JOHN LOCKE said it first. In 1691, he wrote a letter to a Member of Parliament in which he warned that it was futile to tax workers’ wages. His insight was published in Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. Such taxes would reduce take-home pay below what people needed to live on. So taxpayers would defend their living standards by reducing the Rent that they paid for the use of land. In other words – ATCOR: All Taxes Come Out of Rent.
Rent is society’s net income – the residual value after covering the costs of living. It is what people can afford to pool in the public purse, after looking after themselves from the fruits of their labour.
Locke’s theory made sense for a society in which people were free. That freedom was defined by the right to determine how much of income was net of the living costs. But by the time Locke was helping to shape public policy, the aristocracy had already begun to re-enserf English folk in a post-medieval form. They did so by roping off the commons. That deprived the peasantry of their right to self-sustaining life.
Locke’s version of liberty was expressed in his trilogy “life, liberty and estate” – the doctrine of the social contract. Estate was the old English term for land. But 200 years earlier, the aristocracy had begun in earnest to turf people off the commons to make way for sheep, while Henry VIII legitimised the theft of land by grabbing the estates of the monasteries and abbeys. Over the following centuries, an increasing proportion of the population lost the freedom to determine their destiny as Parliament sanctioned the enclosure of common land.1
Adam Smith intervened in 1776 with his proposals for the revision of governance. The state, he explained, should be funded in a way that caused minimal damage. This would be achieved by paying for public services out of Ground Rent – the nation’s taxable income.
If governments had adopted Smith’s model, taxes would have been removed from earned incomes, the wages and the revenue people could earn by investing their savings in productive enterprises. Those taxes, Smith stressed, inflicted damage on the nation’s wealth and people’s health.
Taxes were bad, and they were futile: people shifted the burden off their wages and onto the net income that they could afford to yield as Ground Rent. To reinforce his argument for a systemic transformation of the financial system, Smith provided at least 10 examples of how government revenue did, indeed, come out of the nation’s Rents.2
The virtue of the direct payment of Ground Rent into the public purse was the benign impact on industry. By this means “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”. That was why Ground Rent, and the ordinary rent of land, were what he called “the species of revenue which can best bear to have a peculiar tax imposed upon them”. This contrasted with a tax on a manufacturer: the burden would be passed on in the form of higher prices paid by consumers. They, in turn, would be left with less income, which meant they would have to reduce what they paid as Rent to their landlords. A tax levied on the producer would ultimately result in “a reduction of rent, the final payment of the tax would fall upon the landlord”.
Another virtue of Rent-as-public-revenue was its transparency, because “the quantity and value of the land which any man possesses can never be a secret, and can always be ascertained with great exactness”. This contrasted with taxing the producer of goods, which caused “endless vexation as no people could support”. Smith noted that “land is a subject which cannot be removed, whereas stock easily may”. By raising revenue directly from Rent, auditing the taxable capacity of a nation entailed no difficulty.3 It neutralised the temptation to dodge taxes by transferring assets to tax havens.
Ground Rent and houses
For Adam Smith, “Ground-rents are a still more proper subject of taxation than the rent of houses,” because that charge would not raise the rents that people paid for their dwellings. A levy on Ground Rent would fall on the owner of the Ground Rent, who (as a monopolist) was already exacting “the greatest rent which can be got for the use of his ground”. But if the tax was levied on the tenant, “the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent”. Smith believed that raising revenue from Ground Rent was reasonable, because this was revenue which the owner received “without any care or attention of his own”.4
House prices and the Window Tax
Observing how, in 1775, taxes were levied on windows in people’s homes, Smith emphasised that “The natural tendency of the window-tax, and of all other taxes upon houses, is to lower rents. The more a man pays for the tax, the less, it is evident, he can afford to pay for the rent”. The increase in the rent of dwellings had more than offset the taxes on windows. This was because of the rising demand for dwellings; it did not falsify the theory. And, as Smith concluded, “Had it not been for the tax, rents would probably have risen still higher”.5
Taxes on the profits of farming
A tenant farmer would not reduce his output in response to a tax levied directly on his profit. Why not? Because he would still be liable for Rent to the landlord. He would, therefore, continue to produce at the same level of activity. But, noted Smith, to protect his profit, the farmer would end up “paying less rent to the landlord. The more he is obliged to pay in the way of tax, the less he can afford to pay in the way of rent”.6
The Poll Tax on slaves
Smith tracked the impact of the Poll Tax that was levied on the slaves on plantations in the English colonies in the Carolinas of America and the islands of the West Indies. Those taxes, Smith explained, reduced the profits of the agricultural enterprises. And so “As the planters are, the greater part of them, both farmers and landlords, the final payment of the tax falls upon them in their quality of landlords without any retribution”.7
Taxes on the sale of property
When taxes are levied on the transfer of property, the buyer is in the best bargaining position. “He considers what the land will cost him in tax and price together,” observed Smith. “The more he is obliged to pay in the way of tax, the less he will be disposed to give in the way of price.” So the tax on land is passed on in the form of a lower price paid to the seller.8
A tax on the wages of labour
The chaos caused by a tax on wages was carefully examined by Smith. He concluded that, whichever way the burden was twisted (reducing profits, raising the price of consumer goods or inflating the wages paid to workers), there was no escaping the ultimate outcome. “In all cases a direct tax upon the wages of labour must, in the long-run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed upon the proper assessment of a sum equal to the produce of the tax, partly upon the rent of land, and partly upon consumable commodities.” He branded those taxes as “absurd and destructive”, and he was emphatic about their disruptive effects.
