What is the link between taxation and productivity?

By Kevin Price

It appears policy types either "don't get" or "don't care" about one of the most fundamental ideas behind sound fiscal policy..."the more you tax something, the less you get of it." Arthur Laffer created quite the buzz in the 1970s when he developed his now famous "Laffer Curve," which shows that if you tax people at zero percent, you will get zero revenue and if you tax people at 100 percent, you will still get zero revenue because people will simply stop working. Therefore there is a point — somewhere between zero and one hundred percent — where you will find maximum amounts of both productivity and revenue. Finding that optimal point will mean widespread job creation and huge financial returns for a nation. Looking to find models of this can be challenging. In spite of the hard cuts in spending being done today, Europe is no place to look for tax solutions.

The National Center for Policy Analysis points out that, in 2004, Edward Prescott (an economist with the Federal Reserve Bank in Minneapolis) won the Nobel Price in economics for his paper "Why do Americans Work so Much More than Europeans?" How much is "much more"? Prescott found that the average production per adult between 1993 and 1996 in the United States was:

• 49 percent greater than in the United Kingdom
  
  
• 75 percent higher than in Italy
  
  
• And 35 percent greater than in France and Germany.
  
  

Regarding these findings, Prescott found that "Most of the differences in output," he wrote, were "accounted for by differences in hours worked per person and not by differences in productivity." Americans are not working more efficiently or effectively, per se, just much more. "More" in terms of days of the week, the number of weeks in a year, and the number of years in a lifetime.

According to the research:

• In 2007, the average French or Austrian male retired at 58.7 and 58.9 respectively, the average American male works until 64.6.
  
  
• That same year, 72 percent of Americans between the ages 15 to 64, were in the workforce, compared with 59 percent of Italians and 64 percent of the French.
  
  

As a result, Americans produce and earn considerably more than Europeans. For example, the average American makes $47,000 annually compared with $36,000 in Germany and the United Kingdom, and $34,000 in France. In fact, the disparity between the US and Europe is so great that, citizens of our poorest states, like Mississippi have a higher GDP per capita than the Italians. Meanwhile, Alabamans have a higher GDP per capita than the French, Belgians, and even the Germans.

So why are Americans more productive than their European friends? Prescott points to high taxes as a deterrent to economic growth and industriousness. Furthermore such taxes encourage people to want to retire early so they can get on the dole. Where is all the money going? According to writer James Glassman in Commentary Magazine (July/August 2010), it is not to maintain a strong defense, but to sustain the region's giant welfare state. This seems to be the path the United States is following.

© Kevin Price