Policymakers face important questions about the optimal size and scope of federal spending. Labor taxes used to fund government programs provide citizens with important benefits, but at what point does taxation become a disincentive to working? How large is this effect? In his study, The Impact of Labor Taxes on Labor Supply (AEI Press, June 2010), Arizona State University economist Richard Rogerson attempts to answer these questions by comparing data from countries around the world over a fifty-year period. He finds that a 10 percent increase in labor taxes as a percentage of GDP leads to a 10 to 15 percent decrease in hours of work and that the unintended consequence of increasing taxes is a weakened revenue stream. These findings have enormous implications for policymakers who fail to account for this drop in government revenue when calculating the costs and benefits of expanding government programs.

At this AEI event, Rogerson discussed his work in a discussion with Harvard’s Robert Barro and Boston University’s Laurence Kotlikoff. Henry Olsen, vice president of AEI’s National Research Initiative, moderated.