Conservative Taxation Theory: Reductio Ad Absurdum

Reductio ad absurdum is latin for “reduction to absurdity.” It’s the form of argument where you assume something is correct, then explore the absurd results that follow. Can reductio ad absurdum be applied to conservative taxation theory? Let’s see.

Under conservative taxation theory, taxes cause people not to work, so we should strive for a flatter tax structure. So argues Amity Shales, the board chair of, get this, the Calvin Coolidge Memorial Foundation, in Make Longer Hours Worthwhile, which appeared in today’s NY Times. Here’s her argument:

People decide to work more (or less) than 40 hours a week because of a variety of factors including family life, education, hobbies and leisure time in general. But the biggest reason may be as simple as one word: taxes.

Americans would willingly work longer hours, earn more and be more productive if their marginal tax rates were lowered.

If Americans had a less progressive tax code that rewarded their hard work, they might be inspired to work longer hours.

Across nations and decades, the Nobel-winning economist Edward Prescott found, tax rates largely determined the hours that workers put in. Heavily taxed workers in Europe put in fewer hours than more lightly taxed workers in the United States, he determined.

Got that? Tax rates “largely” determine the hours workers put in. The threshold problem with that is simply that none of us really have ever met anyone who tailors his or her work hours to tax rates. But it gets worse, way worse, for Amity and Edward Prescott.

The impact of tax rates on work ethic is inextricably tied to the marginal utility of money. Whether I work another hour depends on how much I value the additional compensation I will receive on an after-tax basis. I actually could care less about the tax rate by itself. Two hundred dollars subject to a 50% tax is no less valuable to me than one hundred dollars tax-free. If I’m working zero hours and the money from my first hour of work will avert starvation for my family, then I’ll be willing to work for very little. You likely could hit me with a 90% tax rate and I’d still work in order to avoid the consequences of not working.

Now, consider professionals, like doctors and lawyers, who command very high rates for their time. On the margin, their additional work actually is very rewarding financially, because they’ve already covered all the overhead from their practice and their marginal rate of employment tax is low, as they’ve already maxed out on social security tax. But visit a country club on Wednesday afternoon and you’ll see plenty of doctors and lawyers. Why? Because the marginal utility of the additional income is low. They’ve already made enough to enjoy a very good life. To them, four hours on the golf course is worth more than the additional money they would earn.

Could you entice those doctors and lawyers to work longer hours through lower tax rates? Perhaps, but remember, in terms of the amount they’re earning per additional hour, those additional hours already are very profitable. The income tax rate may have increased marginally, but the other costs of earning the income, overhead and employment taxes, have decreased dramatically.

So, in order to maintain the incentive for workers to work longer and longer hours, we’d not only have to make the additional work more profitable on an after-tax basis, we’d have to make the initial hours of work less profitable on an after-tax basis. After all, if workers could do well enough from their first 20 or 30 hours of work per week, they would not be inclined to work longer hours. Remember that most jobs really are “work.”

For many workers, we’ve already created this incentive through overtime pay. If you think about it, the additional income workers earn during overtime typically is more, on an after-tax basis, as their ordinary pay is on a pre-tax basis. In other words, overtime pay is better than having to pay no tax. Yet workers routinely turn down overtime work.

Now, compare the impact tax rates have on minimum wage workers in the United States and Australia, where the minimum wage is double what it is here. Yes, tax rates are higher in Australia, and the cost of living is a trifle higher as well. Nonetheless, the after-tax income of the Australian minimum wage worker has more purchasing power than the after-tax income of the American minimum wage worker. Yet the American minimum wage worker logs longer hours. Why? Because after a 40-hour work week, the Australian is getting by okay, whereas the American is struggling. Thus, the marginal utility of the additonal income to the American worker is higher, even though it’s lower in amount.

The bottom line? Conservative theory on taxation would not stop at a less progressive tax structure. In order to create the incentives conservatives desire, our tax structure would have to be regressive. We would tax the first dollars earned heavily, because those are the dollars that have the highest marginal utility, and the dollars on which the worker would be most tax-tolerant. Then, going up the income scale, with the marginal utility of additional income diminishing, tax rates would have to be reduced, in order for workers to be sufficiently incented to work longer hours. Indeed, at very high levels, we might need to go to a negative tax to get high-earning workers to maintain longer hours.

Reductio ad absurdum