The declension of industry, the decrease of employment for the poor, the diminution of the annual produce of the land and labour of the country, have generally been the effects of such taxes. In consequence of them, however, the price of labour must always be higher than it otherwise would have been in the actual state of the demand: and this enhancement of price, together with the profit of those who advance it, must always be finally paid by the landlords and consumers.
The consumers to whom Smith referred were rich people, most of them landowners.
One detects sorrow in Smith’s words as he recorded how, while the deadweight burden of bad taxes did, ultimately, come out of Rent, this circuitous route victimised the poor by pricing them out of work.9
Taxes on the “necessaries of life”
In the 18th century, the principal taxes on the “necessaries of life” were on salt, leather, soap and candles. These taxes caused an increase in wages, but the charges would ultimately “fall upon the rent of the landlord”. Again, Smith expresses the bitter consequences of this indirect way of raising revenue for government. One manifestation was the “forced frugality” imposed on the working population. Another outcome was a reduction in fertility, and some people resorted to immoral behaviour. Immorality affected children whose parents were impoverished. If the children survived the hardships to which the bad conduct of their parents exposed them, such conduct commonly corrupted their morals, “so that, instead of being useful to society by their industry, they become public nuisances by their vices and disorders”. That was a human price paid for bad fiscal policy.
Taxes upon necessaries, so far as they affect the labouring poor, are finally paid, partly by landlords in the diminished rent of their lands, and partly by rich consumers, whether landlords or others in the advanced price of manufactured goods; and always with a considerable over-charge.
The landlords pay the heaviest price, because they “always pay in a double capacity; in that of landlords, by the reduction of their rent; and in that of rich consumers, by the increase of their expense”.10
The tax on wine
Smith was driven to the same conclusion when he analysed the economics of a tax on the production of wine. “The whole weight of the tax, therefore, would fall upon the rent and profit; properly upon the rent of the vineyard.” The producers of commodities such as sugar were aware of this effect, so they asserted that a tax on output would not fall on consumers, but would reduce the Rent they received as plantation owners. Smith pointed out that this argument demonstrated that, to the contrary, if the tax was extracted out of the Rent of plantation land then it was an appropriate charge!11
The impact of tithes
Traditionally, communities supported their church and clergy by allocating a proportion of their produce as a tithe. That charge “diminishes more what would otherwise be the rent of the landlord”. Smith reviewed the relative virtues of a Land Tax compared to a tithe in the colonies compared to the charge levied on rent-rolls in Great Britain. But he saw no reason to alter his conclusion: one way or another, the charge came out of Rent. As Smith noted, “There is no farmer who does not compute beforehand what the church tithe, which is a land-tax in kind, is, one year with another, likely to amount to”.12 This enables the farmer to make “a proportionable abatement in the rent which he agrees to pay to the landlord”.13
Silence of the post-classical economists
Macro-economists of the 20th century omitted from their mathematical models this process of shifting the tax burden onto Rent. There can be one reason only for that omission: the scholars would be obliged to discuss the logic of the roundabout method of raising government revenue. They would have to address Adam Smith’s arguments that this tortuous method under-funded not just the material infrastructure of the nation, it also corrupted the moral fibre of the population.
The earliest land-grabbers accepted this situation as the price to be paid for consolidating their privileges, which stemmed from the privatisation of the nation’s Rent. Besides, the suffering caused by under-production in the economy and the blunting of human sensibilities was endured by others, not them. But the final outcome was the failure of governance. As Smith noted, if landlords ceased to play their part by direct payment of Rent into the public purse, “it is altogether impossible that the tenant should continue to do his”. The outcome was distress, a decline of output, and the indebtedness of governments.14
1. Locke wrote fine prose on the theory of governance, in which he championed the freedom of the individual. But he profited from the practises of his time: he invested in the Royal African Company, which transported slaves to America. He also contributed to the constitution for the colonists who deprived the indigenous peoples of their land and settled in Carolina, where they established slave plantations.
2. The page references provided here are to the 1976 edition of The Wealth of Nations, edited by Edwin Cannan and published by the University of Chicago Press.
3. Bk 5, Ch 2, Pt 2, Article 1, pp. 370, 374-375.
4. Bk 5, Ch 2, Pt 2, Article 1, p.370.
5. Bk 5, Ch 2, Pt 2, Article 1, p.373.
6. Bk 5, Ch 2, Pt 2, Article 2, p.383.
7. Bk 5, Ch 2, Pt 2, Article 2, p.384.
8. Bk 5, Ch 2, Pt 2, Arts. 1 & 2, p.390.
9. Bk 5, Ch 2, Pt 2, Art. 3, p.392-4.
10. Bk 5, Ch 2, Pt 2, Art. 4, p.400-403.
11. Bk 5, Ch 2, Pt 2, Art. 4, p.424-425.
12. Bk 5, Ch 2, Pt 2, Art. 1, p.362.
13. Bk 5, Ch 3, p.472.
14. Bk 5, Ch 3, p.464-465.