More Faulty Tax Logic

In a post at the The Corner, David Freddoso comments on an article about labor shortages in Denmark:

Supply Side 101: Denmark's high marginal income tax rate discourages Danes from working — at least from working in Denmark. Now Denmark faces a severe skilled-labor shortage and a shrinking native population (a trend masked by the arrival of many unskilled immigrant workers)

This is a perfect example of the tendency among supply-siders to cite completely irrelevant data as evidence of the validity of their economic theories. The phenomenon described in the article--educated Danes fleeing to other European countries to work--has nothing whatsoever to do with supply-side economics.

Supply-siders posit that tax rates have a significant effect on productivity, i.e., that if you lower taxes and allow people to keep a greater percentage of what they earn, they will be motivated to work harder, which will lead to greater productivity and economic growth. This is no doubt true at some level. If, for instance, you were to reduce income tax rates dramatically--say, from 99% to 50%--that undoubtedly would have such an effect. But it is highly questionable whether marginal decreases in more reasonable rates have the same effect.

But this is all beside the point. What's going on in Denmark is much simpler. As citizens of the European Union, Danes are free to live and work in other E.U. countries, many of which have significantly lower tax rates. As a result, many Danes are choosing to live and work in other countries. It's as simple as that. The same thing would happen in the U.S. if the taxation rate varied dramatically from state to state.

The fact that many people would rather live somewhere with lower tax rates says absolutely nothing about the question central to supply-side theory, i.e., whether people work harder when their tax rates are lower. Are Danes in Denmark less productive than Danes in Germany? Who knows? The article doesn't say. What would productively be like if every country in the E.U. adopted the Danish system? Again, who knows. But these are the relevant questions.