Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 40: Taxation and Domestic Free Trade

Richard Johnsson ()
Additional contact information
Richard Johnsson: The Ratio Institute, Postal: P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: In this paper it is argued that the domestic division of labor and trade is organized according to the same principle as the international division of labor and trade – the Ricardian comparative advantages. After all, the ultimate source of these comparative advantages is the individual. The comparative advantages of individuals then lend themselves to groups of people, companies, regions and countries. It is these that make it worthwhile for people to cooperate on any larger scale at all; we all rely on them and they imply that there is room for everyone in society. But just as tariffs ruin the international division of labor, taxes and similar domestic government interventionism destroy the domestic division of labor among people. This is illustrated by means of the ‘division of labor condition’, where taxes enter as a possible restriction to trade, thus creating a Darwinist society of the survival of the fittest. The least productive individuals and those who face the highest barriers to trade run the risk of ending up on the outskirts of society. The more productive ones will run the risk of overreaching as they are forced to perform more and more tasks themselves. The result is not only more home labor and more black markets, but also real barter and situations where nothing gets done at all. To restore the division of labor, and to make room for everyone who wants to participate in it, it is argued that removing barriers to domestic trade is the only possible option.

Keywords: Division of labor; Comparative Advantage; Trade; Productivity; Growth; Taxes; Unemployment; Household Labor; Informal economy

JEL-codes: B30; B53; D13; D31; D51; D60; D70; E23; E24; E31; E60; F00; F10; F20; F40; H20; H30; J22; J23; J24; J31; J38; J44; J60; O11; O12; O13; O40; P16

16 pages, First version: April 29, 2004. Revised: June 7, 2004.

Note: The publication refers to a Swedish version of the paper.

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