Notwithstanding the stereotype that libertarians care about little other than low taxes, I don’t write much about tax policy. But I was reflecting today on Nozick’s coyly Marx-inflected comparison of taxation to compulsory or stolen labor—which however overblown as rhetoric got me thinking about how different types of people might respond to the same tax incentives differently. Often you’ll hear opponents of high taxes make an Atlas Shrugged–style argument to the effect that people will be less productive if their take-home pay is decreased, diminishing their incentive to work ever harder for that marginal dollar. Perhaps unsurprisingly, proponents of higher taxes tend to associate that opposition with selfish materialism—the obsession of people with no higher concern than maximizing their bank balances.
But it seems perfectly plausible to me that tax incentives could work quite the other way as well. As a writer and geek, I’m surrounded by folks who could probably be making a good deal more money doing something else, but have chosen journalism or activism or wonkery because they enjoy it, find it interesting and important, and so on. Many people without particularly expensive tastes just want to find intrinsically enjoyable work that will allow them to maintain a middle class standard of living—and if that threshold is met, cannot easily be induced to trade leisure time, or the non-economic rewards of the job, for even relatively substantial sums of money. Folks like this, in other words, are income satisficers for whom the marginal utility of an extra dollar drops off quickly once they have enough to afford some fixed set of amenities. Those requirements can, of course, change over time: I’ll sometimes see a writer who was making a comfortable living writing as a childless single decide—perhaps with a twinge of regret—that with a baby on the way, that it’s time to take a higher-paying corporate job and open a college fund for Junior.
For folks like this, the conventional prediction about the effects of taxation may be quite reversed: Since they are highly motivated to achieve some relatively fixed acceptable income level (assuming the cost of sustaining their lifestyle remains constant), but their interest in money past that point drops off sharply, raising taxes may actually cause them to increase effort or productivity in order to keep hitting the same target they achieved with less work at the lower rate. Something similar might happen in a double-income household (assuming two satisficers with comparable thresholds): If they can make it on one income, they prefer that one partner stays home with the kids, or takes time out of the workforce pursuing a dream of starting a business or launching a new career or, hey, going on American Idol… even if they’d be substantially wealthier with two incomes.
If this is true of a significant number of people, it might sound like a great debating point for advocates of tax hikes: a too-good-to-be-true, tastes great and less filling combination of more tax revenue for the government and more economic productivity! But of course, the folks at the top of the income distribution—the ones paying the bulk of the taxes—are also most likely to be the ones who do care about making a lot of money, and most likely to have the accumulated wealth to sustain their lifestyles even if they are (or, as they age, have become) satisficers.
Intuitively, it’s lower down the ladder you’d expect to find to find the income satisficers whose behavior is more susceptible to being shifted by tax incentives in this way: People who, having met their income threshold (at the lower tax rate), were either taking a good deal of their “compensation” for their jobs in the form of the intrinsic satisfaction of the work, or who had opted for less-demanding jobs that left time for their hobbies or other projects. By the narrow criterion of GDP, this might seem like a good thing: You’re getting the slackers off their butts and mobilizing fallow productive capabilities! But it also seems a little more unsettling from a moral perspective, because it’s more clear that what you’re taking from people is time—time away from the people and projects they love. For the folks at the top, this might not be something we lose much sleep over: Don’t want to give up your leisure time? Well, settle for a marginally less opulent lifestyle (though the cost of that choice in GDP terms is also especially high). For satisficers in the middle whose tastes and expectations are more modest, though, that seems a little colder, because it’s more likely to force a choice between a significant sacrifice of personal time and job satisfaction or a more conspicuous drop in living standard.
