Wednesday, December 9, 2009

The US and the Payroll Tax

The United States Treasury is going “European” on tax matters. Casey Mulligan reports in his blog today (“Approaching a Tax Milestone”, December 9) that the payroll tax has, for the first time in history, become the single largest federal tax, replacing in that role the federal income tax.

As a conclusion he wonders “Will it be Democrats who first harness the revenue-collection power of the payroll tax? Or will Republicans appreciate its favorable incentives?”

I disagree with the last sentence claim: the incentives provided by the payroll tax are not “favorable” but strongly detrimental to labor supply. And the transatlantic differences in its level go a long way to explaining differences in hours worked per capita, and consequently production per capita, on both sides of the Atlantic as Edward Prescott showed (see my paper "Comment gagner plus" on my homepage here ).

Read the Mulligan post here .

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