landlord of marginal land had no capacity to pay any tax. 41
Ricardo, recognizing this problem, wrote to Malthus in February 1815:
I differ too, as you know, as to the effects of taxation on the growth of
produce. You appear to me not quite consistent in admitting as you
unequivocally do that the last portion of land cultivated, yields nothing
more than the profits of stock, − no rent, and yet to maintain that taxes
on necessaries or on raw produce fall on the landlord and not on the
consumer (Ricardo 1951−55, 6:173).
Malthus replied:

40

Malthus taught Political Economy at East India College 1805−34 using Smith’s

Wealth of Nations as a text. Hashimoto has reproduced Malthus’s examination papers on
Political Economy and on Modern History distributed in 1808, and the Inverarity
Manuscript − a transcript of an 1830 lecture taken by Jonathan Duncan Inverarity (one ofMalthus’s students). The examination papers and Inverarity Manuscript contain several
references to Smith’s theory of tax incidence, and show that Malthus taught Smith’s
theory of tax incidence as orthodoxy. See Hashimoto 1988, 25−6 and 84−6.
41

The following statement shows that Malthus accepted the theory of differential rent:“From the preceding account of the progress of rent, it follows, ... that the price of
produce, in every progressive country, must be just about equal to the cost of production
on land of the poorest quality actually in use; or to the cost of raising additional produce
on old land, which yields only the usual returns of agricultural stock with little or norent” ([1815] 1986, 7:132). This statement was copied in the first edition of Principles.
Ricardo complained that Malthus did not definitely say that no rent would be paid for
additional capital employed on marginal land (1951−55, 2:167).

28

With regard to the tax being thrown off on the Landlord I did notcertainly express myself as I meant. I intended to alter it before I left
Town but forgot it. It is now corrected. I think however there are oftencases where taxes are thrown off on the landlord, and I meant to say thatthose which had not already been thrown off on the consumer would
then be thrown off on the landlord (6:176).
Malthus’s reply presumably did not satisfy Ricardo, because it did not
clearly demonstrate on whom taxes on raw produce and necessities would
finally fall − consumers, capitalists, or landlords.
In what way did Malthus alter his opinion concerning tax incidence after
receiving the letter from Ricardo? Firstly, as was shown above, in the 1817
edition of the Essay he eliminated two footnotes which had appeared inprevious editions. Secondly, when he included the 1815 pamphlet on rent
as Chapter 3 of Principles of Political Economy (1820; hereafter
Principles), he eliminated the passages discussing taxes on agricultural
capital. However the final paragraph (except for the concluding sentence)of the pamphlet − quoted above − was copied as the final paragraph of
Section VII, Chapter III of the Principles. Thus, by 1820, Malthus had
removed most of his early criticism of the Physiocrats’ theorem, thereby
supporting the position demonstrated in 1815 − i.e. that most taxes would
ultimately fall on rent. 42 If Malthus wished to maintain the Smithian
theory of tax incidence, he had to render it compatible with his theory of

42

Malthus’s references to Locke are in the first edition of An Essay on the Principle ofPopulation ([1798] 1986, 125−26) and in Definitions in Political Economy ([1827] 1986,
96): however they are not on the subject of taxation.

29

rent. At the least, he had to put forward a theory of rent whichaccommodated the possibility of positive rent on marginal land.43
The first edition of Malthus’s Principles did not contain an independent
chapter on taxation. He planned to attach a new chapter on taxation to thesecond edition: however, this plan was not realized. 44 It is possible that
one of the reasons why Malthus did not write a separate chapter on taxation
was because he felt trapped by the contradiction between the Smithian
theory of tax incidence and the Ricardian theory of rent.45

6. David Ricardo
Ricardo devoted almost one-third of the chapters in his Principles of
Political Economy and Taxation (1817) to the subject of taxation. 46
43Malthus might have done so. In his 1815 pamphlet, he argued that whenever “theinstruments of production become cheaper, and the difference between the price of
produce and expenses of cultivation increases, rents naturally rise” ([1815] 1986, 7:129) :this might render the rent of marginal land positive. Hollander notes that “the explicit
allowance for diminishing returns in 1814/15 does not undermine the physiocratic bias,
since even marginal land is said to yield rent” (1997, 407).
44