Get further down the income ladder, of course, and the argument looks different: You’ve got people who may not be paying much in taxes (though, of course, everyone pays sales taxes) but might be getting by, thanks to public assistance, with one job (rather than having to look for a second, or for outside income), or as a student, or on unemployment while they look for a job that suits their skills rather than just taking the first one that comes along. This is, in fact, exactly the argument you sometimes hear for the benefit of a generous welfare state to creativity and entrepreneurship. In other words, your J.K. Rowlings and assorted indie rock bands can make it on the dole for a couple years while they hone their skills, rather than having to spend every spare hour scrambling to survive; the prospective entrepreneur can take a risk starting a small business without fearing he’ll be wiped out; the out-of-work programmer waits for the market to rebound so she can get a coding job instead of moving out of the Valley to work retail. At the bottom of the income ladder, of course, the whole satisfice/maximizer distinction becomes irrelevant, because pretty much nobody (maybe excepting a few extreme ascetics) “satisfices” in grinding poverty. The further down the ladder you go, the more likely it is that the people situated there would already be deploying any excess earning capacity if they had it—but some combination of market conditions and personal barriers to work just leave them without much choice. Under current economic conditions, that’s presumably a whole lot of people. Still, if you find the safety net argument plausible at the bottom, and a decent chunk of the population are satisficers, it seems similarly plausible that there’s a flip-side phenomenon corresponding to lower tax burdens as you move into the middle.
Maybe this is just my perception, but it seems as though—for all politicians gear their public rhetoric (as opposed to their policies and private assurances) to appeal to the middle class—arguments about tax policy and economic justice tend to focus on the extremes. That is to say, the super-wealthy and those who are just barely scraping by. Both are groups we tend to think of as earning about as much money as they possibly can—one by disposition, the other as a matter of necessity—which tends to reinforce a picture we have of people as income maximizers. But I bet that’s not a terribly accurate picture, and it would be interesting to see some empirical research geared toward figuring out just how much variation there is in our dispositions, and to what extent, especially in the broad middle, people are satisficers at one threshold or another, or tax-rate-insensitive maximizers, or who knows what all.
Talking more explicitly about the range of economic dispositions might make us more apt to think of taxation as much in terms of effects on time and satisfaction as on bank balances. It also might give a little pause to those of us who suspect we probably could be making a good deal more money doing less interesting work (or with less free time) than we currently do. Political ideology aside, I’m as likely as the next guy to feel distaste for the high earner who fails to give more than a pittance to charity and carps at higher taxes: It seems obvious someone that well off should be doing more to help the needy. But what about the journalist and the academic and the non-profit staffer who could be high(er) earners but prefer their compensation in the non-taxable form of leisure and job satisfaction? I don’t think I’d much like being a consultant or practicing corporate law, but I like to imagine that I could probably do one or the other competently, have a hell of a lot more income to transfer to the needy, and still keep a comparable or higher material standard of living. I don’t look as greedy as the guy who fails to share the wealth, because I’m deriving my utility from a less readily quantifiable and transferable source. But if that’s partly a matter of choice (it’s hard to say, since for all I know I’d actually be awful at better-paying professions) is there all that much moral difference between us? (Those of you who think “libertarian pundit” is already about as immoral as it gets, kindly restrain yourselves.)
What I’m calling varying dispositions (“satisficer” and “maximizer”), an economist might say are just arbitrary groupings of personal utility functions, or of indifference curves between income and other goods. And probably there’s already an economic literature elaborating (or falsifying!) with rigor and precision these various crude thoughts. But in popular discussion—and especially moral discourse and conversations about economic justice—it seems as though we more or less treat people as being a good deal more uniform than they are in their pursuit of income versus other goods. (Maybe because those conversations are mostly conducted by people who might be bothered by the ethical implications of acknowledging the gap between their potential and chosen-actual earnings?) For readers in search of the agenda shoe dropping: I haven’t thought it through enough to have a sense of whether it would tend to push us in a more or a less libertarian direction if we did take more explicit account of this kind of interpersonal variation. But it would probably be more interesting.
18 responses so far ↓
1 sam // Jun 29, 2011 at 7:47 pm
“Often you’ll hear opponents of high taxes make an Atlas Shrugged–style argument to the effect that people will be less productive if their take-home pay is decreased, diminishing their incentive to work ever harder for that marginal dollar”
I have to say that in all the years I worked, I never, ever met anyone who thought that if his or her taxes were raised, he or she would just not work as hard because, etc. We did not have that luxury. Mortgages had to paid, children clothed and educated — you know, watching after the mundane furniture of middle-class earth. I sometimes wonder who in hell are such people who have that option.
2 Justin // Jun 29, 2011 at 8:39 pm
This confuses me. If high-income folk work the same hours, receive the same salary but pay more of it in taxes, does that produce an obvious hit to GDP? I had always thought the relevant effect here was the result of people working less than they might with lower taxes. But the people you’re describing here are extremely high income satisficers. They probably won’t work less as a result of higher taxes–otherwise, as satisficers, they would already be working less.
