Death and Taxes: the Drivers of Economics Growth

We show that in a Malthusian world an increase in taxes raises average labour productivity by culling marginal workers and reducing equilibrium population. Thus states with higher taxes will have higher labour productivity, ceteris paribus, and an increase in taxes in a particular state will generate an increase over time in labour productivity (”economic growth”). Landowners create the same effect by extracting agricultural surplus from workers. Differential tax regimes and landownership structures can thus explain Europe’s labor productivity advantage over China in the eighteenth century. We test the model directly on a cross section of Chinese provinces and European states for c. 1775.