We have seen in the previous chapters that secure property rights and the rule of law are crucial in fostering economic growth. These institutions help ensure that individuals are secure in the knowledge that they will get to keep the fruits of their labor.
Hence, people are willing to work hard, invest for the future, and engage in innovation. And because all of these activities contribute to higher incomes and greater economic growth, they ensure more long-run prosperity. But note the key point. People undertake work, invest, and innovate because they believe they will be rewarded with the fruits of their efforts.
If these fruits are denied them—because, for example, taxes take much of what they produce— the incentives to work, invest, and innovate are sharply reduced, and so too is economic growth and, ultimately, wealth. Data from Europe illustrate how taxes shape incentives to work. Researchers have found that a tax increase of just over 12 percentage points induces the average adult in Europe to reduce work effort by over 120 hours per year—the equivalent of almost four weeks’ work.
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