Higher taxes reduce labour supply

October 16, 2007 5:25 PM

A new paper, "Labour supply and marginal tax rates" by AJ de Bruin from the Erasmus University in Rotterdam, investigates the effect of labour income taxes on the supply of paid labour for several Western countries over the last two decades.


For the countries with the best data, namely France, Italy, the Netherlands and the United States, the paper finds labour supply elasticities of approximately 0.43, 0.2, 0.15 and 0.18 respectively. This means that the amount of paid labour would increase between 1.5 percent and 4.3 percent in the selected countries if the tax pressure on labour income was reduced by 10 percent (i.e., a reduction in the marginal tax rate from 40 percent to 36 percent). Moreover, the structure of the models shows that the time required for such an effect to materialise in the respective labour markets would be between one and two years.


So - cut income tax rates; increase labour supply, grow the economy and get back a large part of the lost revenue. Simple, really.

A new paper, "Labour supply and marginal tax rates" by AJ de Bruin from the Erasmus University in Rotterdam, investigates the effect of labour income taxes on the supply of paid labour for several Western countries over the last two decades.


For the countries with the best data, namely France, Italy, the Netherlands and the United States, the paper finds labour supply elasticities of approximately 0.43, 0.2, 0.15 and 0.18 respectively. This means that the amount of paid labour would increase between 1.5 percent and 4.3 percent in the selected countries if the tax pressure on labour income was reduced by 10 percent (i.e., a reduction in the marginal tax rate from 40 percent to 36 percent). Moreover, the structure of the models shows that the time required for such an effect to materialise in the respective labour markets would be between one and two years.


So - cut income tax rates; increase labour supply, grow the economy and get back a large part of the lost revenue. Simple, really.

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