On the Effects of Taxation
on the Rent of Land

David Ricardo

[Extracts from On The Principles of Political Economy and Taxation, published in 1817]

A land-tax, levied in proportion to the rent of land, and varying with every variation of rent, is in effect a tax on rent; and as such a tax will not apply to that land which yields no rent, nor to the produce of that capital which is employed on the land with a view to profit merely, and which never pays rent, it will not in any way affect the price of raw produce, but will fall wholly on the landlords. In no respect would such a tax differ from a tax on rent. But if a land-tax be imposed on all cultivated land, however moderate that tax may be, it will be a tax on produce, and will therefore raise the price of produce. If No. 3 be the land last cultivated, although it should pay no rent, it cannot, after the tax, be cultivated, and afford the general rate of profit, unless the price of produce rise to meet the tax. Either capital will be withheld from that employment until the price of corn shall have risen, in consequence of demand, sufficiently to afford the usual profit; or if already employed on such land, it will quit it, to seek a more advantageous employment. The tax cannot be removed to the landlord, for by the supposition he receives no rent. Such a tax may be proportioned to the quality of the land and the abundance of its produce, and then it differs in no respect from tithes; or it may be a fixed tax per acre on all land cultivated, whatever its quality may be.

A land-tax of this latter description would be a very unequal tax, and would be contrary to one of the four maxims with regard to taxes in general, to which, according to Adam Smith, all taxes should conform. The four maxims are as follow:

1. 'The subjects of every state ought to contribute towards the support of the government, as nearly as possible in proportion to their respective abilities.

2. 'The tax which each individual is bound to pay ought to be certain and not arbitrary.

3. 'Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.

4. 'Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.'

An equal land-tax, imposed indiscriminately and without any regard to the distinction of its quality, on all land cultivated, will raise the price of corn in proportion to the tax paid by the cultivator of the land of the worst quality. Lands of different quality, with the employment of the same capital, will yield very different quantities of raw produce. …

…There is no farmer who does not compute beforehand what the church-tithe, which is a land-tax of this kind is, one year with another, likely to amount to.' It is undoubtedly true, that the farmer does calculate his probable outgoings of all descriptions, when agreeing with his landlord for the rent of his farm; and if for the tithe paid to the church, or for the tax on the produce of the land, he were not compensated by a rise in the relative value of the produce of his farm, he would naturally endeavour to deduct them from his rent. But this is precisely the question in dispute: whether he will eventually deduct them from his rent, or be compensated by a higher price of produce. For the reasons which have been already given, I cannot have the least doubt but that they would raise the price of produce, and consequently that Adam Smith has taken an incorrect view of this important question.

M. Say supposes, 'A landlord by his assiduity, economy and skill, to increase his annual revenue by 5,000 francs;, but a landlord has no means of employing his assiduity, economy and skill on his land, unless he farms it himself. and then it is in quality of capitalist and farmer that he makes the improvement, and not in quality of landlord. It is not conceivable that he could so augment the produce of his farm by any peculiar skill on his part, without first increasing the quantity of capital employed upon it. If he increased the capital, his larger revenue might bear the same proportion to his increased capital, as the revenue of all other farmers to their capitals.

M. Say's error in the above passage lies in supposing that because the value of the produce of one of these two farms, after reinstating the capital, is greater than the value of the produce of the other, on that account the net income of the cultivators will differ by the same amount. The net income of the landlords and tenants together of the wood land, may be much greater than the net income of the landlords and tenants of the corn land; but it is on account of the difference of rent, and not on account of the difference in the rate of profit. M. Say has wholly omitted the consideration of the different amount of rent, which these cultivators would have to pay. There cannot be two rates of profit in the same employment, and therefore when the value of produce is in different proportions to capital, it is the rent which will differ, and not the profit. ...

