In a recent article (Ng 1987), Yew-Kwang Ng demonstrates that taxes on goods whose utility is derived entirely from their market value ("diamond goods") can provide revenue to the government with no cost to the taxpayers aside from the administrative costs of collecting them. Such a tax decreases the quantity of the good produced while proportionally increasing the value per unit quantity. Since the utility of the good depends only on its value, the smaller quantity produced (after the tax is imposed) produces the same total utility to consumers as the previous larger quantity. The revenue collected by the government is paid, in effect, from the reduced cost of producing a smaller quantity of the good.

Professor Ng mentions a number of earlier discussions of goods whose utility comes in part from their price. He is apparently unaware of an analysis which is both much earlier and much closer to his than any he cites. In Chapter 13 of the Principles of Political Economy, David Ricardo wrote:

If gold were the produce of one country only, and it were used universally for money, a very considerable tax might be imposed on it, which would not fall on any country, except in proportion as they used it in manufactures, and for utensils; upon that portion which was used for money, though a large tax might be received, nobody would pay it. ... The benefit would be this, that if less gold were produced, less capital would be employed in producing it; ... From such a tax, as far as money was concerned, the nations of Europe would suffer no injury whatever; they would have the same quantity of goods, and consequently the same means of enjoyment as before, but these goods would be circulated with a less quantity, because a more valuable money. ...If in consequence of the tax, only one tenth of the present quantity of gold were obtained from the mines, that tenth would be of equal value with the ten tenths now produced. (Ricardo 1951 pp. 194-196.)

As can be seen from the quote, Ricardo's burden-free tax is a tax on gold used exclusively for money. A reduction in the quantity of gold results in a proportional increase in its price; since the services provided by a coin depend on what it will buy not how much it weighs, the smaller quantity produced as a result of the tax provides the same monetary services as the larger quantity produced before the tax. The revenue to the government is paid by the reduced cost of producing a smaller quantity of gold.[1]

Ng's analysis is more general than Ricardo's, and considerably clearer. The essential argument, however, is exactly the same.

Ng, Yew-Kwang , "Diamonds are a Government's Best Friend: Burden-Free Taxes on Goods Valued for their Values," AER 77 (1987) pp. 186-191.

Ricardo, David, Principles of Political Economy, Piero Sraffa, ed., Cambridge 1951.

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