Pullen points out the alterations between the first edition, Manuscript Revision, andsecond edition with respect to taxation and national debt. He shows that Malthus
intended to write an independent chapter on taxation for the second edition of Principles.
See Malthus [1820] 1989, 2:430−31.
45There was another problem: following Steuart, Malthus thought government

expenditure financed by taxation and public debt would create an effectual demand;
meanwhile, he criticized the poor rate because it was unfavorable to the balance between
population and food production. For a comprehensive discussion of why Malthus did notwrite an independent chapter on taxation see Dome 1997.
46

Ricardo’s theory of tax incidence has, for example, been examined by Seligman[1927] 1969, Shoup 1960, and Eagly 1983. This section is based on the model put
forward in Dome 1992.

30

Following Smith, Ricardo discussed the incidence of taxes on the basis of
the natural-price system with respect to three kinds of commodities: raw
produce; necessities; and luxuries. However, he thought that Smith’s theoryof tax incidence was undermined by a misleading theory of rent. He stated:
In 1815, Mr. Malthus, in his “Inquiry into the Nature and Progress ofRent”, and a Fellow of University College, Oxford, in his “Essay on the
Application of Capital to Land”, presented to the world, nearly at thesame moment, the true doctrine of rent; without a knowledge of which,
it is impossible to understand the effect of the progress of wealth on
profits and wages, or to trace satisfactorily the influence of taxation ondifferent classes of the community; particularly when the commodities
taxed are the productions immediately derived from the surface of theearth. Adam Smith, and the other able writers to whom I have alluded,
not having viewed correctly the principles of rent, have, it appears to me,
overlooked many important truths, which can only be discovered after
the subject of rent is thoroughly understood (Ricardo [1817] 1951−55,
5−6).
Ricardo’s new theory of rent stated that the price of raw produce wasdetermined by the conditions of production in marginal land in which norent was paid to the landlord. On the basis of this differential-rent theory,
Ricardo banished rent from the cost-price equation of raw produce. He wasalso able to make the natural rate of profit an endogenous variable: inSmith’s system it was given exogenously. In the chapters on taxation,
Ricardo was subject to the Malthusian principle of population, assuming
the wage basket fixed at the subsistence level.47 Thus, if either the price of47

With respect to the fixed-wages assumption, Hollander states that although “Ricardo’s

31

raw produce, necessities or luxuries was chosen as the numéraire, thesystem would determine the rate of profit and the other prices in terms ofthe numéraire. This system consistently produced Ricardo’s main
conclusions concerning the incidence of different taxes.48
Ricardo thought that a tax on raw produce, as well as a tax onnecessities, would raise the price of the commodity taxed by the amount of
the tax (159−60 and 243). Such a tax would also increase money wages,
and consequently reduce the rate of profit in all industries. This happened
because raw produce and necessities were consumed by laborers and used
for production, and because the wage basket was fixed. In order for
Ricardo’s conclusion to be true, however, it had to be assumed that thewage taxation theorems … can be interpreted as applying to the case where thesubsistence wage rules” (1997, 383), “the constancy of the wage rate is nothing morethan a first approximation, for purposes of analytical simplicity, to be relaxed whenappropriate” (310). Thus, the “theorems on taxation, in short, do not depend on theassumption that the ‘natural’ or subsistence wage applies” (310). He shows that
Ricardo’s theory of wages fundamentally followed Smith’s (387).
48

Ricardo’s natural-price system may be presented as follows:
1 = (1+t1 ){1+(1+tp )r}{a 11 +a 21 p 2 +(1+tw)(b 1 +b 2 p 2 )l1 },(4)

p 2 = (1+t2 ){1+(1+tp )r}{a 12 +a 22 p 2 +(1+tw)(b 1 +b 2 p 2 )l2 },(5)

p 3 = (1+t3 ){1+(1+tp )r}{a 13 +a 23 p 2 +(1+tw)(b 1 +b 2 p 2 )l3 }.