Let M. Say make a due allowance for rent; let him further allow for the effect which such a tax would have on the prices of these different kinds of raw produce, and he will then perceive that it is not an unequal tax, and further that the producers themselves will no otherwise contribute to it, than any other class of consumers. ...But as a tax on houses may be considered in the light of an additional rent paid by the tenant, its tendency will be to diminish the demand for houses of the same annual rent, without diminishing their supply. Rent will therefore fall, and a part of the tax will be paid indirectly by the landlord. 'The rent of a house,' says Adam Smith,, may be distinguished into two parts, of which the one may very properly be called the building rent, the other is commonly called the ground rent. The building rent is the interest or profit of the capital expended in building the house. In order to put the trade of a builder upon a level with other trades, it is necessary that this rent should be sufficient first to pay the same interest which he would have got for his capital, if he had lent it upon good security and, secondly, to keep the house in constant repair, or what comes to the same thing, to replace within a certain term of years the capital which had been employed in building it.' 'If in proportion to the interest of money, the trade of the builder affords at any time a much greater profit than this, it will soon draw so much capital from other trades, as will reduce the profit to its proper level. If it affords at any time much less than this, other trades will soon draw so much capital from it as will again raise that profit. Whatever part of the whole rent of a house is over and above what is sufficient for affording this reasonable profit, naturally goes to the ground rent; and where the owner of the ground, and the owner of the building, are two different persons, it is in most cases completely paid to the former.

In country houses, at a distance from any great town, where there is a plentiful choice of ground, the ground rent is scarcely any thing, or no more than what the space upon which the house stands, would pay employed in agriculture. In country villas, in the neighbourhood of some great town, it is sometimes a good deal higher, and the peculiar conveniency, or beauty of situation, is there frequently very highly paid for. Ground rents are generally highest in the capital, and in those particular parts of it, where there happens to be the greatest demand for houses, whatever be the reason for that demand, whether for trade and business, for pleasure and society, or for mere vanity and fashion.' A tax on the rent of houses may either fall on the occupier, on the ground landlord, or on the building landlord. In ordinary cases it may be presumed, that the whole tax would be paid both immediately and finally by the occupier. If the tax be moderate, and the circumstances of the country such, that it is either stationary or advancing, there would be little motive for the occupier of a house to content himself with one of a worse description. But if the tax be high, or any other circumstances should diminish the demand for houses, the landlord's income would fall, for the occupier would be partly compensated for the tax by a diminution of rent. It is, however, difficult to say, in what proportions that part of the tax, which was saved by the occupier by a fall of rent, would fall on the building rent and the ground rent. It is probable that, in the first instance, both would be affected; but as houses are, though slowly, yet certainly perishable, and as no more would be built, till the profits of the builder were restored to the general level, building rent would, after an interval, be restored to its natural price.

As the builder receives rent only whilst the building endures, he could pay no part of the tax, under the most disastrous circumstances, for any longer period. The payment of this tax, then, would ultimately fall on the occupier and ground landlord, but, 'in what proportion, this final payment would be divided between them,' says Adam Smith, 'it is not perhaps very easy to ascertain. The division would probably be very different in different circumstances, and a tax of this kind might, according to those different circumstances, affect very unequally both the inhabitant of the house, and the owner of the ground.'(25*)

Adam Smith considers ground rents as peculiarly fit subjects for taxation. 'Both ground rents, and the ordinary rent of land,' he says, 'are a species of revenue, which the owner in many cases enjoys, without any care or attention of his own. Though a part of this revenue should be taken from him, in order to defray the expenses of the State, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground rents, and the ordinary rent of land are, therefore, perhaps, the species of revenue, which can best bear to have a peculiar tax imposed upon them.'

