An argument
frequently employed by free-market sympathizers against a high income tax is
that the higher the tax on individuals’ income, the less incentive they will
have to work for money, as their monetary rewards for every hour of labor put
in are diluted by the tax. They will have less of an incentive to overcome
their preference for leisure, to overcome their preference for more enjoyable
but less monetarily reward jobs, and to move to a different geographical
location in order to make a higher income. This means that the person taxed by
the income tax will have less of an incentive to serve the consumers in the
best way they are able to.
A
counter-argument of income tax proponents is that, while this above effect
could well occur, it will be counterbalanced by the fact that with the income
tax, more work must be performed in order to make a given amount of money. If
people really want a given amount of money, they will be willing to put more
work in under an income tax regime in order to receive this given amount of money.
The economy thus gets more work out of such people for the because of the tax.
A textbook
on Canadian Income tax law puts it like this: “On the one hand, it is
reasonable to expect that the incentive to work would decline as the after-tax
return from work declines, creating a preference for leisure. On the other
hand, it is also reasonable to expect that the reduction in disposable income
which is caused by the income tax creates an incentive to work longer and
harder to make up some of the lost income. It is hard to know what the net
effect of these competing pulls will be on any given individual.”[1]
Theoretically,
this account is right. But I would venture to guess that given the psychology
of most individuals, the “net effect of these competing pulls” will reduce the
incentive to work well for the consumers for most working individuals. This is
because money isn’t valuable for its own sake; it is a means to the end of
enjoying life as much as possible. In order to use our money to enjoy life, we
need leisure time to spend and enjoy the money in. So what if you earn a
million dollars a year if you must put in 14 hours of work, 7 days a week, in
order to earn it? You would barely have any spare time to make use of all this
money.
The more hours
of leisure you have to spread out your money consumption budget on, the better
off you will be. Thus, a person who has a $500,000 yearly consumption budget
with 30 hours of leisure a week in which to spend and enjoy it, will be much
better off than a person who has a $500,000 yearly consumption budget with 10
hours of leisure a week in which to spend and enjoy it. Now, let’s assume that the former and the
latter scenario are describing the same person in two possible political
situations, the former where no income tax is applied, the latter where a high
progressive income tax is applied. When the high progressive income tax is
applied, will the individual really want his $500,000 yearly consumption budget
so badly that he will be willing to cut his leisure to a third to earn it?
Highly unlikely. The individual will probably still want something like 30
hours of leisure, and may well choose to take more because the monetary
benefits of giving up leisure in order to work marginally more hours are cut by
the income tax. They will be willing, although not enthusiastic, to settle for
a smaller yearly consumption budget. This will especially be true for
relatively wealthy individuals, the individuals that we are primarily talking
about when discussing the costs and benefits of a high progressive income tax.
But I think
that the main objection to this argument in favor of the income tax is not a
technical objection, but an emotional objection. Personally, whenever I see
this argument employed, it strongly arouses my indignation. I have relatively
strong feelings of sympathy for people who do nice things for me. It makes me
happy when good things happen to such people, unhappy when bad things happen to
such people. I think that this trait is fairly common among humans. It gives
rise to the popular sentiments of Gratitude and Loyalty.
I know that
as a consumer, my standard of living is based on the actions of the producers.
The more they produce, the more the money I earn will enable me to consume. It
is true that not every producer contributes directly to producing the products
that I seek to buy. However, I know that the market system cannot just cater to
my demands alone. In order for it to function, it must cater to the demands of
all consumers with purchasing power. Hence, in this instance, I tether my
interests to those of consumers in general. Whenever a producer earns a high
income by producing things that the consumers want, the system of production
for the consumers is advanced. The more this system is advanced, the better off
I will be as a consumer. Hence, when I see a producer earning a high income
through free-market means, I consider them to be a benefactor, and thus I
particularly sympathize with them.
Now, along
come the income tax advocates. They see the large free-market incomes earned by
efficient producers for giving the consumers what they want, through a series
of voluntary, mutually beneficial exchanges. They decide that it would be
better if some of this income were taken away and used by the government. A
free-market advocate cautions that if too much is taken, incentives to produce
for the consumers will be weakened, hence restraint must be exercised. The
income tax advocates respond: ‘Perhaps incentives to produce for the consumers
will be weakened as you say, but it is equally possible that producers will be
incentivized to produce more, as now they must work harder to maintain the same
standard of living as they did before we instituted the tax.’
Here, I
become indignant. This argument treats my benefactors, the ones that make my
comfortable standard of living possible, like chattel slaves. ‘The more we
take, the more they must work to make good the difference!’ the income tax
taskmasters cackle. I say that this is a horribly shabby way to treat my
benefactors, and I will not stand for it. These grasping people are not satisfied
with all of the contributions that high income producers have made to our
standard of living, they want more! They want them to do the same amount of
work for the consumers, and fund a significant portion of the government at the
same time! To me, this attitude is infuriating and revolting. If the technical
objection that I made to the argument above is not sufficient to throw it out
of court, my strong indignation will definitely be enough to finish the job, at
least from my point of view and hopefully from those of many others as
well.
[1]
Peter Hogg, Joanne Magee, and Jinyan Li, Principles
of Canadian Income Tax Law, 7th Edition (Toronto: Carswell, 2010),
p. 56.
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