Income Tax and the Motivation to Work

Abstract

How does income tax influence the motivation to work? We propose that the degree of effort exertion in the presence of income tax depends on people’s attitudes toward two key components of taxation: redistribution and government intervention. For people favorable toward both, working while taxed is aligned with personal identity and may actually enhance motivation. All others, however, may find taxes demotivating. In two incentive-compatible labor experiments, framing wages as subject to an income tax reduced participants’ productivity unless they were chronically favorable toward both redistribution and government intervention. This latter group was significantly more productive when taxed. An objectively equivalent intervention that did not redistribute a portion of participants’ wages (framed as a wage “match” rather than a “tax”) did not motivate anyone to work harder. Our findings suggest that the net effect of income tax on productivity depends on the distribution of attitudes toward redistribution and government intervention.