It must be admitted that the effects of these taxes would be such as Adam Smith has described; but it would surely be very unjust, to tax exclusively the revenue of any particular class of a community. The burdens of the State should be borne by all in proportion to their means: this is one of the four maxims mentioned by Adam Smith, which should govern all taxation. 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. It is to be lamented, that the duty by stamps, with which the transfer of landed property is loaded, materially impedes the conveyance of it into those hands, where it would probably be made most productive. And if it be considered, that land, regarded as a fit subject for exclusive taxation, would not only be reduced in price, to compensate for the risk of that taxation, but in proportion to the indefinite nature and uncertain value of the risk, would become a fit subject for speculations, partaking more of the nature of gambling, than of sober trade, it will appear probable, that the hands into which land would in that case be most apt to fall, would be the hands of those, who possess more of the qualities of the gambler, than of the qualities of the sober-minded proprietor, who is likely to employ his land to the greatest advantage.

If the profits of all trades were taxed, excepting the profits of the farmer, all goods would rise in money value, excepting raw produce. The farmer would have the same corn income as before, and would sell his corn also for the same money price; but as he would be obliged to pay an additional price for all the commodities, except corn, which he consumed, it would be to him a tax on expenditure. Nor would he be relieved from this tax by an alteration in the value of money, for an alteration in the value of money might sink all the taxed commodities to their former price, but the untaxed one would sink below its former level; and, therefore, though the farmer would purchase his commodities at the same price as before, he would have less money with which to purchase them. The landlord, too, would be precisely in the same situation, he would have the same corn, and the same money-rent as before, if all commodities rose in price, and money remained at the same value; and he would have the same corn, but a less money-rent, if all commodities remained at the same price: so that in either case, though his income were not directly taxed, he would indirectly contribute towards the money raised. But suppose the profits of the farmer to be also taxed, he then would be in the same situation as other traders: his raw produce would rise, so that he would have the same money revenue, after paying the tax, but he would pay an additional price for all the commodities he consumed, raw produce included. His landlord, however, would be differently situated, he would be benefited by the tax on his tenant's profits, as he would be compensated for the additional price at which he would purchase his manufactured commodities, if they rose in price; and he would have the same money revenue, if in consequence of a rise in the value of money, commodities sold at their former price. A tax on the profits of the farmer, is not a tax proportioned to the gross produce of the land, but to its net produce, after the payment of rent, wages, and all other charges.

…A tax on the profits of stock always leaves corn rent unaltered, and therefore money rent varies with the price of corn; but a tax on raw produce, or tithes, never leaves corn rent unaltered, but generally leaves money rent the same as before. In another part of this work I have observed, that if a land-tax of the same money amount, were laid on every kind of land in cultivation, without any allowance for difference of fertility, it would be very unequal in its operation, as it would be a profit to the landlord of the more fertile lands. It would raise the price of corn in proportion to the burden borne by the farmer of the worst land; but this additional price being obtained for the greater quantity of produce yielded by the better land, farmers of such land would be benefited during their leases, and afterwards, the advantage would go to the landlord in the form of an increase of rent. The effect of an equal tax on the profits of the farmer is precisely the same; it raises the money rent of the landlords, if money retains the same value; but as the profits of all other trades are taxed as well as those of the farmer, and consequently the prices of all goods, as well as corn, are raised, the landlord loses as much by the increased money price of the goods and corn on which his rent is expended, as he gains by the rise of his rent. If money should rise in value, and all things should, after a tax on the profits of stock, fall to their former prices, rent also would be the same as before. The landlord would receive the same money rent, and would obtain all the commodities on which it was expended at their former price; so that under all circumstances he would continue untaxed.(26*)

Now, suppose a society to consist of landlords, manufacturers, farmers and labourers, the labourers, it is agreed, would be recompensed for the tax; - but by whom? - who would pay that portion which did not fall on the landlords? - the manufacturers could pay no part of it; for if the price of their commodities should rise in proportion to the additional wages they paid, they would be in a better situation after than before the tax. If the clothier, the hatter, the shoe-maker, &c., should be each able to raise the price of their goods 10 per cent, - supposing 10 per cent to recompense them completely for the additional wages they paid, - if, as Adam Smith says, 'they would be entitled and obliged to charge the additional wages with a profit upon the price of their goods,, they could each consume as much as before of each other's goods, and therefore they would pay nothing towards the tax. If the clothier paid more for his hats and shoes, he would receive more for his cloth, and if the hatter paid more for his cloth and shoes, he would receive more for his hats. All manufactured commodities then would be bought by them with as much advantage as before, and inasmuch as corn would not be raised in price which is Dr Smith's supposition whilst they had an additional sum to lay out upon its purchase, they would be benefited, and not injured by such a tax.

