Behavioral Tax

On Time magazine’s Curious Capitalist blog, the blogger decides to solicit behavioral economists for their opinion on a higher tax rate for the super-rich. That is, specifically, what should the tax rate be? Read on:

My basic assumption was that behavioral economists would see the question of how people react to tax rates as a question of relative wealth. We all want to be wealthier than the next guy. So the no mater what the tax rate was, we would continue to work because goal is not the money itself, but standing. So here’s the e-mail I sent out:

At what point do you think tax rates make work less appealing? It seemed to me this was more a behavioral question and not a traditional economics questions. I would think people would work until tax rates hit 99.99%, because even if I get only 0.01% of my last bit of income I’m still wealthier than the next guy, which is what I care about anyway. Please let me know if you have any thoughts on this. Thanks. [link]

The question was interesting. They are essentially asking, why do rich people work? Is it for the money, or to get richer than the next guy? And if the tax rate is too prohibitive, will they stop working?

My unsolicited response is that people who are rich are rich for two reasons:

  1. They are incredibly smart and motivated.
  2. They are incredibly lucky.

The mix of #1 and #2 varies from person to person, but in general, I think that is the case. If we allow ourselves to be optimistic, we can imagine that they work hard and are driven because they are passionate about what they are striving for. If that is the case, money should (in theory, at least) be a by-product of their hard work.

Just because they are taxed more will not mean that they will work less. In fact, they might work exactly the same thus achieving the same results. I do agree that they should be rewarded for their ingenuity, etc. and end up being richer than their fellow man – so no prohibitive tax rate. But I don’t believe that being richer than the next guy is one’s sole motivation for working.

Then again, was it Voltaire that said: “It is not enough that I succeed – my friends must also fail.”

Note – this is based on pure speculation. I have done no literature search on the subject, so please read it with a grain of salt.

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1 comment for “Behavioral Tax

  1. xzz76
    November 29, 2010 at 12:05 am

    This is really an interesting topic…..I agree with you that the rich people “work hard and are driven because they are passionate about what they are striving for”, but I am afraid that the goal which they are striving for might be “making more money”!
    I become curious what pushes the entrepreneurs to work hard in those nations which have much higher taxes for those richer people, i.e. Australia. The only story I have heard from that country is that the middle class won’t devote themselves too much for more money, because they actually will get nothing more with harder work!

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