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What are the effects of taxes on motivation and productivity?
One way to fight the budget deficit and income inequality is to change the marginal tax rate. The question is what are the implications of such change.
Some people think that this will cause the wealthy to stop working, others think that this will cause everyone to stop working, yet others think that a long as we care about how we do relative to others an increase of the tax rate will have no effect on effort and productivity.
What do you think will the effects of increased tax rate have on you and on the people you know?
Thamaruud Pahnt 20+
Stephanie Bernell 20+
Joe Leimkuhler 20+
Tim Colgan 50+
Lee Wilkinson 20+
Thamaruud Pahnt 20+
Eric Lawton
Are there any peer-reviewed studies on the topic that can shed further light? Anecdotal evidence may not be accurate. Certainly, as someone with an above-average income derived entirely from paid employment, I have never changed my daily work life in response to a change in the marginal tax rate, but I don't know for sure if others are different or if it has a more subtle change in the long run; we humans are notoriously bad at understanding our own motivations.
It probably also depends on what the tax is for. In my countries (Canada, UK) taxes pay for my medical care. In my near neighbour (USA) they would not; I would presumably pay a huge insurance company for the same service. If my payment goes up $100 per year to pay for better care does it make a difference to my motivation or productivity whether it is in the form of a tax or a payment to a corporation? I don't mean here to enter into the US debate on medicare, just to point out again that focus on "tax" as such over-simplifies the question. We are often motivated to work harder so we can buy something better; if Governments were demonstrably providing us with useful and valuable services, why would we be less motivated to buy them through "taxes" than through equivalent payments to large corporations?
Krisztián Pintér 100+
and it is not theoretical. i lived under socialism, and i've seen the government providing http://en.wikipedia.org/wiki/Szaloncukor to decorate our xmas trees. it came in four tastes: pink, white, dark brown and light brown. noone had any idea what the actual tastes were supposed to be. light brown was a little coffee-ish, pink was probably some fruit. my favorite was light brown. i hated pink. i didn't know how much of a crap this was, until finally capitalism came, and now we have our own supermarkets with lotsa stuff.
Arsalan Anwar
I think its effect is more in developing countries, because in developing countries, growth mainly occurs in industrial sector, so increase in tax rate will discourage the private enterprise to invest in industrial sector,hence debilitates the growth rate in development.
cc mcfarland
Lina Zaproudi 30+
Your comments "socialistic politics have been unpopular ever since. As a political marker, that is; not as actual policy."
and "People are socialist or capitalist depending on what they think serves their immediate interests at the time. The long-term and the overall health of the economy is not their concern."
illuminate for me why this backwardess in former communist countries... I guess people want the freedom capitalism brings, but not the responsibility for themselves (have cake and eat it too).
@Julie "Scandinavia" is a very broad concept. If you start examining Scandinavian countries individually, you will see that it is far from a socialist paradise. There are many problems and a move away from socialism, in order to address them, in many of these countries. And it is not because they run out of resources necessarily or are now unhappy to help their fellow-man. They still want to help. Their mentality does not seem to have changed much. Just the idea of what the better tool is for the job, i.e. capitalism rather than socialism.
And to make it crystal clear: I think capitalism is the tool that helps the most people (rich or poor or in between) in a country, society, the world. Not socialism.
@Jim I do not believe in or trust records about the particulars of what happened in early Christian days, so your point is moot to me.
Plus the motivations (e.g. acceptance of original sin and inherent guilt) in such groups distort any useful conclusions about the organization of society on rational terms.
Hrvoje Simic 30+
Also, I would not say that people did "want the freedom capitalism brings". Mostly they wanted to have more - more money, more choices, more flashy stuff - and capitalism provides more. They also associated it with Western democracy, so they bought it as a package.
Krisztián Pintér 100+
definitely. the best thing about having a government is that you can simply put the burden of thinking on leaders. low taxes, high expenditures without debt: governments can promise this with straight face, and people are ready to (pretend to?) believe.
it is an interesting game to try to view government actions as a way to relieve people from responsibility of being selfish or short sighted. it fits surprisingly often.
George Kong 30+
James McNaughton
"What are the effects of taxes on motivation and productivity" is an extremely difficult question to ask, in a Modern World where Globalisation and Social Inclusion is at an all time high, the UK currently spends a huge amount of taxes on a huge variation of outlets, that benefit;
the poor, other countries in the World, charities, stryggling businesses, young families, socially excluded, the list is endless,
Everyone will disagree with certain things that taxes are spent on, such as military weapons, whereas others may agree with it.