If then neither the labourers nor the manufacturers would contribute towards such a tax; if the farmers would be also recompensed by a fall of rent, landlords alone must not only bear its whole weight, but they must also contribute to the increased gains of the manufacturers. To do this, however, they should consume all the manufactured commodities in the country, for the additional price charged on the whole mass is little more than the tax originally imposed on the labourers in manufactures.

Taxation can never be so equally applied, as to operate in the same proportion on the value of all commodities, and still to preserve them at the same relative value. It frequently operates very differently from the intention of the legislature, by its indirect effects. We have already seen, that the effect of a direct tax on corn and raw produce, is, if money be also produced in the country, to raise the price of all commodities, in proportion as raw produce enters into their composition, and thereby to destroy the natural relation which previously existed between them.

Another indirect effect is, that it raises wages, and lowers the rate of profits; and we have also seen, in another part of this work, that the effect of a rise of wages, and a fall of profits, is to lower the money prices of those commodities which are produced in a greater degree by the employment of fixed capital. The following argument of M. Say is founded on the same views as Mr Buchanan's: 'The quantity of wine or corn which a piece of land will produce, will remain nearly the same, whatever may be the tax with which it is charged. The tax may take away a half, or even three-fourths of its net produce, or of its rent if you please, yet the land would nevertheless be cultivated for the half or the quarter not absorbed by the tax. The rent, that is to say the landlord's share, would merely be somewhat lower. The reason of this will be perceived, if we consider, that in the case supposed, the quantity of produce obtained from the land, and sent to market, will remain nevertheless the same. On the other hand the motives on which the demand for the produce is founded, continue also the same. 'Now, if the quantity of produce supplied, and the quantity demanded, necessarily continue the same, notwithstanding the establishment or the increase of the tax, the price of that produce will not vary; and if the price do not vary, the consumer will not pay the smallest portion of this tax. 'Will it be said that the farmer, he who furnishes labour and capital, will, jointly with the landlord, bear the burden of this tax? certainly not; because the circumstance of the tax has not diminished the number of farms to be let, nor increased the number of farmers. Since in this instance also the supply and demand remain the same, the rent of farms must also remain the same. The example of the manufacturer of salt, who can only make the consumers pay a portion of the tax, and that of the landlord who cannot reimburse himself in the smallest degree, prove the error of those who maintain, in opposition to the economists, that all taxes fall ultimately on the consumer.' - Vol. ii. p. 338. If the tax 'took away half, or even three-fourths of the net produce of the land,' and the price of produce did not rise, how could those farmers obtain the usual profits of stock who paid very moderate rents, having that quality of land which required a much larger proportion of labour to obtain a given result, than land of a more fertile quality? If the whole rent were remitted, they would still obtain lower profits than those in other trades, and would therefore not continue to cultivate their land, unless they could raise the price of its produce. If the tax fell on the farmers, there would be fewer farmers disposed to hire farms; if it fell on the landlord, many farms would not be let at all, for they would afford no rent. But from what fund would those pay the tax who produce corn without paying. any rent?

