Motivation and Incentives - Are the Rich and Poor Different?

March 19, 2014
Posted by Jay Livingston

Economic policies often rest on assumptions about human motivation. 

Rep. Ryan (Republican of Wisconsin): 
The left is making a big mistake here. What they’re offering people is a full stomach and an empty soul. People don’t just want a life of comfort. They want a life of dignity — of self-determination.
Fox News has been hitting the theme of “Entitlement Nation” lately. The Conservative case against things like Food Stamps, Medicare, welfare, unemployment benefits, etc. rests on some easily understood principles of motivation and economics.

1.    Giving money or things to a person creates dependency and saps the desire to work. That’s bad for the person and bad for the country
2.    A person working for money is good for the person and the country.
3.    We want to encourage work
4.    We do not want to encourage dependency
5.    Taxing something discourages it. 

Now that you’ve mastered these, here’s the test question:
1. According to Conservatives, which should be taxed more heavily:
    a.    money a person earns by working
    b.    money a person receives without working, for example because someone else died and left it in their will

If you said “b,” you’d better go back to Conservative class. A good Conservative believes that the money a person gets without working for it should not be taxed at all.*  

Not all such money, of course.  Lottery tickets are bought disproportionately by lower-income people.  If a person gets income by winning the PowerBall or some other lottery, the Federal government taxes the money as income. Conservatives do not object.  But if a person gets income by winning the rich-parent lottery, Conservatives think he or she should not pay any taxes.

What Conservatives are saying to you is this: working for your money is not as good as  inheriting it.** This message seems to contradict the principles listed above. But, as Jon Stewart recently pointed out (here), Conservatives apply those principles of economics and motivational psychology only to the poor, not to wealthy individuals or corporations.

Me, I’m with Rep. Ryan on this one. I think that the children of the wealthy would not at all mind paying considerable taxes on their inheritance. What abolishing inheritance taxes offers people is a full stomach (not to mention a full bank account, stock portfolio, a full house or two, etc.) but an empty soul. To repeat the Wisdom from Wisconsin: “People don’t just want a life of comfort. They want a life of dignity — of self-determination.”

Unfortunately, Conservatives want to take away that dignity and self-determination
* Conservatives like to call the inheritance tax the “death tax” as though a person is being taxed for dying. But it’s not the deceased who is being taxed. It’s the lucky people who are given the money.

** Conservatives also favor lower taxes on other ways of getting money that are available mostly the wealthy and involve little or no work – gambling on stocks and more complicated derivatives for example.


Andrew Gelman said...


According to Greg Mankiw, raising the inheritance tax will reduce the motivations of rich people to work hard, as once you've reached a Mankiw-level of wealth, you realize that your marginal income will go into your estate, and you'll be less motivated to work if you know that this money will be heavily taxed.

Mankiw also gives a moral argument that it's not fair to take away people's money. I think the moral argument is just silly (after all, the tax money has to come from somewhere) but his incentives argument (summarized in the paragraph above) does fit within "econ 101" type reasoning. I think if you want to argue against this reasoning on his own terms, again you'd have to go in the direction of opportunity cost and point out that taxes have to come from somewhere, that all taxation creates disincentives, and there presumably aren't enough "sin taxes" (drinking, smoking, gambling winnings, carbon, etc) to cover the entire federal budget.

Jay Livingston said...

In discussions of taxes, there are arguments based on morality (fairness) and arguments based on economic effects, and people shift back and forth depending on which serves their position. My impression is that they often are not aware that they are changing trains.

I assume that Mankiw has evidence for his position, but I think you made the same point that I did a while ago – that Mankiw himself was evidence to the contrary. Not only was he putting effort into something that wasn’t remunerative (e.g., blogging), but I also wondered whether he upped his efforts in the 1980s when top tax rates fell 50%, and then increased his efforts still more in the 90s, when it went to 40%. (My post is here.)

Do top earners really make these kinds of 20-years-out calculations and trim or expand their output accordingly? Especially if they work for companies, there are probably significant pressures that have nothing to do with their taxes. Is a trader at Goldman really going to tell them that he’ll be taking Mondays off now, thank you, because the Bush 36% rate was going up to 39%?