Ricardo and Progressive Taxation

I have two observations about ideology and crisis. The first one will be today and the second (or “Part Two?”) will be tomorrow. The first is about wealth and income inequality and the second is about Climate Change. No new ground being broken in either one, but just one observation that links the two (and probably other problems) together.

The first has to do with the great Portuguese and British economist, David Ricardo, who wrote in the late 18th and early 19th Century in England.

I confess that it’s been a long time since I have read Ricardo. (In fact, probably since graduate school, but I won’t go look that up because the embarrassment would be too high.) But I’m reading Thomas Piketty’s new book, Capital in the Twenty-First Century, and he makes an interesting observation about Ricardo, which I had totally missed or forgotten.

One of Ricardo’s important observations was that in England in the 19th Century, the population was going up and therefore demand for food (etc.) was going up, but the amount of available farmland was not. Therefore over time the value of farmland would feel more and more scarce, relative to the hungry mouths that needed to be fed from it and its value (and the wealth of its owners) would go up—way up. That’s usually called “Rent,” not like the rent on a house , but the difference between the value of the rise of supply relative to demand. That is, when your wealth goes up because there is more and more demand for your product--even if you didn’t put in any new labor or effort or costs--then that increase is your “rent.” And that was what was going on with land owners when their land was becoming increasingly in demand.

He believed that this growing share of national income that was going to the land owners and declining share that was going to poor people who needed food, upset the national equilibrium. Piketty, commenting on this, says that “For  Ricardo, the  only logically and politically acceptable answer was to impose a steadily increasing tax on land rents.”[1] That is, Ricardo was proposing a progressive tax. The higher the wealth and income of the land-owners, the higher should be their taxes because otherwise they would skew the economy. In my childhood reading of Ricardo, I had missed that. Unless I missed another great economist back there, he may be the first political economist to raise the idea of a progressive tax, the kind of tax we used to have in America, back when we believed that “all men (sic) were created equal.”

Now, as it happens, in the long run Ricardo was slightly wrong. The value of rent on food-producing farmland did not actually continue to go up. Over time, the value of other production in England (industrial products, for example) began to rise more rapidly, making the value of farmland rise more slowly relative to these other items. But his main point, I believe, was still accurate. When the “rent” (the non-labor-related income and wealth) rises faster than the labor or production-related income and wealth, it throws off the basic equilibrium of a society and causes dangerous inequality. And the best (though clearly not only) way to stop it is by a graduated tax that keeps that income and wealth closer to the center.

Check back tomorrow for part two.

[1] Capital, p. 11.

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