(6)Equations (4), (5) and (6) are cost-price equations for the sectors of raw produce,
necessities, and luxuries respectively. The notation follows that in equations (1) − (3). In
contrast to Smith’s system, Ricardo’s system contains a ij − input coefficients ofcommodity i (i = 1, 2, 3) into sector j ( j =1, 2, 3): this reveals that Ricardo considered
the input-output relationship more explicitly than Smith. The system determines r, p 2 andp 3 , the other variables being given exogenously. The results derived from this system
will − except for some minor points − coincide with Ricardo’s own conclusions
concerning tax inc idence. For more precise analyses of Ricardo’s theory of tax incidence
see Dome 1992 and Erreygers 1995.

32

ratio of the input of the commodity taxed to the total production cost was
equal between all sectors: in this case the price of luxuries would not beaffected by a tax on raw produce or necessities. Meanwhile, a tax on
luxuries would not reduce the profit rate: it would simply increase the priceof the commodity taxed by the amount of the tax (243−4). This result
depended on the assumptions that luxuries were not consumed by laborers,
and were not used in the production of any commodity.
A tax imposed on profits in all industries would not alter the price ofcommodities, although each capitalist would attempt to shift the burden of
the tax by raising the price of his commodity. The ultimate incidence ofsuch a tax would be carried by all capitalists in the economy (205−206). A
tax levied on profits in a specific sector would have the same effect as a tax
on the commodity produced by that sector (205).
Because Ricardo accepted the Malthusian principle of population, he did
not think that a tax on wages would be paid by laborers. Were a tax
imposed on wages, the laboring population would decrease and the price oflabor would rise. An increase in money wages would bring about areduction in the rate of profit through the trade-off between wages andprofits. As a result, capitalists, and not laborers, would have to pay the tax
on wages (205). Ricardo concluded that a tax on wages would have thesame effect as a tax on the profits of all sectors. In order for this conclusion
to be true, the capital-labor ratio had to be equal between industries.
Ricardo assumed that this would be the case, though he recognized that it
did not always hold good (240).
A tax imposed in proportion to the rent of land would fall on landlords.
Ricardo derived this conclusion from his theory of differential rent.
Landlords could not pass on the tax to capitalists by raising their rent,
because they could charge to capitalists only the difference in productivity
33

between their lands and the marginal land where no rent was paid (173).
However, if a land tax was fixed per acre, it would be in reality a tax
imposed on profits in the sector of raw produce. Consequently, it would
produce the same effect as a tax on raw produce: 49 the price of raw
produce would become relatively high, and the rate of profit in allindustries would fall.50
Ricardo’s conclusion with respect to the incidence of taxes cansummarized as follows: (1) a tax on raw produce (necessities) would
decrease the rate of profit, raising the price of raw produce (necessities);(2) taxes on profits and on wages would reduce the rate of profit, keeping
all prices unchanged; (3) a tax on luxuries would increase their price,
keeping nominal rent and the prices of raw produce and necessities
unchanged; (4) a land tax levied in proportion to rent would reduce rent,
maintaining the prices of necessities and luxuries; (5) a land tax fixed invalue per acre would produce the same effect as a tax on raw produce.
Consequently, t axes on raw produce, necessities, profits, wages and a fixed
land tax would fall on profits, not rent. This conclusion was attributable tothe price system in which any change which increased the production costof raw produce or necessities would reduce the uniform rate of profit.
Landlords would pay a land tax only if it was imposed in proportion torent; otherwise they would only incur taxes on luxuries as consumers.
49

This conclusion was a revival of Petty’s theorem that a land tax would be shifted on to

the price of agricultural produce.
50

Ricardo argued that a la nd tax proportionate to the productivity of land, tithes and a

tax on raw produce would not change the money rent but instead reduce the corn rent,
and that a fixed land tax and a tax on profits in the raw produce sector would increase themoney rent, leaving the corn rent intact ([1817] 1951−55, 1:157−58, 177−78 and211−212).

