Taxes and labour supply: more evidence

Do tax cuts boost labour supply and hence tax revenues? Here’s some evidence that they don’t. Pierre Cahuc and Stephane Carcillo report on an experiment* in France:

The detaxation of overtime hours introduced in October 2007 was intended to allow individuals in France to work more so as to earn more. The evaluation conducted in this article indicates that the detaxation of overtime hours has not, in fact, had any significant impact on hours worked…
Detaxation is a measure costly for the public purse, without any ascertained impact on hours worked.

We can put this alongside the evidence we have for footballers and New York cabbies, which suggests that we are on the positive side of the Laffer curve, where tax cuts do not increase revenues. It’s also consistent with the - very tentative - evidence we have from UK tax receipts this year, which suggests that the introduction of the 50p tax rate has not (yet) reduced revenues.
Now, this is not to deny that Laffer curves exist. No doubt, there is a point at which higher taxes would be counter-productive and tax cuts would pay for themselves. And I’ll concede that it’s possible that the 50p tax rate will, eventually, have adverse effects.
But where is the hard evidence that, at tax rates around current levels, there are such effects? Do the glibertarians  have anything more than prejudice, half a theory, and the post hoc ergo propter hoc fallacy?
* Here’s another (futile) Dillow campaign. Instead of using the word policy, we should use the word “experiment”.

Comments

[Nick]

http://www.nationalreview.com/agenda/243096/long-run-and-short-run-impacts-taxation-reihan-salam

As you acknowledge, short run looks v different to the long run. 2007 really isnt long ago and it's a slightly weird policy intervention anyway.

[Mark Wadsworth]

Well yes, but:

1. Who says that people in France didn't do the rational thing and work less regular hours and more 'overtime'?

2. These people who say that tax cuts always increase revenues should be politely ignored. As right wing as I am, I am happy to concede that the revenue maximising rate of income tax is about 60% or 70%. (assuming price-elasticity of labour supply of 0.4). And there are plenty of people and businesses who pay 60% or 70% once you add in VAT, means testing and two layers of NIC.

3. But let's not forget the curve that is omitted from most sketches of the Laffer Curve, namely the impact on GDP. At the revenue maximising point, GDP is about one-third lower than it would be in the absence of income taxes.

4. We also know from observation that increases in GDP tend to flow through into higher land values (by looking at changes over time or comparing wealthy and poor areas, or low taxed and high taxed areas).

5. So why not scrap taxes on income and output completely and just tax land values instead? We'd have higher GDP, higher tax revenues, and, assuming that most LVT receipts were dished out as a Citizen's Income, higher net incomes.

What's not to like?

[Steve]

1) The Laffer curve for the state is the combination of individual curves e.g. total income tax revenue vs personal income tax.
2) Does the curve have to be continuous or is it more likely a discrete function.
3) Who says it has to have only one peek?

[chris]

@ Nick, Mark - I agree LVT is a good idea, and the long-run effects might well be stronger. I was just criticizing the simple-minded glibertarian notion that tax rises have quick adverse effects.
@ Steve - good question. No reason - other than simplicity and Occam's razor I guess - why the curve should be single peaked.

[Luis Enrique]

have you seen the research on how (one of) the biggest effects of income taxes at higher income levels is to change how people choose to report their income? have a flick through Joel Slemrod's research if you are interested.

[Laura]

It is a very interesting post. It's interesting to see that, unlike what many people think tax cuts don't increas labor opportunities.

[Rose]

Here is a three part series explaining the Laffer Curve:

http://www.youtube.com/watch?v=fIqyCpCPrvU

http://www.youtube.com/watch?v=YsB_rnzBA08

http://www.youtube.com/watch?v=Mw7LtVwDCbs