Personally I think too many people in the World, myself included, make uneducated, biased statements with regards to Government Spending and taxes, so I find it incredibly difficult to answer this question.
Mike Mccrady
I work because I need to make a living and provide the level of life style I choose for my family . I look at my taxes at the end of the year and am very thankful that I pay about 25% in federal taxes plus the usual in local and sales taxes. I am in the top bracket and don't look for any shelters that everyone can't use . If I want more money each year the best way for me to get it is to work longer harder or smarter. I am not foolish enough to think that my marginal tax rate should change my motivation to work and earn . I work with many highly paid professionals , they ALL grip about their taxes but I have NEVER known one who stayed at home to keep out of the next tax bracket.
Ben Jarvis 50+
perhaps there is a further discussion as to why some people feel that their group consists of all inhabitants of earth (the first group), while for others their circle is smaller, but in any case clearly any changes to taxation are going to affect the 2 groups differently. it seems logical to me that a tax rebalance (increased tax to the rich and decreased tax to the others) would not be opposed to those in the first group since they believe in helping those less well-off anyway which this tax adjustment would do, while it would certainly be opposed by the second group as it would make accruing wealth harder. importantly, those who continue to seek personal gain are also the ones most likely to cut costs such as benefits and employee salaries in line with their drive to benefit themselves, hence would be the least likely to allow tax breaks to trickle down to those 'below', keeping the benefits in their own accounts.
taxing the poorest also is ultimately self-defeating to the rich, since people with less money have less to spend driving the consumption that rich company owners and investors need. furthermore, a general lowering of taxes mans poorer infrastructure and healthcare, meaning companies are less able to conduct business and more sick people means fewer people earning a spendable salary and paying tax.
Bill Cromie 20+
This is proven out when you take a look at the startup hubs in the US, and throughout the world: they tend to be in higher taxed regions/states. California, New York, Massachussets, none of these are income tax haven states. If income taxes were a major inhibitor of motivation and productivity, one would imagine that New Hampshire and Texas would house the startup hubs. Instead, if you look at startups in the US and around the world, they tend to be where you have high quality public education, better social services, and generally more of a safety net.
Take a look at this article from INC magazine about startups in Norway:
http://www.inc.com/magazine/20110201/in-norway-start-ups-say-ja-to-socialism.html
Tax havens are just that, tax havens where the wealthy go in order to avoid paying taxes, not productivity centers.
Christophe Cop 500+
So as you are talking about the effects of income tax...
* I would say increasing tax rate them would make people complain, and make them feel less motivated and less productive (some strikes,...) until they adapt to the change and it gets accepted.
* It might have an effect on investments: if labor becomes more expensive... and then it gets all macro-economical but i'm not an expert on macro economics... so I don't know
@ Philip,
I must disagree with your business school teachings.
* If you give money first and then take it away, the effect on happiness is more averse than when you give less money in the first place.
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Would I make less bionicles if the diminishing returns is increased?
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Bill Cromie 20+
Income taxes on the other hand mean that when you earn more money, you actually earn more money, even if a larger percentage of those earnings got to the government. If you find me someone who would turn down a half a million dollar a year salary because their taxes would increase, I'll eat my shoe. Investments typically have more to do with capital gains taxes and corporate taxes. That said, look at states with some of the highest corporate income taxes: New York and California. They account for almost 20% of the entire US GDP, with a little over 10% of the population.
Dan Ariely 100+
One approach is to have consumption tax only on luxury goods, but this seems much less appealing.
Christophe Cop 500+
This said: actually, I would agree with heavier taxes on luxury goods, and very low taxes on necessary goods...
The advantage of a consumption tax would be that it can include health and pollution cost in a transparent way (at least in principle and if applied on a sufficiently large scale)
So a big mac might become a 10$ snack, while local rice, bread and veg will cost nearly nothing.
A HUM-V will cost a factor 10 more, while public transport might be nigh free
So it is possible to counter the 'regressive' part.
But tax on consumption would make everything more expensive.
