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12/19/2004

Lower Taxes = More Lawyers

Two pillars of the Bush economic agenda are bashing lawyers and lowering taxes to change work incentives. The NBER finds that the economic activity most susceptible to income-related incentive shifts is, of course, lawyers:

Taxes on labor income and consumption spending encourage households to shift away from work in the legal market sector and toward untaxed uses of time such as leisure, household production, and work in the shadow economy. In Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons (NBER Working Paper No. 10509), authors Steven Davis and Magnus Henrekson assess the long-term effects of persistent tax rate differences among countries. The authors stress that taxes affect work activity directly through labor supply-and-demand channels and indirectly through government spending responses to available tax revenues. They find that higher tax rates on labor income and consumption expenditures lead to less work time in the legal market sector, more time working in the household sector, a larger underground economy, and smaller shares of national output and employment in industries that rely heavily on low-wage, low-skill labor inputs.
Lower taxes on labor leads to more lawyer work - is this something Bush wants? It's foolish to expect consistency from this group, but still worth chuckling over.

Update, 12/20/04, 12:24 PM EST: Commenter and blogger Hoadley points out that I am completely wrong in my interpretation of the press release. By "legal market sector" it refers to the non-black market economy.
For our purposes, “market production” refers to output produced and incomes generated in legal markets, and which are declared to the government and captured in the National Income and Product Accounts. The “shadow” or “underground” economy refers to the output and incomes generated in markets, but which are not declared to the government, particularly the taxing authorities. [Page 3]
I guess I should have bothered to read the whole paper?

 

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