An Overtaxed Electorate

On Sunday, France goes to the polls to elect a president, with a clear choice between the UMP leader, Nicolas Sarkozy, who wants to lower taxes to a maximum of 50%, and the socialist candidate, Segolène Royal, who wants to preserve and expand the welfare state.

In the candidates' debate on May 2, taxes, arguably the most important influence on economic growth, took center stage.

France, with a disastrous experiment with a 35-hour workweek, an overall unemployment rate of 8.8%, and a youth unemployment rate in some areas approaching 25%, needs jobs. Mr. Sarkozy, accusing Ms. Royal of "sharing out the work like pieces of a cake," said that as president he would bring the unemployment rate down to 5% and that everyone who wants a job would be able to work.

Mr. Sarkozy clearly sees a link between lower taxes and increased economic growth and employment. He concluded the debate, viewed by 20 million, by saying that he wanted to get rid of the "moral crisis" in France, which he attributed to the "crisis of work."

Many economists have concluded that higher taxes, unions, and associated cultural effects are responsible for the shorter hours of work. In France, as in the rest of Europe, work weeks are shorter, vacations are longer, people enter the workforce later, and retire earlier.

As taxes discourage some from working and union contracts set shorter hours, others also come to prefer more leisure, so as to be able to spend time with friends and family.

This matters because if Europeans continue to earn and produce less, they will fall further behind Americans and might become dissatisfied with their living standards.

A professor at Arizona State University, Richard Rogerson, following in the path of Nobel Prize-winning Edward Prescott, also of professor at Arizona State, has shown that hours of work in major industrialized countries varied inversely with levels of taxation over the period 1956 to 2004. In highly-taxed France, on average, people work only three-fourths of the American work week.

But average hours worked by a country's population can't be taken as a sole measure of well-being, or even of the effects of taxes. The value of those hours is crucial, as well as who is working and the types of economic activity generated.

For instance, men's work hours have declined in the industrialized world over past decades because it's becoming more common to attend college and retire earlier. This is a long-term benefit, though, to the economy because a better-educated workforce is more productive. Increased productivity means that less work achieves the same level of income.

This decline in men's work hours has been offset in many countries, including America, by the entry of women into the labor force. Women's labor force participation rates are 59% in America, 62% in Canada, and 58% in Australia, countries with high hours of work. France, with low hours of work, has a female labor force participation rate of 51%. Lower taxes could encourage more women to take paid work.

To further nudge women into the labor force, an economics professor at Harvard University, Alberto Alesina, in a paper entitled "Gender Based Taxation" co-authored with a professor at the University of Bologna, Andrea Ichino, has proposed a radical policy shift — tax women at a lower rate than men. Married women tend to be secondary earners for a family, and their choice of whether or not to work has been shown to be more sensitive to the tax rate than the hours of work of men.

However, Mr. Alesina admits that there might be some negative effects of greater numbers of mothers working. They include higher rates of divorce as women become more financially independent; less time spent with children, which could be made up by additional time spent by fathers, if they work less to avoid their tax rates; and less well-behaved children.

The effect of a tax system on income is of far greater importance than on hours worked. Income effects are critical when it comes to assessing the effects of changes in tax rates on government revenues and the inefficiencies associated with different taxes.

Professors at MIT and the University of California at Berkeley, Jonathan Gruber and Emmanuel Saez, respectively, have found that people at the upper end of the income distribution are highly responsive to changes in tax rates, more so than those at the middle and lower end. Their research shows that lowering top tax rates in France would encourage upper-income earners to work more.

Similarly, professors at Williams College and Columbia University, William Gentry and Glenn Hubbard, found that higher marginal tax rates discourage entrepreneurship. Entrepreneurship involves risk-taking, and people are less willing to take risks when the rewards will be taxed away. The increase in taxes in America in 1993, they found, lowered the probability of people becoming self-employed by 20%. The ensuing period of high growth and low unemployment could have been even better.

This has important implications for keeping entrepreneurs in France, rather than having them flee to Switzerland or Belgium, neighboring countries with lower tax rates. Additional entrepreneurs would create jobs and encourage innovation, and enable France to reap further benefits from its superb educational system.

On May 2, Mr. Sarkozy declared, "I want to say to those who find life too hard, that for me, everyone has the right to work." If he's elected and can achieve his goal of reducing top tax rates, he might be able to jump-start job creation and fulfill his campaign promise of a job for everyone who wants one.

Ms. Furchtgott-Roth, a former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.