Income Taxes Don't Disincentivize Work
2504 sats \ 47 comments \ @Undisciplined 12 Sep econ
First off, they certainly might and likely do in some cases.
The point of this post is that it's not a straightforward relationship.
Here are two talking points you've probably heard before:
  1. If you tax something, you'll get less of it.
  2. Thanks to income taxes, wives/moms have to work outside the home too.
See the problem?
What's going on here is that labor is not like pineapples or jean shorts or other goods. We have to produce enough income to sustain our households and quality of life.
When we choose to work, we are sacrificing our free time, for the sake of earning more. Taxes make it take longer to earn more, which can lead to us sacrificing more of our free time to maintain our standard of living.

Leisure is a Normal Good

In economics, we refer to things as "normal goods" if people tend to consume more of them as they become wealthier (think resort vacations). The inverse are "inferior goods", which people consume less as they get wealthier (think crack cocaine).
If we look at history, people work far fewer hours now than they used to. If we look at lifestyles, the wealthy sure seem to vacation more than we do. Signs point to leisure being a normal good.
As a normal good, we actually expect income taxes to drive people to work more than they would otherwise choose to. The other way of saying that is to say if people were earning more they would opt to work slightly less, which would allow them to have both more leisure time and more money.
That makes income taxes a great scam perpetrated by the ruling class on the rest of us. By working more hours, we generate more taxes and corporate profits for them.
write
preview
related posts
141 sats \ 22 replies \ @didiplaywell 12 Sep
They absolutely do desincentivize work. Here in Argentina there's still a problem (until corrected by Milei) about government confiscating gains to such a violent extreme that makes it worthless to try to work more, for at some point the new returns do not justify the work you put in. The most common solution is to start managing part of the business under the table. Yet it's pretty common for people to start rejecting new work at some point because after a certain threshold the government will take so much from it that even if you do end up with a net positive, it's not worth the hassle, plus it will certainly bring up a nightmare of new regulatory hardships upon you.
So I couldn't disagree more, I see it in everyday real life: taxes desincentivize work.
reply
41 sats \ 21 replies \ @Undisciplined OP 12 Sep
I'm talking about the American context, here. You're talking about the downward sloping part of the Laffer Curve, which unfortunately is what's been the norm in Argentina.
reply
72 sats \ 11 replies \ @didiplaywell 12 Sep
I understand but the laffer curve is not a static graphic but an evolutionary graphic. It doesn't only shows where you are but where are you going next. So to be more strict we shouldn't say "this taxes current state desincentivize work" but "the taxes scheme disincentivizes work". And you are seeing that yourselves in the USA. You started on the left side of the graph and you are steadily evolving to the right.
You must not confuse what a tax scheme takes from you with what services expenses take from you. The more a tax scheme is closer to actual functioning services expenses, there's no practical conflict, yet there's an inconsistence: if it's a service you need, then you will pay for it just as any other service, it doesn't haves to be compulsory. Yet taxes are, and thus are poised to evolve as the laffer curve shows.
Taxes are a work-incentive killer because they are not based on need but on coercion.
reply
0 sats \ 10 replies \ @Undisciplined OP 12 Sep
Ok, but we have more labor hours being worked as taxes have risen.
If income taxes were abolished, my expectation is that far more moms would stay home with their kids, people would retire earlier, and people would take more time off.
No doubt, there would be a group that offsets that to some extent, by taking more opportunities to earn more per hour.
The other way of saying this, that I think makes it pretty obvious, is that if people can afford to enjoy more leisure time that's what they'll do.
reply
37 sats \ 7 replies \ @didiplaywell 12 Sep
Exactly "labor" hours, not actual work being done. What do you get from a poorly paid employee? More work? Or half-arse mediocre work? People that's well paid tends to be more incentivized to be more productive. Poorly paid people ends up getting leisure in the workplace itself.
And we are not accounting for the most important part:
If income taxes were abolished, my expectation is that far more moms would stay home with their kids, people would retire earlier, and people would take more time off.
Bear in mind that that implies that a whole new mass of state parasites will now need to be productive to earn money. So cutting taxes implies that now that money will have to come from actual work, thus compensating the work that others can now afford to not to do. Even more, the parasites previously maintained by those taxes had ZERO incentives to work. There's no way around, look at it from any angle and you will only find: taxes are work-incentive killers.
reply
20 sats \ 6 replies \ @Undisciplined OP 12 Sep
You're just multiplying hypotheses.
