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Dan Ariely

Professor, Duke


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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?


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    Feb 16 2011: One old and hoary concept is 'marginal utility'. Simply put (by example), if you tax a man making $10,000 a year at 10 percent, he feels it a lot since he's barely scraping by; if you tax Warren Buffet at 10 percent, he never notices since every added dollar he retains doesn't affect how he eats, where he lives, or whether he can afford medical care. Each added dollar yields a bit less satisfaction than the dollar before..... I doubt that Warren would work harder if you gave him a 10 percent pay raise either (does he even read his income tax form before his accountants give it to him to sign?). If you took the guy making $10,000 a year and gave him a 10 percent increase in income (if he did something specific) I suspect he would jump through hoops to make that extra $1,000 -- a real motivator!
    • Feb 16 2011: I completely agree Thomas. Ambition, competitivness and pride in accomplishments are 'sweeten' by financial rewards, not dependent on them.
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      Feb 17 2011: @ Thomas

      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.
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        Feb 17 2011: Seems like our current economic policies (post-Reagan) have been most effective at re-distributing wealth from the middle-class to the upper class. But that I assume you're OK with?
        • Feb 17 2011: Not to nitpick, but redistribution of wealth is different than a shift in what people earn. The fact that the wealthy are earning more (which could be argued as problematical) than the middle class is a significantly different phenomena than redistributing wealth--the direct confiscation of income from one economic strata (or individual) and giving it to another. In the US economy, "redistribution of wealth" only happens in one direction, downward.
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        Feb 17 2011: Response to Bart: Read "The Conservative Nanny State":


        And then tell me it only happens in one direction.
        • Feb 18 2011: reference point, I am not sure if I would call myself a conservative or not, but I am conservative leaning.
          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
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        Feb 18 2011: Reply to Charlie. There's a lot worth addressing in your comments, but I'd like to stick to one side issue.

        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?
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      Feb 18 2011: This view of the world suggests a very high marginal tax at the high rates of income.

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