Try to guess who said this: "High taxes on earned income discourage labor supply and reduce the returns from entrepreneurship and higher education. Growth, innovation and human capital development are all harmed as a result."

You might think that remark came from some Reaganite supply-sider, such as Art Laffer or Larry Kudlow. Actually, it came from a major study, "Going for Growth 2005," by the Organization for Economic Cooperation and Development (OECD) in Paris, an group generally regarded as a paragon of economic orthodoxy.

Guess who said this: "Taxes on labor income and consumption expenditures encourage households to substitute away from the legal market sector in favor of untaxed activities -- leisure, household production and the shadow economy."

You might think that came from another Reaganite supply-sider, such as Jack Kemp, Steve Entin or me. Actually, it came from Steven J. Davis of the University of Chicago and Magnus Henrekson of the Stockholm School of Economics. Their multi-country evidence in the 2005 anthology "Labor Supply and Incentives to Work in Europe" "supports the view that tax rate differences among rich countries are a major reason for large international differences in market work time."

Davis and Henrekson estimate that a tax hike of 12.8 percentage points -- regardless of whether that tax is on what we earn (an income tax) or what we spend (a value-added tax) -- would shrink the employment-population ratio by 4.9 percentage points, cut hours worked by 122 per year among those left working in the taxable economy and boost the size of the tax-free underground economy by 3.8 percent of GDP.

Taxes matter -- a lot. We don't need astute economists from France and Sweden to prove it. I mentioned some U.S. studies in an August 2002 column, "Supply-Side Goes to Harvard," including one by Ed Prescott, who later won the Nobel Prize. A half-dozen other Nobel laureates have done related research on the nefarious ways high tax rates distort incentives.

This is a congressional election year, however, so politicians and pundits would much rather talk about federal spending as a blessing than a burden. They are trying hard to change the subject to budget deficits. But describing the issue in terms of how much the government borrows, rather than how much it spends, makes it appear as though higher tax rates are a realistic solution, rather than an ominous threat.

To focus on budget deficits is to pretend the burden of government spending would magically disappear if only it could be financed entirely from current tax revenue, rather than having a small portion (2.6 percent of GDP) financed by selling bonds. This is a dangerous delusion.

If the government had never borrowed a dime (which makes no more sense for governments than it would for homeowners and corporations), all that could have saved is the interest on the debt. But interest on the debt was only 1.5 percent of GDP over the last four years -- the lowest since 1977 and lower than when the budget was in surplus.

Aside from interest, government spending is either for transfer payments (entitlements) or purchases. Transfer payments and purchases impose an immediate burden on the private economy, regardless of how they're financed. Transfer payments typically involve taking money from taxpayers who've earned it and giving it to other people on the condition that recipients promise not to work too hard, save too much or plant too many crops. If work is allowed at all, it is sternly punished. Those who keep working past age 65 pay a penalty income tax on most of their Social Security benefits, while also paying Social Security tax for some lazier person's tax-free benefits.

Government purchases of buildings, equipment, material and land reduce the availability of those resources for private business and raise their cost. When the government hires more bureaucrats or soldiers, that raises the cost of labor for private business. Continued...