The Wealth of Nations · Chapter
Article III: Taxes Upon the Wages of Labour explained
Smith argues that a direct tax on wages cannot be borne by the laborer; instead, it raises wages higher than the tax itself, with the burden ultimately falling on landlords (for agricultural labor) or consumers (for manufacturing labor).
What happens
Smith argues that a direct tax on wages cannot be borne by the laborer; instead, it raises wages higher than the tax itself, with the burden ultimately falling on landlords (for agricultural labor) or consumers (for manufacturing labor). Such taxes also reduce demand for labor, harming industry and national output. He cites examples from France and Bohemia and notes that taxes on public offices are more acceptable.
Themes in this chapter
Social Class and Inequality
The tax burden shifts from laborers to landlords and consumers, illustrating class-based economic impacts.
Role of Government
Smith critiques direct taxes on wages as absurd and destructive, showing how government policy can harm industry and employment.
Wealth and Money
The analysis of wage taxes reveals how money flows through different economic classes and affects national wealth.
Characters to notice
- The Employer
Advances the tax on wages; in manufacturing, passes the cost to consumers; in agriculture, reduces rent paid to landlords.
- The Landlord
Ultimately bears the burden of a tax on country labor through reduced rent.
- The Consumer
Ultimately pays the increased price of manufactured goods due to the tax on manufacturing wages.
- The Farmer
Advances the tax on country labor and recoups it by paying less rent to the landlord.
- The Master Manufacturer
Advances the tax on manufacturing wages and charges it with profit to the consumer.
Key passages
“A direct tax upon the wages of labour, therefore, though the labourer might perhaps pay it out of his hand, could not properly be said to be even advanced by him; at least if the demand for labour and the average price of provisions remained the same after the tax as before it.”
Even if the laborer hands over the tax money, he does not truly bear the cost, because his wages will rise to compensate, provided labor demand and food prices stay unchanged.
Smith argues that the laborer is not the ultimate payer of a wage tax.
“The final payment of this rise of wages, therefore, together with the additional profit of the master manufacturer, would fall upon the consumer.”
The consumer ends up paying for both the higher wages and the manufacturer's extra profit.
Smith traces the shifting of the tax burden in manufacturing.
“The final payment of this rise of wages, therefore, would in this case fall upon the landlord, together with the additional profit of the farmer who had advanced it.”
In agriculture, the landlord ultimately pays for the wage increase plus the farmer's profit.
Smith shows how the tax on country labor reduces rent.
“Absurd and destructive as such taxes are, however, they take place in many countries.”
Despite being irrational and harmful, such taxes exist in numerous nations.
Smith criticizes the prevalence of direct wage taxes.