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Social, Behavioral, and Experimental Economics (SBEE)

Monday, March 23, 2015
12:00 AM
3100 North Quad (Ehrlicher Room)

Income Tax and the Motivation to Work

Abstract:

How does income tax influence the motivation to work? Above and beyond classical economic consequences (substitution and income effects), income tax may simply be irritating. In particular, income tax involves both wealth redistribution and government intervention, and unless people support both measures, they may find the presence of income tax to be demotivating.

In two labor experiments, researchers found that framing wages as subject to an income tax reduced productivity unless participants were “Egalitarian-Communitarian” (chronically supportive of both wealth redistribution and government intervention). Egalitarian-Communitarians were actually more productive when they saw that their wages were being taxed. However, another equally redistributive intervention that was framed as a wage “match” (rather than a “tax”) did not motivate Egalitarian-Communitarians. The results from this study suggest that income tax has particularly polarizing effects on productivity, and the overall net effect of income tax on productivity depends on the underlying distribution of attitudes toward wealth redistribution and government intervention.