Over-worked or Over-taxed?

Lawrance mentions the well known and ubiquitous Underground European economy. As a general rule, black markets do not occur except where restrictions make them necessary.

In the presence of such an underground market and in light of falling productivity, the ramifications of such a confiscatory tax rate seem obvious.

People have to work harder for the same quality of life that they would otherwise have in a freer market. This is proven by the very presence of such a large black market. To think otherwise is to propose that people are engaging in extralegal economic activity solely for grins and giggles. Of course they are not, so the semi-rhetorical question remains; why are so many engaging in under the table business? To bolster their personal economies, why else.

I wonder about this kind of thing sometimes. (And I’m saying this as a real econ naif, so go easy on me.) I mean, isn’t there an underlying assumption here that if only it weren’t for government meddling/excessive taxation/corruption/whatever nearly everyone would be out spending lots of time and energy maximizing income via legit channels?

Well, says who? Seems unlikely to me. So: what evidence does anyone have that this is a legitimate assumption? And if it isn’t, why make it?

I’m often struck that it never seems to occur to people that perhaps the reason a European indulges in some black-market tomfoolery might not be that excessive tax rates give him no other option (although it might be that too). Perhaps he simply prefers to conduct that kind of life life in that way. Perhaps his people (so to speak) have always done things this way; perhaps he gets a secret thrill out of doing things this way; perhaps he’s comfortable with what we consider corruption (perhaps he finds it sexy — there are a lot of novels based on this idea); perhaps this is his preferred way to make a separate kind of peace with the market.

In other words, perhaps he’s already expressing a preference, just not a monetary preference. Perhaps not, of course. But why is the possibility that this might be the way he prefers to conduct a life so seldom considered?

It seems to me that deviations from a free-market ideal don’t really need to be explained in this way. Why should anyone be expected to want a free-market ideal? Perhaps that’s appealing to some people, but perhaps it’s the last kind of life a French person would opt for.

And besides, people have positive reasons for going about things the way they do, not just negative ones. And perhaps also, once a population’s income gets to a certain point, people might simply become less concerned with maximizing income. Perhaps, income-wise, at a certain point they’re happy enough. What then do their druthers become?

Actually, the assumption that people prefer freedom over oppression is not being questioned, at least not seriously. The question is, if and where a definitive line can be drawn as to what is restrictive and what is, relatively speaking, not restrictive. So it’s axiomatic that people prefer freedom; we’re just talking about degrees of freedom and how individual freedom is affected by external influences i.e. taxes.

No one can determine that “certain point” where another person is happy enough. Who are you or who am I to attempt such an egregious act of hubris? Thus the well documented failure of centrally planned economies.

So the base line for those who champion individual rights is that the government’s role in our lives is to protect the citizens from force and fraud, essentially. Once the government gets involved in making choices for individuals who are not harming anyone else through force or fraud, personal freedom is diminished. Spending someone else’s money on a noble cause thus strips the cause of its nobility.

So the free market in essence then is the natural, default condition of human economy where people are free to engage in voluntary actions with one another. The less free that market, the less free the person who belongs to that market or community. Thus “deviations from free market ideals” are deviations from human freedom.

To otherwise assert that the average person prefers oppression is simply ridiculous, the entirety of human history refutes such an idea.

One last thing that is interesting to note is that part of Mike’s example assumption was that if the government would just get out of the way, “everyone would be out spending lots of time and energy maximizing income.”

This is more than just semantics so bear me out but everyone already maximizes their income, free market or not. This is part of the point; when the government takes more than 50% of a person’s income, they tend to set lower levels of “maximization.”

To say that “everyone would be out spending lots of time and energy” is not true however. As has already been stated, everyone has differing levels of comfort and ambition so people always maximize their energy vs. earning an income. This comes full circle as to how to increase overall productivity and thus the quality of life for that society by allowing people to find their own maximization and not imposing a centrally planned idea on what that level should be.

Many thanks for the explanations. But I still wonder …

An example: Your assumption seems to be that a person is free to the extent that his government lets him be free. (“Once the government gets involved in making choices for individuals who are not harming anyone else through force or fraud, personal freedom is diminished.”) Sympathetic though I am personally to the argument, my experience (admittedly 30 years ago) with the French suggests to me that, as far as most Frenchpeople are concerned, they wouldn’t agree. As far as they’re concerned, they already are free. There’s a government out there, but there will always be a government, and what’s the use of getting upset about that, one might as well get upset about the state of the weather; one takes it into account as best one sees fit and gets on with life. One is always one’s own free man. Perhaps, if you feel that the government is getting greedy, you spend a little time dodging it via blackmarket channels — why not? In what way does that mean one isn’t free? One has freely chosen to dodge the government, which after all is a mere fact of life one deals with, like one deals with disease and hunger. One attends to it, wearily and wisely, and it certainly doesn’t enslave one’s person, except perhaps at the gulag extremes.