34

Consequently, in Ricardo’s view, the main taxpayers were capitalists. Thus,
in contrast to Smith, Ricardo succeeded in devising a system of political
economy which produced a consistent theory of tax incidence that escaped
Locke’s theorem.
What kind of taxation system did Ricardo aim at? When discussing an
income tax in a pamphlet entitled Reply to Mr. Bosanquet’s Practical
Observation on the Report of the Bullion Committee (1811), he argued:
To me, however, it appears convincingly certain, that neither the income
tax, the assessed taxes, nor many others, do in the least affect the pricesof commodities.
Unfortunate indeed would be the situation of the consumer, if he had
to pay additional prices for those commodities which were necessary to
his comfort, after his means of purchasing them had been by the tax
considerably abridged.
The income tax, were it fairly imposed, would leave every member ofthe community in the same relative situation in which it found him.
Each man’s expences must be diminished to the amount of his tax(Ricardo [1811] 1951−55, 3:241).
Ricardo thought that a tax had (1) to keep prices unchanged; (2) be paid
from consumption; and (3) leave the distribution of income unchanged. 51
The first criterion represented the “principle of price-neutrality”. The
second criterion might be called the “minimization principle”, whichreflected Ricardo’s strong concern to minimize impediments to capital
accumulation. The third criterion, which might be called the “principle of51

Shoup (1960, 249) shows that Ricardo’s concern lay in the economic consequences oftaxes with respect to distribution of income, capital accumulation, and price level.

35

distribution-neutrality”, reflected Ricardo’s definition of equality intaxation.
In Principles of Political Economy and Taxation, Ricardo examinedvarious taxes in relation to the principles of price-neutrality, minimizationand distribution-neutrality. Taxes on raw produce, necessities and luxuries
violated the principle of price-neutrality, because they would increase theprice of the commodity taxed. By contrast, direct taxes did not violate theprinciple of price-neutrality. No tax on rent or profits − and conditionally,
wages − would change the natural price.
From the viewpoint of the minimization principle, taxes on raw produce,
necessities, wages and profits, as well as a fixed land tax, were undesirable.
They would fall on profits, checking capital accumulation.52 In contrast, a
tax on luxuries would not check capital accumul ation, because it would be
paid from unproductive consumption. Ricardo discerned, however, thedefect of such a tax; “there is no certainty as to the amount of the tax”
(Ricardo [1817] 1951−55, 241), because “from taxes on expenditure amiser may escape” (167). With respect to certainty − Smith’s second
maxim of taxation − Ricardo acknowledged the advantage of direct taxes.
A tax levied in proportion to the rent of land would also damage capital
accumulation less than other direct taxes, because it would fall on rent, notprofits. However, Ricardo strongly opposed a special tax on rent, because it
violated the security of property to which Ricardo gave the first priority:

52

Ricardo attached importance to this defect of taxation: “There are no taxes whichhave not a tendency to impede accumulation, because there are none which may not be
considered as checking production, and as causing the same effects as a bad soil orclimate, a dimin ution of skill or industry, a worse distribution of labour, or the loss ofsome useful machinery” ([1817] 1951−55, 1:152n).

