Robert Lucas Thinks High European Tax Rates Explain Low Levels Of Output In Low-Tax Japan

Swedish kids going to socialist day care so mom can work.

One of the great oddities of the modern world is right-of-center economists who are obsessed with tax levels as the key explanatory variable for everything, but who also don’t seem to know anything about taxes. For example, here’s a very curious account of Robert Lucas’ views about Japan:

Mr. Lucas is visiting NYU for a few days in early September to teach a mini-course, so I dash over to pick his brain. He obligingly tilts his computer screen toward me. Two things are on his mind and they’re connected. One is the failure of the European and Japanese economies, after their brisk growth in the early postwar years, to catch up with the U.S. in per capita gross domestic product. The GDP gap, which once seemed destined to close, mysteriously stopped narrowing after about 1970.

The other issue on his mind is our own stumbling recovery from the 2008 recession.

For the best explanation of what happened in Europe and Japan, he points to research by fellow Nobelist Ed Prescott. In Europe, governments typically commandeer 50% of GDP. The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households. “The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard,” says Mr. Lucas. “And it’s really hurting them.”

As Noah Smith points out, Japanese taxes are lower than American taxes. According to the Heritage Foundation, Japan’s public sector spends 37.1 percent of GDP compared to 38.9 percent in the United States. Moreover, the picture of a “European” level of taxation that explains a systematic gap with the United States seems misleading to me. Germany’s 43.7 percent of GDP is closer to the American level of spending than it is to what you see in Denmark, Sweden, Finland, Austria, Belgium, or France.

The stylized fact that differential labor force participation by married women is an important driver of output gaps between developed countries is certainly an important topic for discussion. Perhaps we need some feminist growth theory. Certainly the tension within conservative thinking on both sides of the Atlantic (and perhaps Pacific?) over whether or not married women should be encouraged to work is an interesting issue. And there’s certainly a place for taxes in giving an account of this, but if you actually look the numbers up, you’ll see there must be a lot more.