It is quite clear that the tax must fall on the consumer. How would such land, as M. Say describes in the following passage, pay a tax of one-half or three-fourths of its produce? 'We see in Scotland poor lands thus cultivated by the proprietor, and which could be cultivated by no other person. Thus too, we see in the interior provinces of the United States vast and fertile lands, the revenue of which, alone, would not be sufficient for the maintenance of the proprietor. These lands are cultivated nevertheless, but it must be by the proprietor himself, or, in other words, he must add to the rent, which is little or nothing, the profits of his capital and industry, to enable him to live in competence. It is well known that land, though cultivated, yields no revenue to the landlord when no farmer will be willing to pay a rent for it: which is a proof that such land will give only the profits of the capital, and of the industry necessary for its cultivation.' - Say, Vol. ii. p. 127.

In examining the question of rent, we found, that with every increase in the supply of corn, and with the consequent fall of its price, capital would be withdrawn from the poorer land; and land of a better description, which would then pay no rent, would become the standard by which the natural price of corn would be regulated. …

It has, however, been said, that capital cannot be withdrawn from the land; that it takes the form of expenses, which cannot be recovered, such as manuring, fencing, draining, &c., which are necessarily inseparable from the land. This is in some degree true; but that capital which consists of cattle, sheep, hay and corn ricks, carts, &c. may be withdrawn; and it always becomes a matter of calculation, whether these shall continue to be employed on the land, notwithstanding the low price of corn, or whether they shall be sold, and their value transferred to another employment.

Suppose, however, the fact to be as stated, and that no part of the capital could be withdrawn;(41*) the farmer would continue to raise corn, and precisely the same quantity too, at whatever price it might sell; for it could not be his interest to produce less, and if he did not so employ his capital, he would obtain from it no return whatever. Corn could not be imported, because he would sell it lower than £3 10s. rather than not sell it at all, and by the supposition the importer could not sell it under that price. Although then the farmers, who cultivated land of this quality, would undoubtedly be injured by the fall in the exchangeable value of the commodity which they produced, - how would the country be affected? We should have precisely the same quantity of every commodity produced, but raw produce and corn would sell at a much cheaper price. The capital of a country consists of its commodities, and as these would be the same as before, reproduction would go on at the same rate. This low price of corn would however only afford the usual profits of stock to the land, No. 5, which would then pay no rent, and the rent of all better land would fall: wages would also fall, and profits would rise.

It is true, that the man in possession of a scarce commodity is richer, if by means of it he can command more of the necessaries and enjoyments of human life; but as the general stock out of which each man's riches are drawn, is diminished in quantity, by all that any individual takes from it, other men's shares must necessarily be reduced in proportion as this favoured individual is able to appropriate a greater quantity to himself.

Let water become scarce, says Lord Lauderdale, and be exclusively possessed by an individual, and you will increase his riches, because water will then have value; and if wealth be the aggregate of individual riches, you will by the same means also increase wealth. You undoubtedly will increase the riches of this individual, but inasmuch as the farmer must sell a part of his corn, the shoemaker a part of his shoes, and all men give up a portion of their possessions for the sole purpose of supplying themselves with water, which they before had for nothing, they are poorer by the whole quantity of commodities which they are obliged to devote to this purpose, and the proprietor of water is benefited precisely by the amount of their loss. The same quantity of water, and the same quantity of commodities, are enjoyed by the whole society, but they are differently distributed. This is, however, supposing rather a monopoly of water than a scarcity of it. If it should be scarce, then the riches of the country and of individuals would be actually diminished, inasmuch as it would be deprived of a portion of one of its enjoyments. The farmer would not only have less corn to exchange for the other commodities which might be necessary or desirable to him, but he, and every other individual, would be abridged in the enjoyment of one of the most essential of their comforts. Not only would there be a different distribution of riches, but an actual loss of wealth.

From what has been said, it will be seen that the wealth of a country may be increased in two ways. it may be increased by employing a greater portion of revenue in the maintenance of productive labour, - which will not only add to the quantity, but to the value of the mass of commodities; or it may be increased, without employing any additional quantity of labour, by making the same quantity more productive, - which will add to the abundance, but not to the value of commodities.