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Description of Ricardo's Law |
‘... without a knowledge of [the law of rent], it is impossible to understand the effect of the progress of wealth on profits and wages, or to trace satisfactorily the influence of taxation on different classes of the community’
David Ricardo
Ricardo’s Law judges Tony Blair’s decade in power. The author marshals the evidence to address four indictments of how the modern state operates, and how New Labour failed to advance its agenda. Blair was given a mandate to modernise Britain’s institutions and include everyone in the prosperity of the nation. Fred Harrison explains why this prospectus could not be realised, because tax policies continue to favour the rich and penalise the poor.
While politicians of all parties agree on the need to end social exclusion, the gap between rich and poor continues to widen. The reason, the author explains, is that politicians, and their expensive consultants, ignore the Law of Rent, also referred to as Ricardo’s Law after the early 19th century economist who provided the first scientific explanation of how it operates.
The welfare state rests on the belief that progressive taxation can end poverty, on the basis of ‘from each according to his means; to each according to his needs’. This sounds fair: the rich pay more tax to help the poor. However, because, in the words of Ricardo, ‘the influence of taxation on different classes’ is not understood, the opposite result is achieved: taxation favours the rich at the expense of the poor.
The welfare state has raised living standards, but Ricardo’s Law reveals that it is impossible for the original aspiration – of closing the wealth gap - to be achieved under the present tax regime. Harrison reveals how taxes operate to the disadvantage of low income earners in two ways:
1. taxes levied on workers’ incomes, on savings and investments, and on sales reduce economic activity and employment and the wealth available to support public services. The Treasury does not dispute this, but justifies it on the grounds that there is no alternative;
2. low income taxpayers subsidise the rich through the housing market. The more valuable the property, the greater the benefit - a 5% increase in house prices would add £5000 to a house worth £100,000, but £25,000 to a £500,000 house. This enables homeowners to claw back their taxes, a privilege denied to those who rent.
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About Fred Harrison |
FRED HARRISON is Executive Director of the Land Research Trust in London. During 1990s he was advisor to Russian academic and political bodies, including the Duma (parlia-ment), in their efforts to implement an equitable transition to a market economy. He has now turned his attention to the failure of economic and social policies in the market economies.
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