It's true that people will work harder when they feel better compensated, but nothing you've said indicates that those effects entirely offset the productivity gains of additional hours. They're what we would expect to be second order effects, which are typically smaller than the first order effect. (Although, I guess these are actually 3rd and 2nd order effects.)
reply
35 sats \ 5 replies \ @didiplaywell 12 Sep
I'm purposely multiplying hypotheses because it relativizes your claims, which also fall in second order categories. You're assuming that a tax increase mathematically gets offsetted by more work when in reality it makes the living standard more precarious and work hours less valuable. It's a lose-lose outcome.
But that was not my first order argument, that one was the second one: if you cut taxes, the only effect you get is a net increment in working hours because people living off of those taxes now have to integrate to the workforce. You have now caused a net increment in work incentive. In your reasoning you are neglecting from the equation the state itself, which is composed of a mass of people parasiting your work. Take that income from them and you now do get a first order effect consisting in a mass of millions of parasites having now to work full time to earn a living, offsetting the work others now don't have to do anymore: as of 2024 the USA haves a mass of 20 million people "working" for the state, and a mass of 40 million living off from welfare. That's a total of 60 million living from 100 million workers of the private sector, that means that people would need to work 60% more to earn what they would without having to maintain the other part. It's physically impossible for all of the 100 million workers to work 16hrs a day on average, so the net result is that you are getting less working ours from the able-working population, not more, in exchange of precarization, not same living standard. If you abolish taxes, you integrate that 60 million people into the private sector getting a 60% increment in working hours, not less hours.
reply
20 sats \ 4 replies \ @Undisciplined OP 12 Sep
Your point is interesting, but it's beyond what I'm talking about.
In a comparative static analysis, we try to hold everything constant except for the factor in question. That lets us identify isolated effects.
If leisure is a normal good, then when people's budgets are reduced by increased taxes, they will respond by consuming less leisure. Ergo, they will work more.
Also, increased taxes don't necessitate increased government bureaucracy. The MMT weirdos advocate taxes just for the sake of fighting inflation, not for government revenue. Most spending in the US government isn't on bureaucracy, it's just transfer payments and debt service.
view replies
26 sats \ 1 reply \ @cyberpunk02 13 Sep
This is caused by deprivation... Tax disincentivizes work, less work causes deprivation, and sometimes with deprivation, people choose to labour more hours to reduce the deprivation.
reply
0 sats \ 0 replies \ @Undisciplined OP 13 Sep
It is caused by deprivation, but the channel is slightly different. The tax directly deprives the worker of resources, which drives them to work more hours.
reply
88 sats \ 8 replies \ @SpaceHodler 12 Sep
I think they also disincentivize work that would push you into a higher tax bracket.
For example in the UK you pay 20% up to around £50k and above that the 40% rate kicks in. If you're close to that threshold it's not particularly enticing to take on extra work knowing the government will take twice as much for it.
reply
42 sats \ 0 replies \ @didiplaywell 12 Sep
Exactly.
reply
0 sats \ 6 replies \ @Undisciplined OP 12 Sep
Does that work differently for married couples?
I'd expect to see jobs start offering more non-monetary compensation as you get closer to that threshold.
Our marginal tax rates increase much more smoothly than that, so most people don't give them a ton of thought.
reply
0 sats \ 5 replies \ @didiplaywell 12 Sep
I'd expect to see jobs start offering more non-monetary compensation as you get closer to that threshold.
But it can't be the case, because the tax has to be paid anyways. Any non-monetary compensation that do not implies spending money means you get a hug and a kiss for working more for less.
reply
0 sats \ 4 replies \ @Undisciplined OP 12 Sep
Not if it's things like childcare or other services you'd otherwise have to pay for. I don't know what that looks like in the UK, but employer benefits are huge here, precisely because they're tax advantaged.
Tax regimes are very different every where.
reply
0 sats \ 3 replies \ @didiplaywell 12 Sep
childcare or other services you'd otherwise have to pay for.
You are paying for that, hence it's not non-monetary.
reply
20 sats \ 2 replies \ @Undisciplined OP 12 Sep
Compensation in kind is called "non-monetary". You'll have to take that complaint to the Council of Economic Terminology.
view replies
177 sats \ 0 replies \ @IamSINGLE 12 Sep
Taxes is just another form of a cartel. Thankfully, till now I don't have to bother about them. It's also good that in India farming won't cost you taxes. By being a farmer, you can simply earn as much as you like and you don't have to worry about taxes.
reply
80 sats \ 2 replies \ @Coinsreporter 12 Sep
Great Article! I'll add your point to my perception about taxes being unnecessary and a scam.
I think they are scam because government snatches it from you. Government is there to take care of the people like parents are there to take care of kids, home, and for themselves as well. So, for taking care, people earn money through whatever means they have. But when they earn money, they do it by adding value to something.
