Ricardo and the Origin of Dynamic Tax Analysis
While Ricardo’s pure economic theory has been investigated from a dynamic perspective, his theory of taxation has generally been examined from a static perspective. For example, Eagly (1983: ‘Tax Incidence in Ricardian Analysis’, Public Finance) organised Ricardo’s tax shifting theory applying the equalisation principle to the rate of profits. Tsoulfidis (2005: ‘Notes on Ricardo’s Theory of Value and Taxation’, MPRA Paper, No. 35590) argued, ‘Ricardo’s analysis of taxation is a kind of comparative statics exercise’, mathematically validating that the theory of taxation draws directly from the theory of value and distribution. From the perspective of comparative statics, these studies determined that taxes on wage goods and taxes on wages raise money wages and lower the rate of profits. However, notably, Casarosa (1978: ‘A New Formulation of the Ricardian System’, Oxford Economic Papers) argued that Ricardo was aware of the effects of taxes on dynamic equilibrium in the case of assuming variable-wage. According to Casarosa, the dynamic equilibrium in the Ricardian system is determined depending on the condition of corn production. This suggested that several taxes are considered to decrease the labour productivity of corn, so that, if the condition of corn production after taxation is determined according to the amount of taxes, the dynamic equilibrium after taxation is uniquely determined. However, did Casarosa sufficiently reveal Ricardo’s awareness regarding the effects of taxes on dynamic equilibrium? Because Ricardo indicated that the dynamic equilibrium after taxation is uniquely determined, regardless of whether taxes fall on wages or profits in the short term (Ricardo Works I, 226), to demonstrate this, it is essential to analyse the effects of taxes on dynamic equilibrium when taxes fall on profits or wages in the short term, using a model that reconstructs Ricardo on taxation. This cannot be analysed by Casarosa’s pure economic model. This study reveals that the dynamic equilibrium is uniquely determined after taxation, regardless of whether taxes fall on wages or profits in the short term. To achieve this, we arrange Ricardo’s argument of the effects of taxes on dynamic equilibrium in Chapter 16, ‘Taxes on Wages’, of Principles of Political Economy and Taxation, mathematically reconstructing it using a Casarosa model. This study demonstrates that Ricardo intuitively understood his tax theory from a dynamic perspective and argues that the origin of dynamic tax analysis existed in Ricardo’s Principles.
Area: Eshet Conference
Keywords: David Ricardo; economic growth; dynamic equilibrium; tithes
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