Government Spending Discourages Work: The French and Italians pay higher taxes and put in 30% fewer hours per person than Americans

By Edward Lazear. 

"Over the past century, comparatively low federal taxes and Americans’ long working hours have kept the U.S. economy growing. Politicians can always provide a rationale for increased spending. But over time high spending necessitates high taxes, and high taxes reduce work and restrain growth.

Economic trends in developed nations consistently show that low taxes and hard work are linked to robust growth. The U.S. is the least taxed of the Group of Seven countries, with a tax haul amounting to 25% of gross domestic product. Americans also work harder than their G-7 peers, with the exception of Canadians, with whom they are roughly tied. These factors have helped the U.S. and Canada lead the G-7 in growth since 2010.

European countries trail the U.S. in working hard and controlling taxes, and their economies have lagged in comparison. France has a tax-to-GDP ratio of about 44%, and in Italy it’s 43%. The French and Italians work almost 30% fewer hours per person than Americans. Notably, the French economy has flatlined since 2010 while Italy’s has contracted.

These patterns are not a coincidence: High taxes discourage work and capital formation. Data from the Organization for Economic Cooperation and Development suggests that a 1% increase in a nation’s tax rate is associated with a 1.4% decrease in hours worked per person in the working-age population. U.S. data dating to the 1970s also shows that higher taxes cause workers to limit their hours, reducing economic output."

"taxes are ultimately dictated by spending. Countries can borrow to finance short-run spending, but they must eventually levy taxes to repay the loans."

"Tax and spending rates correlate highly across the 35 OECD countries. Higher spending goes hand in hand with higher taxes, higher deficits, fewer worked hours and less growth."

"a 4% increase in spending is associated with a decrease of roughly 0.5 percentage point in the average annual growth rate."

"Furthermore, it is spending—rather than the deficit—that correlates with sluggish growth."

"there is no correlation between deficits and growth at a given level of spending. Deficits often coincide with low growth because deficit increases are usually caused by heightened spending, not reduced taxes. Raising taxes, or keeping them high without lowering spending, stifles growth. But the converse is also true: Lowering taxes without lowering spending also has little direct effect on growth."

"To the extent that government spending goes to programs such as welfare that directly discourage work, it has an additional growth-reducing effect. When fewer people work, those who do must be taxed even more to cover public expenses. These heightened taxes on labor discourage work in turn"