The Effect of Income Tax on the Motivation to Work Depends on People’s Cultural Philosophies

When income is based on effort and performance, daily decisions about how much and how hard to work can add up to influence one’s financial well-being. We investigate how income tax influences the decision to work. Some have famously promised to exit the labor force in response to income tax. For example, many Tea Party enthusiasts have considered “going Galt” (quitting their jobs to reduce the amount of income tax the government can collect), inspired by Atlas Shrugged protagonist John Galt. However, despite decades of empirical research, economists have yet to reach a consensus on how income taxes influence labor force participation (Keane 2011). The lack of a definitive answer may be due to the conflicting effects of income tax posed by neoclassical economic theory. Income taxes make leisure relatively less expensive (substitution effects), but also make people poorer, producing a greater need to work (income effects). Beyond income and substitution effects, income tax may impose psychological costs that influence labor force participation. Although people across the political spectrum prefer a more equitable distribution of wealth than currently exists in the United States (Norton and Ariely 2011), the interventions required to achieve that more equitable distribution (e.g., income tax) may be psychologically aversive to many.