Ross Gittins’ column in this weekend’s Sydney Morning Herald (Increased wealth and higher taxes have a perverse effect on workers, Business p. 5) touches on some of the topics that I’ve visited in this blog over the past few months. The article refers in large part to a study conducted by Esther Duflo and colleagues, who asked five thousand Americans whether they’d work more or less if taxes were increased, and five thousand other Americans whether they thought other people would work more or less if taxes were increased (I suppose this question refers to the theory that increasing income taxes reduces the incentive to work). Of the first five thousand, 72% said they would “not at all” stop working; but of the second five thousand, 60% said that other people would stop working. That is, people largely thought that they themselves would continue working just as much even if taxes reduced the amount that that ended up in their bank accounts for the same amount of work, but at the same time thought that most other people wouldn’t. Duflo and colleages asked similar questions about a universal basic income and other welfare payments, with similar results from the second five thousand.
Gittins’ main point is that people aren’t motivated by money alone: they’re also motivated by status, dignity, social connections, and other things as recognised by Duflo and colleagues. This sounds obvious, but apparently it isn’t to those who suppose that higher rates of income tax or a universal basic income would discourage people (or at least, everyone else) from working. To be fair, people contending that increasing income taxes reduces incentives presumably qualify the claim with all else being equal—but Duflo and colleagues’ point is that all else isn’t equal and may in fact be more important than tax rates or welfare payments.
Gittins notes the that survey respondents could be deluding themselves, saying that they’d keep working when in fact they wouldn’t; but then again they could also be deluding themselves about what other people would do. And in any case, says Gittins, other evidence suggests that people do keep working even in the presence of salary caps for the rich and increasing welfare for the poor. (The framing of the latter evidence suggests a whole other oddity in the debate over financial incentives: the rich are supposed to worry that reducing or capping their income will reduce their incentive to work, while the poor are supposed to worry that increasing their income will do the same.)
The whole argument seems faintly ridiculous from the point of view someone who earns far more than he spends—a government that wanted me to do more paid work might consider increasing income tax so that I had to do more work in order to end up with enough money to meet my needs. But I’ve never heard anyone argue for such a thing, probably because most economics assumes that human desires are infinite, but maybe also because no one wants to volunteer to have their income reduced.
Speaking for myself, I would probably have told Duflo and colleagues that I’d continue working the same even in the presence of higher income taxes, though perhaps I’d work less in the presence of a universal basic income (because I’d already made the decision to reduce my working hours). But what I’ve actually done since working part-time has been determined far more by what kind of work is available than anything to do with taxes or welfare payments: I work part-time in a university, where part-time work is fairly common; but software companies largely hire only full-time, so my choices are full-time work or nothing so long as I’m working in that field. The money is a red herring.