Further Essays in Economics
Leon Maclaren

VII

THE EFFECT OF TAXATION ON THE LANDLORD'S CLAIM

WHEN a community is progressing in an economic sense, and improvements in production are constantly being made, those who occupy sites at the centres of population will enjoy the cumulative benefit of all these improvements, with the results that the rents produced on their sites will be correspondingly increased: for whereas the rent which is produced on land on the outskirts of any community rises slowly even where all land is enclosed, rent at the centres of population rises rapidly. In any progressive community the advantage to be obtained from working at the centres of population will, as production throughout the community rises, increase much more rapidly than that to be obtained in more remote places.

Where taxation is levied upon production and the processes of production and not upon rent as such, it will inevitably fall more heavily on less productive sites than on others, and may indeed eliminate them from production. It follows that increases in taxation levied in this manner have a more serious effect on the less productive land: which in turn re-acts upon landlords' claims. Rising taxation may not merely absorb all increases in rent on less productive land, but may, and frequently does, encroach upon and reduce landlords' claims on the tenants of that land. The owner of the mansion house then has to live in the lodge.

This effect of taxation upon marginal land sets a practical limit to the weight of taxation. When taxes rise faster than the rent on any site, the tenant is rendered unable to meet both the taxes and his other secondary claims. Where this experience is general, many men on the poorer land may be put out of production, and the consequent fall in production must of course reduce the yield of taxation. For some time the fall in production may be offset by increases in the levy. But a point may easily be reached when further increases reduce production so much that the yield of taxes to the government falls.

This sets a limit to increases in taxation: for taxation upon production cannot rise much faster than the rent on the poorer land, and can never rise so fast as rent on better land. Accordingly taxation may reach such crippling proportions as to reduce its yield, while at the same time the landlord's claim at the centres of population rapidly rises.

The political repercussions of these facts are worth noting. Where land is all enclosed and wages are reduced to a minimum, people who are not content thus to be deprived and depressed and yet do not see how society might otherwise be ordered, demand. that government should subsidise their poverty. The national treasury may protest that taxation has reached its limit, but insistent demands for further ameliorations in the lot of the people will intimidate politicians into trying to raise the yield of taxation yet higher. Following this fatal policy, the already failing industry of the country will be subjected to yet greater tolls upon its rent and these will soon exceed the amount of the rent which can be produced on the poorer land. This pressure will ultimately jeopardise whole sections of industry and the national economy will be seriously disturbed. When this distress grows to be a political factor, those in the failing industries will demand subsidies to enable them to pay their way - subsidies which, of course, must be raised by taxation.

Within certain limits and in a disordered way this will work. The benefit of the subsidy, however, will depend on the productivity of the land. By subsidising certain crops or products, for example, the government may increase the remuneration of tenants engaged in agriculture, but not evenly. More productive land will earn more in subsidies than poorer land and it will be the amount of the subsidy on the poorer land that will determine whether or not production is extended. In order to be effective, therefore, the subsidy must be sufficient to yield, on the poorest land desired to be kept or brought back into cultivation, more than the amount by which the secondary claims upon rent, including taxation, hitherto exceeded the rent to be earned without a subsidy. But a subsidy which will achieve this object on poorer land will do much more on better land. The result will be that the rent realised with the aid of subsidies on better land will rise by more than the taxation upon it. This increase will enable the tenant of this better land to pay more to the landlord, whose claim will be increased by the amount by which the subsidies raise the rent on his land over and above the corresponding increase in taxation.

The absurd conclusion is that in order to maintain production on the poorer land, taxation is levied not merely to sustain production there, but in order to make a present to landlords of better land. This of course substantially increases the sum which has to be raised by taxation. The limit on this operation is therefore reached when the taxation required to pay all the subsidies on all the land is such that it causes an imposition to be levied on the poorer land which exceeds the subsidy on that land. When this process has run its full course the whole industry will have subjected itself to secondary claims upon wealth either to the landlords direct or to money-lenders who supplied the funds to buy the land, and these claims the industry cannot meet without the subsidy. At the same time the weight of taxation necessary to pay the subsidy will be such as to put out of production the very land for which the subsidy was raised, and any politician who suggests withdrawing the subsidy will risk his career and popularity.

In short, taxation on production must come out of rent. Where industry is overtaxed and will not yield rent enough to pay the taxes, it is plainly fantastic to subsidise the rent to make it sufficient; yet this is what is being done in nearly every country in the world. The result is to inflate rent - which can only be done at the expense of wages. Money wages may not fall, indeed they may rise; but in the end, real wages will fall when rising prices impoverish the labourer and rising unemployment makes him docile.

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