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you can tax people a lot and still get a lot economic development – a second comment on mokyr

Yesterday, I discussed Joel Mokyr’s book on Britain’s industrialization and I focused on the finding that industrialization happened with a work force that was not formally educated. Today, I’ll focus on another of Mokyr’s observations – Britain was taxed a whole bunch before, during, and after industrialization.

Mokyr raises this point to argue that it wasn’t low taxes that made industrialization possible, but ideas. I wish to raise another point. Economic development can exist within a wide range of tax regimes. Mokyr makes a persuasive point that Britain wasn’t low tax in the 1700s. There were all kinds of tariffs and other forms of taxation. Mokyr does point out that taxation was indirect and that seems to be the cruz of the matter, at least in his eyes.

That seems consistent with modern political economy. Sure, at extremely high tax rates, e.g., socialist economies, you can crush economic growth. But you get a lot of growth at intermediate rates. When you add up American taxes, you get about a 54% tax rate. Same with Europe. Bottom line? There is definitely a point of too much taxation, where people just stop working, but if the taxes are indirect and hidden, people won’t notice for quite a while and they’ll just keep on working.

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Written by fabiorojas

March 14, 2013 at 12:45 am

Posted in economics, fabio

5 Responses

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  1. It’s Joel. Not John.

    And the size of the British government increased by a factor of five in precisely the same period that Acemoglu and Robinson argue “inclusive institutions” cause the Industrial Revolution.

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    Graham Peterson

    March 14, 2013 at 12:54 am

  2. The historical comparison isn’t appropriate as 18th-century British taxes reflect the mercantile economy of the era and were designed largely to route existing merchant trade through British ports and bottoms and capture excess profits from state-sanctioned monopolists (i.e. British East India Company). These taxes (think of the Navigation Acts) disproportionately targeted particular groups (merchants) and left large swaths of the population relatively untaxed that in turn arguably freed up capital to fund the construction of the first factories. Recall Crouzets (1985) work on the first northern British industrialists, who found the capital to build early factories, not from the immense banking sector of the South, but from restricted networks of friends and families.

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    dr

    March 14, 2013 at 1:14 am

  3. @ fabio: if you take the history of britain’s economic development as a case study perhaps your conclusion should read more like “economic development can also happen under high taxes as long as you tax your merchants heavily who in turn squeeze (apparently inconsequential) colonized peoples to pay those taxes”

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    sd

    March 14, 2013 at 2:06 am

  4. dr: Great point. One small knit to pick: growth took off in absence of factories — this was something Marx got particularly wrong. You get a double/tripling of national income between 1750 and 1850. Factories became more widespread after 1850.

    Though I agree that the lasisez-faire hangover on the ground made productive innovation possible without choking the arbitrage of it. However the problem still remains for the Libertarian explanation of the Industrial Revolution — monarchies had been extremely hands-off for thousands of years with no growth.

    Fabio is right that you can tax the hell out of markets and interfere with allocation, without hitting diminishing returns until you start to turn into a totalitarian nightmare. This speaks to the overwhelmingly large positive coefficient on anarchic technological increase though, and its ability to swamp the negative impact of capturing market rents and distributing them to the rich and upper middle class.

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    Graham Peterson

    March 14, 2013 at 4:44 am

  5. dr, if they were monopolists you’d expect them to be overcharging much of the population, so taxing the monopolist is an indirect way of taxing a wide group of people.

    John Nye goes into the details these issues in “War, Wine and Taxes”, participating in a diavlog on the subject here.

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    teageegeepea

    March 14, 2013 at 1:03 pm


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