Government should actually earn the expenses that occur for taking care of its people. Every government has many means for doing so. In most of the countries government is the biggest land and other assets owner. Why can't it earn through them?
reply
20 sats \ 1 reply \ @Undisciplined OP 12 Sep
Why can't it earn through them?
Because stealing is easier.
reply
66 sats \ 0 replies \ @Coinsreporter 12 Sep
Yes, this is unfortunately true. That's why a career in politics is so much lucrative for the crooks.
reply
57 sats \ 0 replies \ @jerrybature 13 Sep
The ruling elites are always thinking and learning ahead on how to keep their fiat scam engine running day by day. It's a form of slavery system. And, bitcoin liberates anyone who is willing to be free.
reply
39 sats \ 4 replies \ @cryotosensei 12 Sep
I actually paid zero in income taxes last year and this year because I benefitted from the Parenthood Rebate that the government awarded me for producing my 2nd child. I don’t think I will pay income tax next year too.
I guess it’s how the taxes are redistributed to fund public projects and advance the collective good in the country?
What I’m always curious about is why people in the Scandinavian countries seem willing to subject themselves to such exorbitant income tax rates? They are often cited as the happiest people on the planet
reply
93 sats \ 3 replies \ @Undisciplined OP 12 Sep
  1. Happiness literature is preposterous and extremely inconsistent.
  2. When they dug into why the Danish scored so high, it was because they had very low expectations. That prevented them from feeling disappointment very often, which was part of the ranking process.
Scandinavia is a very high trust and homogeneous society. That often makes people less angry about taxes.
reply
23 sats \ 2 replies \ @cryotosensei 12 Sep
Thanks for educating me early this morning!
What results in the Danes having such low expectations? Do you know?
reply
30 sats \ 0 replies \ @ZezzebbulTheMysterious 12 Sep
Weather has a major effect on the disposition of the people living in a region.
reply
0 sats \ 0 replies \ @Undisciplined OP 12 Sep
From what I recall, it's just a cultural thing.
reply
49 sats \ 4 replies \ @sancristrader 12 Sep
Two thoughts on this:
  • it's not taught in school but until 1913 personal income tax didn't exist. That was the period when the bulk of American wealth was created.
  • In my own medium sized software company with 10 employees, when I knew that it was basically doomed due to the competitive landscape, rather than extract the money and invest in something else, I chose to almost run it into the ground by paying these employees simply to avoid paying ordinary income tax at the moment of extraction of the money.
reply
0 sats \ 0 replies \ @Bell_curve 13 Sep
1913 was a significant year for American 🇺🇸 history
reply
0 sats \ 2 replies \ @Undisciplined OP 12 Sep
That's a very interesting note. So, your employees all worked more hours, because you had a high income tax rate. That would not have occurred to me.
reply
58 sats \ 1 reply \ @sancristrader 12 Sep
Which overall decreased productivity because they were doing essentially useless work, instead of the extracted money being invested in a newer venture.
Regulations produced by relatively simple centralized systems tend to have unintended consequences, reducing complexity necessary for developing advanced society.
reply
0 sats \ 0 replies \ @Undisciplined OP 12 Sep
Good point. It didn't help your fat cat corporate profits. I'm assuming it actually decreased the total income tax paid, as well, since your marginal rate would have likely been higher than theirs.
reply
20 sats \ 6 replies \ @Satosora 12 Sep
You should see how much they take when you work overtime. Holy smokes.
reply
20 sats \ 5 replies \ @Undisciplined OP 12 Sep
I remember that. It's because they assume your weekly earnings will be constant all year, so overtime pushes you into a much higher bracket.
reply
24 sats \ 4 replies \ @Satosora 12 Sep
You can easily go into a higher bracket if you are given overtime.
reply
20 sats \ 3 replies \ @Undisciplined OP 12 Sep
It's hard not to.
reply
34 sats \ 2 replies \ @Satosora 12 Sep
But I think some of it comes back during returns.
reply
20 sats \ 1 reply \ @Undisciplined OP 12 Sep
That's right. You're basically forced to make a zero interest loan to the government until you get your refund.
reply
33 sats \ 0 replies \ @Satosora 12 Sep
Right, which is a crapshoot. You could claim more dependents, and things, but that makes the calculations even harder to manage.
reply
0 sats \ 0 replies \ @Thereal 13 Sep
In Africa it's worse, indirect taxes are finishing everything
reply
0 sats \ 0 replies \ @BiTCOINNEWS2030 13 Sep outlawed
stackers have outlawed this. turn on wild west mode in your /settings to see outlawed content.