Wall Street Journal, March 26, 2012
Do the Rich Work Less as Their Taxes Increase?
by Robert Frank
Robert Frank, a senior writer for the Wall Street Journal and author of the
newly released book “The High-Beta Richâ€. Mr. Frank opines:
... The idea of “going Galt†has been a key argument for those opposing
higher taxes on the rich. The wealthy, according to the argument, are just
like everyone else when it comes to incentives. If you tax their income
above a certain rate, they will stop working, stop creating jobs and stop
creating wealth that gets spread around the economy.
...
According to the data, “affluent households are unlikely to make substantial
changes in their ‘real’ economic behavior in response to modest tax
increases.†... Jeffrey Thompson at the University of Massachusetts Amherst
Political Economy Research Institute ... finds that “high-income households
did not alter their labor supply in response to large federal tax changes.â€
2-4-8 Response
The behavioral psychologist B. F. Skinner was a pioneer
in the study of positive and negative reinforcements which direct individual
behavior. Negative reinforcers encourage behavior by reducing the
application or threat of punishment. Negative reinforcers, like punishment,
also produce undesirable side effects which are associated with anxiety and
fear. Positively-reinforced behavior is strong and active and is generally
associated with feelings of freedom and happiness. Interestingly, a gradual
and somewhat arbitrarily stretched schedule of reinforcement was found to
strengthen behavior more than a constant schedule. These individual rules
may be less reliably applied to collective business decision making.
Predictably, any business path that leads to increased
profits (and particularly a long and winding road) is going to be viewed as
strong and positive. Tax rates, like other costs of doing business are going
to be negligible in the grand scheme of things to the extent they are
predictable and adjustment can be made as they are for all other costs of
doing business.
Economists like to speculate about how business
behavior might be affected by a scheduled increase or decrees in the tax
rate. It is here that a distinction must be made between a tax on earnings
and a tax on a business (which may or may not be a C corporation). Arguably,
the business profits and pricing are determined not just by costs (including
taxes) but rather on competition. Where there is little competition, a
presumably profitable company might be expected to reap added profits from
any tax reduction. Where there is strong competition a tax reduction would
be more likely to result in a price reduction to increase market share. In
aggregate the competitive businesses are not likely to realize much from a
tax reduction.
In regard to individual tax reductions it is difficult
to see how this would impact job efforts. Like the automatic raises of
career civil servants, the incremental reward or tax reduction has nothing
to do with past behavior and is unlikely to impact future performance. In
this since a tax reduction may be considered a noncontingent reinforcer
because it is not intended to direct any particular behavior.
A dynamic tax structure such as a 2% net wealth tax combined with an 8% flat
income tax can turn the tax code into fuel for the economy. The taxing of
net wealth is not only fair and progressive, it also serves as a negative
reinforcer to use the wealth productively or suffer a long gradual
diminishment of assets. The low flat rate income tax enables all earners to
keep 92% of their earnings, enhancing the rate of economic mobility and
supplying the consumer power that drives the economy. See
www.TaxNetWealth.com for more
details.
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