36

[I]t would surely be very unjust, to tax exclusively the revenue of any
particular class of a community. The burdens of the State should beborne by all in proportion to their means ... Rent often belongs to those
who, after many years of toil, have realised their gains, and expended
their fortunes in the purchase of land or houses; and it certainly would
be an infringement of that principle which should ever be held sacred,
the security of property, to subject it to unequal taxation (204).
Ricardo’s system implied that no tax would realize the principle of
distribution-neutrality, because all taxes, except taxes on luxuries and a
proportional tax on rent, would fall on profits. Ricardo thought that taxes
on rents of land and dividends of stock, combined with a tax on raw
produce, necessities, wages or profits, might be a substitute for a generalincome tax (161). However, even such a combination of taxes would fail tocollect money from laborers. Following Smith, Ricardo acknowledged that“the labouring classes cannot materially contribute to the burdens of theState” (235).
Thus Ricardo’s theory of taxation led to the conclusion that no system oftaxation could satisfy simultaneously the principles of price-neutrality,
minimization and distribution-neutrality. In fact, Ricardo put forward no
positive suggestions with respect to a new taxation system for introduction
into Britain. 53 His attitude towards all taxes was simply negative: he

53

In an article for the Encyclopædia Britannica entitled “Funding System” (1820),

Ricardo proposed a capital levy in order to redeem the existing national debt. However,
he proposed it only as a one-off tax, preferring it to the refunding of the national debt or
to the reservation of the sinking fund. Thus, Ricardo’s advocacy of the capital levy did
not contradict his fundamental posit ion that no tax could be recommended as thepermanent basis for a system of revenue.

37

objected to the revival of an income tax after the Napoleonic Wars, at thesame time as approving a reduction in the existing taxes. In Parliamentary
session of 1822, he voted for every proposal of tax reduction, sweeping
away the misapprehension that he was an advocate for taxation (Ricardo,
1951−55, 5:154). To Ricardo, “[t]axation under every form presents but achoice of evils” ([1817] 1951−55, 167). Despite the fact that Ricardo
succeeded in escaping from Locke’s theorem, he did not propose a systemof taxation which would replace Locke’s single-tax scheme.54

7. Conclusion: After Ricardo
Ricardo’s system of political economy demonstrated that the rent of land
would continue to increase with economic growth, whereas the rate ofprofit would continuously fall: consequently, economic growth would slow
down and finally stop. Thus the pecuniary interests of landlords appeared
to be at odds with social welfare. 55 His theory of tax incidence
demonstrated that taxes, except for a proportional tax on rent and taxes on
luxuries, would finally fall on profits − the main resource for economic
growth. Ricardo also showed that taxes on luxuries were uncertain because
they were easily evaded by non-consumption. Thus, although Ricardohimself never accepted this, his political economy and theory of tax
incidence implied that a special tax might be imposed on rent in order to54

Ricardo did not refer to Locke except on the subject of money. See, for example,

Ricardo [1810] 1951−55, 65 and 81; [1811] 1951−55, 202; and [1817] 1951−55, 369.
55

Blaug states that “Ricardo’s system suggested a “natural” divergence of interests

between the classes of society: the prospects of capitalists and laborers depended upon
the demise of the landed classes. (That this was an erroneous interpretation of Ricardo’s
doctrine is beside the point.) A theory so fraught with disharmonious implications,
Ricardo’s critics asserted, could no longer be sanctioned” (1958, 149).

38

reconcile the interests of landlords with social welfare, as well as toprevent the slowdown of economic growth.
John Ramsey McCulloch − looked upon as the most faithful disciple ofRicardo − recognized the danger which Ricardian political economy held.
He “did his best to minimize any suggestion of a natural or even an
artificial conflict of interests” (Blaug 1958, 223).56 McCulloch strongly
objected to a tax levied in proportion to rent. He thought that it would be
impossible to distinguish a natural increase in rent from an increase
resulting from improvement of the land. Consequently, a proportional land
tax would hinder the growth of productivity in agriculture. For this reason,
he insisted on maintaining the existing system of a fixed land tax per acre,
despite the fact that, according to Ricardo’s theory of tax incidence, such a
tax would fall on profits, thereby checking capital accumulation. To
McCulloch, a special tax on land − whether it was proportional to rent or
fixed per acre − violated his maxim of equality: a direct tax had to be
proportioned to the means of all classes.57 He concluded that, “[i]t is
obvious, therefore, that all projects for laying peculiar burdens on the land,
however varnished or disguised, should no longer be looked upon as
projects for the imposition of equitable taxes, but for the confiscation of a
portion of the property of the landlords!” (McCulloch [1845] 1995, 60).
McCulloch preferred a system of indirect taxes which was light but widelybased.58
56