As taking away given money is worse than giving less money from a psychological point of view... maybe it can be countered by the transparency
Mark Meyer 10+
I would think we have enough historical data to draw some conclusions on productivity, don't we? I've seen the old chart from the BLS showing productivity vs. real wages where the productivity looks like it is increasing quickly despite flat wages. That would seem to offer evidence that wages don't control productivity and lowering real wages with taxes (within reason) shouldn't have much impact here.
On reflection, the question is obviously too simple. A lot of other factors will contribute to a person's motivation and productivity. For instance, how the revenue from taxes is spent. If you tax me and then build good roads allowing me to safely reach more customers, I imagine my productivity will increase regardless of how I feel about being taxed.
Larry Winiarski
Obviously no. It will literally kill him.
It seems pretty obvious that for the extreme poor increasing taxes is going to be counter productive.
Dan Ariely 100+
Such systems create very clear steps and maybe stopping rules (I don't want to get to the next tax bracket), but what is the tax rate was continuous and slightly increased with every amount earned? Would this make the motivation to work higher or lower?
Tim Colgan 50+
Colin Cook
So let's think more broadly when speaking of 'increasing taxes'.
Philip Lelyveld
In business school I was taught that taxes serve two essential purposes
- to cover the payment of services that improve the common good. What that covers varies with time and societal values (building sewer systems, education, R&D, ...)
- redistribution of wealth so there isn't a destabilizing difference between the poorest and richest members of society
Tim Colgan 50+
I would think there's some influence.
Bill Cromie 20+
Average hourly wage in the US: about $19/hr
Overtime wage is time and a half, so it's $28.50
Percentage Taxes on an yearly income of $19/hr: 25% if you are single.
taxes paid on the hour of OT: $7.13
taxes paid on hourly for regular time: $4.75
Income/hr OT: 21.37
Income/hr regular time: $14.25
Would you honestly not put in the extra hour of overtime? You are already selling your time for $14.25/hr. Lets imagine it bumps you up to the next tax bracket! the next tax bracket is 28% for income over $82k/year. Now, an important thing to note is that you only pay the extra 3% taxes on income over $82k/year, so, lets imagine that you are one hour over, so your hour of overtime is now worth $7.98 in taxes and $20.52 in added income.
I don't know about you, but I'd work the extra hour, if I could.
Trudi Duane
Tim Colgan 50+
Say you're Warren Buffet and you're paying 40% of your income (considering tax loopholes this may be about right) in taxes. If you had to pay 50%, you probably won't work any less. And he (Warren), has in fact endorsed increasing the taxes on the wealthy.
Now, say your of more moderate means and already paying 50% of your income in taxes. Increasing it to 60% might be quite a disincentive to put in extra hours.
So the issue really needs to be addressed at different levels.
Tren Obus
Taxing those gains and giving the money to the government is one approach, but not a very efficient one. For one thing, the government seems to be in the pocket of corporations, so they would just find a way to get it back. It would be better if there were rules to prevent executives from robbing their corporations (and thus their shareholders and customers) in the first place.
Seeing people getting billions in undeserved gains is more demoralizing to me than any taxes I pay. We need more referees in this game.
Dan England
Money has a small motivating factor on those that wish to innovate and excel in a skilled craft. Those that want to be rich will be. Those that wish to be good at their craft will be. Any person making $250,000+ that wishes to complain about taxes and can with a clear conscious thinks that taxes have not enabled them to that salary in the first place doesn't deserve that salary.
Daniel Rankin
Simplifying the tax code in some way, and, better utilizing the funds available could go a LONG way.
Many businesses fail, not for lack of money, but for poor management of such.
If we could announce that the US would be on sure financial footing with a 5% tax hike, but, we are also able to give these benefits, we are removing these special projects, etc etc etc. I think the public would complain, but would be better off in the long run.
Fleml Swemson
What might the implications of a LOWERING of rates be?
If we start off from an unbiased and objective point of view, we'd have a lot more to learn than we do from looking at things through the eyes of the liberal elite.
fs
Jim Leous
In the US, we have experienced this for a decade now. Don't we know? One of the bigger effects is the greater inequality in the distribution of wealth. The last "lowering of taxes" which occurred in December 2010, resulted in lower income taxes for everyone except someone making about $20k (single) or $40k (joint filer). They see their tax liability increased because the "Making Work Pay" Tax Credit expires as the result of the tax deal.
Jonathon Blackford
Higher tax rates are useful to the point where they allow a greater proportion of a population's basic needs to be met. For both moral and social security reasons I think this is important. I suspect there is also a productivity rationale for helping people reach this first threshold too.