Another example: “For the most part, we believe that people are better off when they are more free.” But many French people wouldn’t feel free without their whole nanny-state apparatus, the health care, etc. It’s what sets them free, in their eyes. They feel oppressed by our focus on competitiveness and on matters of economic efficiency. I know this contradicts my point above — but the French wouldn’t care; they aren’t bothered by these kinds of contradictions, and find people who care about such things to be naive.

Another example: “Everyone has differing levels of comfort and ambition so people always maximize their energy vs. earning an income. This comes full circle as to how to increase overall productivity and thus the quality of life for that society by allowing people to find their own maximization and not imposing a centrally planned idea on what that level should be.”

Two points:
* OK, if the French, say, are already maximizing their energy vs. earning an income, as you say, well, perhaps the way they are doing so (high tax levels, long vacations, high-ish level of unemployment, some stagnation, substantial black market) suits them. Perhaps it’s their preference. What proof do we have that this doesn’t suit them?
* You seem to be convinced that in all cases a “centrally-planned idea” is a bad and oppressive thing. I’m hardly advocating socialism. But what if the French don’t see “central government” as the same kind of semi-optional, antagonistic thing we tend to see it as? What if they see it as inevitable, semi-desirable, inevitably corrupt and greedy, but also admirable — something whose taxes they’ll certainly spend a little time dodging (why not?), but also something they’d never imagine doing without. What if, in a general way, centrally-planned things are OK by the French? Centrally-planned things, after all, can be mighty convenient. Stylish too. Perhaps the French like the combo of convenient (restricted choice) and stylish. What proof do we have that they don’t? Plus they have a long history of doing the centrally-planned thing; it seems much more like their “default position” than anything you and I would think of as a free-market does.

Arnold writes in his posting intro: “Americans work more than Europeans. Do we work too much, or does Europe tax work too much?” I guess my final musing comes down to: Arnold presents a fact, and the poses a question. Good for him! My response: How and why does that question follow that fact? Perhaps no one’s doing the right thing and no one’s doing the wrong thing. Perhaps Europeans and Americans just have different ways of going about life.

Sure I’m serious. And I’m sorry that you find the observation and question “objectionable” — apologies, though I’m not sure for what.

Look, the French have different attitudes towards a number of things than Anglo-ish countries do. One’s the question of corruption; another’s the relationship of the individual to the state. Anglo-ish countries tend to be moral and reform-driven where corruption’s concerned; we get outraged by it, we think it’s automatically evil, we think it gets in the way of where we want to go. The French don’t see corruption that way. In their eyes, it’s an inevitable part of life. Arguing with it is childish; corruption can even be something to be savored. (No coincidence that the French love cheese that smells like corpses.) We’re all gonna die, governments and businesses (and individuals) will all be corrupt to a point, a lot of secrecy is to be expected … And to fight all that is just to get your knickers in an uptight twist. Let us not be infantile. Let us drink some coffee and eat some cheese instead — that’s what life is really about.

So, sure I’m suggesting that a certain amount of black-market activity isn’t just tolerated by the French but expected. How much, I have no idea. When do they start thinking it’s too much, and that something needs to change? And how can one tell? Good questions for economists to look into. But like I say, they not only don’t mind a certain amount of corruption, they rather enjoy it — it adds flavor, and a life without flavor isn’t a life worth living. But they certainly don’t think it can or should be willed away. And to those who point out that corruption drags down economic efficiency — well, the French nose would go right up. Why should they bow down before such impersonal gods? That would be degrading.

I’m not defending this — I’d rather live in the States than in France. But I did live there for a year and I do have French friends. And I’m pretty sure it’s fair to say that they would never, ever automatically let a question of economic efficiency make a decision for them. That just wouldn’t be French — and “being French” is something they’re devoted to. It’s why they get up in the morning. They may well (and often do) take economic efficiency into account, and past a certain point they may well think it’s imperative that something drastic be done about economic efficiency. (And maybe now’s such a moment, what do I know?) But, good lord, to let such considerations automatically prevail? Why, the thought of it! In their minds, it’s always *up to them* to make these decisions. The idea of letting a spreadsheet or an equation make a major decision for them? Absurd. Degrading. Oppressive.

Another attitude the French have that’s very different than what we’re used to is their attitude towards government. We seem to see government as semi-optional, as existing at our behest, as always on trial, and in great need of policing. (Personally, I don’t mind this view at all.) And to many of us, our sense of personal freedom depends on our ability to beat back the government — to be un-interfered with by it. Freedom to us is often freedom *from* government. The Frenchperson’s relationship with his/her government isn’t like that at all. On the one hand, it’s more like having a neighbor, or a tree in the front yard, or the weather. It’s inevitable, it’s there, it ain’t going away; you live with it and you deal with it. And your sense of your personal freedom certainly doesn’t depend on it, at least until it really starts to misbehave.