For a comprehensive examination of McCulloch’s theory of public finance see

O’Brien 1970, 229−70.
57

McCulloch also criticized the Physiocrats’ proposal of a single tax on rent, showingthat the total value of annual rent would not suffice for annual government expenditure([1845] 1995, 53−54).
58

McCulloch made several amendments to Ricardo’s theory of tax incidence. For

39

Despite McCulloch’s warning, James Mill − another supporter ofRicardian political economy − took the opposite view. In Elements of
Political Economy (1821), he stated that there was “a peculiar advantage inreserving the rent of land as a fund for supplying the exigencies of thestate” (Mill [1844] 1992, 249).59 He thought that, because land had been
converted into private property without a specific contract to make the rent
contribute to public expense, it would be unjust to impose a special tax on
the present rent. However, Ricardo’s theory of differential rent indicatedthat rent would continue to increase as long as the economy grew. Mill did
not think it unjust to regard the natural increase in rent as a new fund formeeting public expense. Thus he proposed to impose a special tax on any
future increase in the rent of land.60
example, he showed that an indirect tax would raise the price of the commodities taxedby the amount of the tax only if demand for the commodity was inelastic and the importof the commodity was prohibited (80). Taxes on wages or necessities would not raise
wages if laborers worked at piece rates: they would work harder to pay the tax (98).
O’Brien (1970, 229) argues that McCulloch’s framework for the analysis of taxation was
fundamentally Smithian, and that he came in time to abandon most of Ricardo’s
conclusions concerning taxation.
59 59

James Mill criticized McCulloch for identifying rents of land with profits of capital

as a subject for taxation: “I utterly disallow the parallelism of the case of capital, which
Mr. M‘Culloch has adduced; as if because increased profits of stock ought not to be
exclusively taxed, therefore the rent, which accrues in the manner above supposed, could
not be justly appropriated to the service of the state. Nobody is more aware of thefundamental differences between profits of stock and rent of land than Mr. M‘Culloch: itis, therefore, the more surprising that he should have founded his argument on anagreement between them, which does not exist” ([1844] 1992, 254).
60

Ricardo did not agree with Mill’s proposal for a special tax on rent. In his notes onMill’s Elements of Political Economy, Ricardo commented: “An objection may be madeagainst this tax that it would tend to arrest improvement or would finally in some cases

40

James Mill’s proposal for a special tax on rent was adopted andextended by his son, John Stuart Mill.61 Because it would be difficult andcomplicated in practice to assess the natural increase in an individual rent
as distinguished from an increase ascribed to the landlord’s improvementof the land, the younger Mill resorted to a general measure. His plan was tomodify the land tax per acre, subject to the average market price of land,
which would be re-estimated periodically. The land tax would increase as
the value of land increased: because the average price of land included thecapitalized value of future rent, the land tax would increase in proportion to
the expected increase in rent. Thus Mill revived Smith’s idea of a variable
land tax. The variable land tax − together with a prohibition against theconversion of public or corporate lands into private property − was one ofMill’s main proposals to the Land Tenure Association which he chaired in
the 1870s.62 Landlords who objected to this plan could sell their land at thecurrent price when the new tax was introduced. Thus Mill proposed a newland tax in order to increase the amount of land held by the state.63
Once a special tax on the rent of land had been justified, it would bearbitrary to tax only the future increase in rent: past increase might also befall on the consumer of raw produce; I mean the case of a landlord expending a great
deal of capital on his land for which he receives a return not under the name of profit, but
under the name of rent. … On the whole I should greatly prefer the present system oftaxation” (1951−55, 9:132)
61

For a comprehensive analysis of Mill’s tax-reform plan see, for example, Hollander

1985, 858−79 and Ekelund and Walker 1996.
62

For Mill’s reports on the land tax to the Land Tenure Reform Association see, forexample, Mill 1963−91, 5:687−95; 25:1235−43; and 29:416−31.
63

Blaug states that “James Mill and John Stuart Mill … made the most of the image ofthe parasitical landlord as a justification for land reform proposals” (1958, 224).

