More Empirical Evidence on the Negative Effects of Taxes
Here I linked to a few empirical studies on the subject.
Now there is a new study on the issue, from Magnus Henrekson and Steven Davis. Just as one would have expected, high taxes on labor will reduce private sector employment, particularly in highly labor intensive sectors. An excerpt from the summary:
"They find that higher tax rates on labor income and consumption expenditures lead to less work time in the legal market sector, more time working in the household sector, a larger underground economy, and smaller shares of national output and employment in industries that rely heavily on low-wage, low-skill labor inputs.
The estimated tax effects are large for the authors' preferred tax measures. Cross-country comparisons in the mid-1990s indicate that a tax hike of 12.8 percentage points (one standard deviation) leads to 122 fewer hours of market work per adult per year and a 4.9 percentage point drop in the employment-to-population ratio. It also increases the size of the shadow economy by 3.8 percent of official GDP, and it reduces by 10 to 30 percent the share of national output and employment in "Retail Trade and Repairs," in "Eating, Drinking, and Lodging," and in a broader category that includes "Wholesale Trade and Motor Trade and Repair." The evidence suggests that tax rate differences among rich countries are a major reason for large international differences in market work time and in the industry mix of market activity."