Am I misunderstanding the situation, or is there an alternate way to read what you’re saying in that paragraph?
3 Eric Biesel // Jun 29, 2011 at 9:21 pm
I don’t know whether you’ll find this as amusing as I do; for someone that works for Cato, reading your blog over the last few years has actually dragged my economic views to to the left a lot more than I would have anticipated. It’s not as if I were beating off to the Laffer curve every night or anything, but I find your musings on the “real” effects of the rates of taxation pretty persuasive.
4 The only subject that we libertarians truly care about § Unqualified Offerings // Jun 29, 2011 at 10:00 pm
[…] something about taxes now and then in order to keep receiving my subsidy from the Koch Brothers. Julian Sanchez has taken up the question of whether people would actually work harder if taxes were … He observes that at the bottom of the income scale, people work as much as they can because they […]
5 Vince // Jun 29, 2011 at 11:29 pm
The economic term for this is the income effect. In general, the higher your income the less motivated you are to make more money. The standard effect that people focus on is the substitution effect: you’ll tend to substitute other activities for work if work brings lower returns. So across-the-board tax raises which decrease both people’s total income and their marginal income per hour worked will have an ambiguous effect on hours worked. Decreasing total income tends to make people more motivated to work (the income effect) but higher marginal tax rates make people less motivated to work (the substitution effect), with a net effect of unclear sign.
There is some research on the relative size of these effects among different groups of people, but I’m not actually an economist so I don’t know what they’ve found.
6 greed for hippies | The Handsome Camel // Jun 30, 2011 at 12:52 am
[…] Julian Sanchez, who has been kind of a featured guest-star here this past week: a look at the moral confusion that erupts when people who voluntarily earn less than they could demand […]
7 Tom // Jun 30, 2011 at 4:27 am
You anticipated my reaction:
“Maybe because those conversations are mostly conducted by people who might be bothered by the ethical implications of acknowledging the gap between their potential and chosen-actual earnings?”
It seems safe to say that maximizers have more (or at least different kinds of) political influence than satisficers. Not to say that this shuts others out of the conversation, but I think it probably changes the terminology of the conversation. Nobody says “increasing marginal rates on the top brackets will constitute a negative subsidy to the financial sector, which frankly has grown too big.” They need those finance folks! Instead we talk about the middle class (using language that avoids any implication that anyone is not a maximizer, since that makes them sound lazy).
8 Glen // Jul 1, 2011 at 4:00 pm
Vince is right about the economic terminology: the effect Julian is describing relates to the income effect. When the income effect dominates the substitution effect, the expected total effect can be reversed. In labor economics, this is called the backward-bending supply curve.
However, it’s also important to pay attention to the labor demand. Much of the argument against higher taxation depends not on the idea that workers will choose to work less, but that employers will choose to hire fewer workers (or worker-hours). Remember that an income tax is not so much a tax on the employee, or even the employer, as it is a tax on the transaction. A higher tax means the gains from trade must be larger to justify the transaction. That’s my reply to Sam’s point, above.
9 Mike // Jul 4, 2011 at 1:24 pm
There is a reasonable argument that higher tax rates highly influence the higher amounts of vacation time for European workers. If you only get to keep 50% of a pay raise, but 100% of a time off increase, which are you going to lobby for?
But of course, that does decrease your total productivity, because it reduces the number of hours you worked.
10 marcus // Jul 6, 2011 at 5:34 pm
However, it’s also important to pay attention to the labor demand. Much of the argument against higher taxation depends not on the idea that workers will choose to work less, but that employers will choose to hire fewer workers (or worker-hours). Remember that an income tax is not so much a tax on the employee, or even the employer, as it is a tax on the transaction. A higher tax means the gains from trade must be larger to justify the transaction. That’s my reply to Sam’s point, above.
Not really. For most people economists think that labor supply is pretty inelastic (for precisely Sam’s reason above). So employers can pass on pretty much all of the cost of labor taxes to their employees through lower wages. Exceptions are when you bump up against the minimum wage.