41

a subject for taxation. Consequently, a special tax might be imposed on all
rents past, present and future. In fact, Henry George − the founder of thesingle-tax movement in the United States − moved in this direction, finallyadvocating the confiscation of all pure rents by a single tax. In Progress
and Poverty (1879), he criticized British writers for not pushing Ricardianpolitical economy to its logical conclusion.
In fact, that rent should, both on grounds of expediency and justice, be
the peculiar subject of taxation, is involved in the accepted doctrine ofrent, and may be found in embryo in the works of all economists who
have accepted the law of Ricardo. That these principles have not been
pushed to their necessary conclusions, as I have pushed them, evidently
arises from the indisposition to endanger or offend the enormous interest
involved in private ownership in land, and from the false theories inregard to wages and the cause of poverty which have dominatedeconomic thought (George [1906] 1973, 421).
Thus the story has returned to its starting point, namely, Locke’s
single-tax scheme.64 Locke proposed a single tax on rent based on thetheorem that all taxes would ultimately fall on rent. Hume attacked Locke’s
theorem and proposal. Although Hume recommended taxes on luxuries
because they were equal taxes, he failed to develop a system of political
economy which would justify his recommendation. Steuart put forward a64

Petrella credits the philosophical foundation of George’s single-tax scheme to Locke:“Just as his concept of private good was grounded in Locke’s “labor effort” theory ofproperty, George’s concept of land as public good was a 19th century extension of
Locke’s conditions governing the use of land prior to the origin of money and theemergence of exchange economies” (1988, 246). For the similarities and differences
between George’s and the Physiocrats’ single-tax scheme see Buurman 1991.

42

general sales tax based on his system of political economy. However, histheory of tax incidence contained a number of ad hoc assumptions, inparticular with respect to the incidence of direct taxes. His political
economy was also incomplete in that it did not clearly explain thecapitalistic reproduction. Smith developed a more complete version ofpolitical economy in Wealth of Nations. However, his theory of tax
incidence led to a conclusion − that all taxes except taxes on luxuries
would fall on rent − which did not differ much from Locke’s theorem: hissuggestion of a variable land tax was a step back towards Locke’s proposal.
Malthus was unable clearly to expound his own theory of tax incidence,
because he was trapped by a contradiction between the Smithian theory oftax incidence and the Ricardian theory of rent.
By establishing a system of political economy on the basis of thedifferential-rent theory, Ricardo succeeded in escaping from Locke’s
theorem. He demonstrated that all taxes − except a tax imposed inproportion to rent and taxes on luxuries − would fall on profits, not rent.
However, he did not recommend any system of taxation because no tax
could

satisfysimultaneously

theprinciples

ofprice-neutrality,

minimization and distribution-neutrality. Contrary to Ricardo’s intention,
his theory of tax incidence suggested the legitimacy of a special tax on therent of land. Whereas McCulloch did his best to reject a special tax, theMills proposed to tax the natural increase in rent. Henry George argued
that the logical conclusion of Ricardian political economy was a single tax.
Locke’s theorem was successfully overturned by the establishment ofRicardian political economy. However, because of its success, Ricardianpolitical economy opened the route back to Locke’s proposal, that is asingle tax on the rent of land. Thus the history of the doctrine of tax
incidence shows that the development of British political economy in the43second half of the eighteenth and the early nineteenth centuries wascharacterized by an attempt to escape from Locke, an attempt which was
destined to meet with failure. Although, in relation to the subject of tax
incidence, British political economists − with the exception of Hume − didnot explicitly refer to him, they were unknowingly connected together in
an attempt to resolve a problem posited by Locke.

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