On the other hand, done properly, government isn’t the antithesis of freedom, it’s an enabler of freedom. They’re quite happy looking to government to make a lot of decisions for them. (Once these decisions are made, they’re then free to go back to the real business of a Frenchperson, which is “being French.”) They think that’s one of the reasons government is there; they’re paying it, to some extent, to do this job.

Freedom to them isn’t a matter of carving out a little space where you’ll be undisturbed by the bureaucrats. Freedom is first something you have in yourself, and is second something the government helps provide by taking care of certain arrangements for you. It frees you from some of these burdens — which they’d otherwise feel oppressed by. You freely choose, on your own, to interact with this system as you see fit. It would never occur to them to try to “be free” of government — that would strike them as absurd.

I should add, by the way, that I’ve known a couple of rich French people, a couple of poor ones, and a couple of working-class ones. And they’ve all been equally French — “quality of life” (cheese, wine, vacation, etc) considerations generally prevail over economic math, at least until they feel something really must be done. And they’re proud of this; it’s in this that, to some extent, their Frenchness resides. It’s important to all of the French people I know that *they* do the choosing, not the economic equation, even if it’s the equation they finally choose. And in their eyes, there’s no question: we’re the oppressed ones. They see us as enviably prosperous and energetic, perhaps, but also as slaves to questions of economic efficiency, fools and rubes who let maximizing value in money terms make all the decisions for us. Forever chasing after dollars and “fun” and clueless about how to savor what it is to be alive. In their eyes, we just don’t know how to live.

Please don’t mistake me as an advocate for any of this. I much prefer the American thing to the French thing, although I do think the French are on to a few things. (Some excellent cheeses!) But boy is it ever obvious to me when I’m with the French that they prefer the French thing to the American. Immense self-satisfaction and a feeling that any sane person deep inside really aspires to be French are characteristics of the French, no? So until we have good proof that the French are unhappy with the way they’re going about their beloved mission of “being French” — and they do get a lot out of “being French,” it’s a source of great satisfaction to them — I’m going to assume they’re doing a pretty good job of it.

But perhaps there are good indications that the French these days are fed up with their way of arranging matters and want to change it. Are there?

“Americans work more than Europeans. Do we work too much, or does Europe tax work too much? ”
~~

Strikes in Italy yesterday over the government’s attempt to raise the retirement age (now 57 for many) a little as a small step towards averting future insolvency.

Europeans can work as little as they want, that’s up to them, but they can’t both work little and less *and* provide retirement benefits for themselves that become greater and more as time goes on, through their transfer tax retirement systems, no matter what they do with tax rates.

They are trying to legislate a free lunch for themselves. If one wants to see Bastiat’s “government is the fiction by which everybody strives to live at the expense of everybody else” in action, look no further.

Of every 100 produced by a worker in high-tax countries, 40 goes to the government and 60 is available for the worker’s consumption? Is Prescott really suggesting that the rate of profit in high-tax countries is zero?

>> But perhaps there are good indications that the French these days are fed up with their way of arranging matters and want to change it. Are there?

Of course, there are. Mismanagement with state monopolies (e g Telecoms, Mail, Energy) are more and more scrutinized by their control authorities in charge of their auditing. High-civil servants now publicly express their views towards market-driven reforms in the state utilities, once a tabu in France. A major reform with public finance is also being put into force in the same way. In brief,the Parliaments will now check state expenses according to program-oriented budgeting instead of voting for credit authorizations.

>> Is that a sufficiently high tax rate [60%] to have a large effect on labor supply?

Yes, but in France one also have to take into account the peculiar structure of the labour market. One out of five workers is still active in the public sector where the wage progression is so-to-say ‘automatic’. Indeed french civil servants are rewarded upon an experience-based scheme, which is strictly incremental since a public servant cannot be fired excepted in a few extreme situations (criminal convictions). Some extra premiums based on individual performance are now suggested but the trade unions remain strongly opposed to such (minor) reforms.

Speaking about french peculiarities, we must also remind that personal income tax is still not a pay-as-you-earn tax but is annually declared and paid upon receipt afterwards.

However, I think that the French-American divide about individual preferences for work and leisure cannot be generalized without falling into mere prejudices. For instance, I used to work 50-55h a week for a (french) telecom operator in Paris some years ago. A british colleague of mine then told me about his disappointment when he came from his previous job working 41h a week (strictly observed) for a british operator. In Germany, working overtime is still mainly regarded as unefficient and not professional even outside the public sector.

Lord Maynard, a british economist, is developing some interesting theories about optimal taxation. Even if one does not fully agree with some of his assumptions, this approach competes elegantly with public-choice or market-oriented theories in my humble opinion.
See his papers about the economics of happiness for further information. (“Happiness : Has Social Science a Clue ?” available at http://cep.lse.ac.uk/layard/ )