There is a huge econ literature on all this stuff. A lot of conservative economists have moved from emphasizing the effect of taxes on labor hours (where you can’t find much effect) to labor effort (hard to measure).
11 dwayne stephenson // Jul 31, 2011 at 5:55 am
I’d describe myself, at the moment, at least, as a strong satisficer. This is largely due to the work options available to me (and the fact I don’t have kids to worry about, etc), and if they changed, my attitude about work would probably change too. As it stands, I’m happy to minimize my standard of living as much as I can without getting evicted in exchange for as much free time as I can get. I know others like me, and there must a large number in the lower strata of wage earners, since often the jobs available don’t cross the threshold necessary to get a person out of the parent’s house or what have you. If you are going to be broke either way, that eight dollar hour starts looking like more of a hassle than its worth.
12 want more jobs? how about the medium chill plus universal health care. « roadburnt // Aug 1, 2011 at 12:19 pm
[…] for people who work enough to afford the life they want and no more. I saw it from Julian Sanchez here first as a response to why tax policy is just not the big economic lever it is supposed to be. […]
13 sac à main // Aug 26, 2011 at 3:11 am
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14 Brock // Aug 30, 2011 at 9:21 am
This can be looked at as the income effect vs. the substitution effect for a particular good: leisure. As one’s hourly wage rises, one has more money with which to purchase leisure time, but on the other hand the cost of leisure time rises as well.
I hypothesize that very few ultra-high earners are actually in a good position to cut their hours in response to higher taxes (= lower cost of leisure time). The highest classes of earners are CEOs, financiers, movie stars, and rock stars.
CEOs and financiers are salaried, and will be paid the same no matter how much or little they work. Movie stars and rock stars might cut back on their labor in response to a tax increase. In the case of movie stars, that’s no real loss. The movie will still get made, just with different actors. There’s no shortage of good actors wanting to star in Hollywood movies.
The real economic loss would be if major musical acts decide to tour less in response to a tax increase.
15 Dan // Aug 30, 2011 at 11:35 am
I’m an example of someone at an interesting margin (though I’m likely unusual).
I’m an entrepreneur who creates startups. Some have been successful, some not. I typically take a few years off after each has been acquired (or shut down). I come back because I enjoy doing startups, but they are high-stress and definitely a PITA of managing people; fighting competitors; dealing with government forms, regulation, bureaucracy, and taxes; and the like.
There are lots of other things I could do for fun: I could easily decide not to do another one. Each one creates a good number of jobs and, if things work out, wealth for early employees who have stock options.
Ignoring temporary incentives, I’d pay 15% cap gains + 10% CA cap gains + 3.8% Medicare on stock appreciation, for a tax rate of 28.5%.
At a rate of 50%, I’d probably stay retired after the next one. I’d have time to blog and other things I’d like to do.
16 JasonSL // Aug 31, 2011 at 2:37 am
Brock: The real economic loss would be if major musical acts decide to tour less in response to a tax increase.
I know you don’t say it explicitly, but I don’t think economics is the best lens through which to view the loss accruing to humanity from being deprived of highly-demanded artistic performances and exhibitions.
Additionally, star musicians, I think, are more concerned about adoration and acclaim than they are about money. The same might also even be said about CEOs, but for them, money is bound up with adoration and acclaim.
17 Affirmative Action and High Minimums | Learning To Be Wrong // Sep 1, 2011 at 2:27 pm
[…] I’m a bit late to the party in commenting on this post from Julian Sanchez. He talks about a group of people called “satisficers” who […]
18 Warren Levine // Sep 6, 2011 at 6:26 pm
I don’t think you’ve taken into account the downsized boomer at all, but we make up a good percentage of the underemployed or unemployed, some of whom you refer to as satisficers.
Also, when you talk about “going into retail” you’re talking about accepting 20-25 hours a week, very limited benefits, if any, and minimum wage. Know how Walmart “creates jobs”? They fire two 8-9-year veterans making $12 an hour and hire THREE new people making $8 an hour to replace them.
This is what so many former middle-class people have to deal with, in addition to fat-cat CEOs firing experienced middle management and replacing them with fresh college diploma-mill graduates who’ll consistently fuck up, but who have so much stamina and will be satisfied with so much less.
I don’t think anyone truly has a 360-degree view of the problem.