One of the funny things I notice is when 'successful' people complain about taxes because they feel they 'need/deserve' more than what they are bringing home. Clearly they have some needs which aren't being met; but in 9/10 cases I suspect more money in their pocket wont change this.
It would be interesting to see whether the tax system would be viewed differently should the following two things happen.. (1) taxes were renamed ''contribution for shared services''; and (2) they made how much each person paid a matter of public record. I'm sure the right minds could come up with an even better name again.
Thomas Brucia
Trudi Duane
Fleml Swemson
If your goal is to create a moral justification for increasing taxes on the rich, you're wrong to use Warren Buffet as your example of the "rich" guy. An increase in rates can easily affect his investment strategy, but it would have no effect whatsoever on his lifestyle. Instead, lets use the implications of a rise in rates for the normal "run of the millionaire" who makes just over $250,000 per year.
Raising his rates (in comparison to raising the rates on the guy making $10,000 per year) will indeed have an effect on his lifestyle, especially when you consider that the guy making $10,000 pays no taxes at all, and the guy making $250,000 pays about 50%, when you add together his federal, state, city, sales, real estate, & other taxes.
The liberal left's assumption that all of the "rich" are billionaires, makes it easy for them to justify the way they treat those who produce more than they consume. The problem with that of course, which also applies to all of the other principals of the left, is that it's a lie, based on erroneous assumptions and revisionist history.
And while we're at it, just to be honest, let's stop talking about a hypothetical lowering of the taxes on the rich as "giving them a raise". Stealing less from someone isn't the same as giving them something. It's their money, not yours in case you forgot.
Production of wealth comes before re-distribution of wealth.
Tim Colgan 50+
Bart Vickers
Tim Colgan 50+
http://www.conservativenannystate.org/
And then tell me it only happens in one direction.
Charlie Kimball
I have started reading this book, and as a starting point, he isn't using accurate conservative ideals. The so called "conservative" big government is some people taking an ideal and distorting or mis-representing (maybe even abusing the label) an actual conservative ideal.
As I said, I have only started reading, so I am going to restrict my comments to the introduction.
As it says, conservatives believe less is better when it comes to a lot of government functions. So I believe there should be less government intervention in, for instance, doctors. Especially in the information age. Just require transparency (Well, considerably less government than now) on the Doctor's part, then people and hospitals can make informed decisions. And also from Chapter 1, immigration is good, but not the illegal immigration of today. The stereotypical Ellis Island immigrant from 50 years ago was a great thing for this country, ready to work, but the largely illegal immigration of today is not the same thing.
The Fed. Way to much power, and should be reigned in. I know some people that are definitely conservative and their general thought is to entirely eliminate the Fed. I don't know enough to have that strong of an opinion, but limiting is good.
CEO's - I agree that a lot of CEO's make way to much money. Along with people like athletes and actors. And while it isn't the government's job to help them get higher, it is also not the government's job to decide what they should get at all.
Patents/copyrights - While education associations doing research is ok, why would a drug company invest in a new drug unless they know they will be able to get that money back. There may be other ways to foster creativeness, but profit is a very good one. So far as Windows goes, there are always "foss software" equivalents, often better.
I hope I am clear
Tim Colgan 50+
I've become intrigued by the Conservative vs. Progressive dichotomy, based purely on semantic terms.
If a progressive is one who wants the world to progress. wouldn't a conservative be one who want's to return to "the good old days"? Is that really what we want? Were the good old days really that good?
Dan Ariely 100+
Biggles Bristol
Definitely when you are saving every penny and trying to make more each month than goes out in bills, taxes hurt. Or when you are self employed and fight tooth and nail for a contract, only to have to write a cheque to the taxman at the end of it, they really hurt. But however much it hurts, what can you do? You can find legal ways to not pay tax, perhaps by changing nationality, or you can go black-hat and make all your transactions in cash. I can't imagine a situation where people would work *less* as a result of higher taxes.
Essentially: increasing taxes might lead to less people *paying* taxes altogether, but working less hard? I doubt it.
(there is also the effect on personal or corporate spending that increased taxes create, as Krisztián Pintér mentions, but that's an entirely different kettle of fish)
Mark Middelhoven
South Africans invest a large amount of time in avoiding tax and may even consider emigrating