Amity Shlaes has a column about a new Tax Foundation study that the Foundation headlines, "Global Evidence on Taxes and Economic Growth: Payroll Taxes Have No Effect."
Shlaes is a genius and a friend with whom I agree probably 99.9% of the time, and the Tax Foundation is a wonderful institution that I also usually agree with. But on this one I think they are missing a key point. Here's the Shlaes column:
Maybe payroll-tax cuts don't equal growth. Perhaps they don't matter to growth. Perhaps other steps generate better growth....Some countries featuring very high or regressive payroll-tax rates, such as the Slovak Republic, with taxes in the mid-40 percent range, grew fast over the decade.
Here's the Tax Foundation report:
Table 1 shows cumulative real economic growth in OECD countries over the years 2000 to 2010, where 2010 is the most recent data available from the OECD. This period may be considered the long term in that it exceeds the business cycle, which generally ran from the peak in 2000 to the next peak in 2007 with recessions in 2001 and 2008-2009. Over the entire 11-year period, the U.S. grew 16.7 percent, which was well below the OECD average of 24.9 percent. The fastest-growing country was the Slovak Republic, at 59.7 percent....Our first task is to look at the relationship between payroll taxes and economic growth. As Figure 1 shows, there is no relationship between payroll taxes and long-term economic growth. Some countries, such as Slovakia, have high payroll taxes and high growth while other countries, such as the United States, have relatively low payroll taxes and low growth.
What neither Miss Shlaes or the Tax Foundation mention is that, according to the latest OECD data, Slovakia's unemployment rate was 13.4% in 2011 and 14.4% in 2010. Other countries with high payroll tax rates, such as France and Hungary, also had high unemployment rates relative to the others. The payroll tax is a tax on work. Keep it high, and you'll have fewer workers, just as surely as with the income tax. Cutting it, even temporarily, here in America may not have had a big effect on growth, but since the payroll tax holiday went into effect unemployment has dropped.
I'm not saying that employment is more important than growth, or that the payroll tax holiday in America should have been renewed, or even that the Tax Foundation is incorrect when it suggests that cutting the corporate or individual income tax rates would have stronger positive effects on growth than cutting the payroll tax. But the left could well seize on that Tax Foundation study and the Shlaes column to argue for, say, uncapping the Social Security payroll tax, or further increasing the Medicare payroll tax, or otherwise raising payroll taxes, on the grounds that, "hey, it wouldn't affect growth, look at the Slovak Republic, with its 44% payroll tax and strong growth." All I'm saying is that one shouldn't be casual in dismissing the deleterious economic effects of high taxes of any variety. If the Tax Foundation doesn't grasp the point, perhaps some unemployed Slovakians could explain it to them.
