Taxes and Human Behavior

“Decreasing taxes incentivizes one to work harder because you get to keep more of your money.” I think this theory or something similar to that was what I learned in college and when I heard that, I couldn’t believe it. I never really bought into the theory that reducing taxes will make one work harder.

So, if you did not work but then got a job that pays you, but you’re going to be taxed for it, you won’t choose to work because of taxation?

Why do people strive to get promoted which usually brings a raise and potentially a tax increase?

Nobody would want to become CEOs if taxation really reduced the desire to work. Yet, we have quite a few people who aspire to such lofty positions.

I never could buy into that theory.

It would be different if the theory was phrased as one won’t work harder for raises if taxes took so much out of your payment that the return on the hard work was not worth it. Or one won’t invest in something if the return on the investment was not greater than the additional taxes. Or one won’t work harder if the costs of taxation was so much greater that you actually make less money.

But the taxation theory was not talking about working harder up until taxation takes more out than your return for the effort. It was basically, increasing taxes will decrease the desire to work and conversely, decreasing taxes will incentivize you to work harder. It was just that blanket statement.

And I found it really hard to buy into.

Now, at the cusp where the tax rate increases, a salary increase that bumps you to the next tax level could reduce your disposable income unless the salary bump is large enough to offset that tax pain. But my impression of the taxes is that at the upper salary levels, tax rates don’t really go up, so the pain is really at the lower level.

Still, people still strive for a raise, despite the risk of a tax rate bump.

So I still don’t buy into that theory.

Last week, I read a tweet (I think it was a tweet) that said there was research debunking the theory. People do not get lazy when there’s an increase in tax. That research makes way more sense from a psychological/social perspective. I wish I had kept that tweet so I can refer to it.