TAX ROLL BACK IS NECESSARY
October 26, 2004
Based on labor market statistics from the Organization for Economic Cooperation and Development, Americans ages 15 to 64, on a per person basis, work 50 percent more than the French. Comparisons between Americans and Germans or Italians are similar.
Why? It turns out that marginal tax rates explain virtually all of this difference, says Nobel prize-winning economist Edward C. Prescott.
- According to the OECD, from 1970 to 1974 France's labor supply exceeded that of the United States, yet two decades later, France's (and others') labor supply dropped significantly; what stands out in these cross-country comparisons is that when European and U.S. tax rates are comparable, labor supplies are comparable.
- Another data set shows that Italians aren't necessarily working any less than Americans -- they are simply not being taxed for some of their labor; indeed, the Italian government increases its measured output by nearly 25 percent to capture output of the underground sector.
- A recent study shows that Germans and Americans spend the same amount of time working, but the proportion of taxable market time vs. nontaxable home work time is different.
These data show that we should stop focusing our attention on the recent tax cuts and, instead, start thinking about tax rates, says Prescott. And that means we should roll back the 1993 tax rate increase and re-establish those from the 1986 Tax Reform Act. Just as they did in the late 1980s, and just as they would in Europe, these lower rates would increase the labor supply output and tax revenues would increase.
Source: Edward C. Prescott, "Why Do Americans Work More Than Europeans?" Wall Street Journal, October 21, 2004.
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