Monday, October 15, 2012

Higher Marginal Tax Rates Decrease Supply Of Labor: Higher Marginal Tax Rates Will Not Increase Tax Revenue: Obama's Tax Plans Will Cause Four More Years Of Slow Economic Growth

From "Why Do Americans Work So Much More Than Europeans?" by Edward C. Prescott, awarded the 2004 Nobel Prize in Economics:
Americans, that is, residents of the United States, work much more than do Europeans. Using labor market statistics from the Organisation for Economic Co-operation and Development (OECD), I find that Americans on a per person aged 15–64 basis work in the market sector 50 percent more than do the French. This was not always the case. In the early 1970s, Americans allocated less time to the market than did the French. The comparisons between Americans and Germans or Italians are the same. Why are there such large differences in labor supply across these countries? Why did the relative labor supplies change so much over time? In this article, I determine the importance of tax rates in accounting for these differences in labor supply for the major advanced industrial countries and find that tax rates alone account for most of them.

This finding has important implications for policy, in particular, for financing public retirement programs, such as U.S. Social Security. On the pessimistic side, one implication is that increasing tax rates will not solve the problem of these underfunded plans, because increasing tax rates will not increase revenue. On the optimistic side, the system can be reformed in a way that makes the young better off while honoring promises to the old. This can be accomplished by modifying the tax system so that when an individual works more and produces more output, the individual gets to consume a larger fraction of the increased output. [Emphasis added.]
An economy's output, its GDP, is a function of the labor supply, the number of hours worked and the number of workers, and capital investment. Higher marginal tax rates will decrease the labor supply and GDP. Romney has it right about increasing the US economy's growth. Obama's tax plan for increasing the top marginal tax rates will cause four more years of slow growth of the US economy.

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