Freddoso Responds

I somehow missed this earlier today, but David Freddoso at The Corner has responded to my critique of his post from yesterday. In response to my rather obvious point--that the Danish labor shortage is a result of the tax rate differential between Denmark and neighboring E.U. countries, not Denmark's tax rate in and of itself--Freddoso writes:

Well, okay. But this guy in this article — isn't he saying that he is willing to work harder where tax rates are lower? Is he working in Germany because tax rates there are lower than in Denmark? It sure looks like it to me, if you actually take ten seconds and look at what the Dane in the article said:

"When you are at 63 percent tax, you don't look forward to the evaluation with the boss to get a raise," Sorensen said. "You look for more vacation or a training course in the tropics - something that you get the full benefit of."

So he's saying that if you're going to stay in Denmark, you're going to demand more vacation (i.e. less work), because it isn't even worth working for more pay when tax rates are at 63 percent. He is saying that the high tax rate is an incentive to seek time off rather than higher pay.

Tell me if I'm wrong, but uh...isn't that precisely the point I was making?

It shouldn't surprise me that a liberal would thus ignore reality — it might cause him brain-freeze or something if he actually tries to digest the idea that incentives matter in economics.

This is pretty weak stuff. Clearly Freddoso thinks a high level of condescension can compensate for poor analysis. Notice that he is now reduced to citing a single anecdote from a single Danish worker as evidence of the obvious correctness of supply-side economics. The labor shortage itself, which was the subject of the article, is apparently of only tangential relevance.

Freddoso claims that I am ignoring the "reality" represented by this singularly insightful anecdote and suggests that my head would hurt if I tried to "digest the idea that incentives matter in economics." Okay, David, you win. Let's talk about incentives.

Central to supply-side orthodoxy is the notion that all (or least most) people respond to tax cuts in a similar way. Essentially everyone is the Dane quoted in the article. When taxes are high, they lack incentive to work hard. When taxes are lowered, they get to keep more of their income and respond by becoming more productive, innovative, entrepreneurial, etc.

I fully concede that some people are likely to respond to tax cuts in this way. But the equation is infinitely more complex than supply-siders would have us believe. First, the nature of the tax cut obviously matters. A cut from 90% to 30% is much more likely to affect incentives to work than a cut from, say, 33% to 28%.

Moreover, conservatives never seem to consider the fact that tax money is used to provide services which many people genuinely value. Though Denmark has high taxes, it also provides, among other things, universal health care and education, excellent public services, and state of the art infrastructure. Not everyone thinks that the portion of their income that goes to the government isn't worth working for. Denmark is a democracy, after all. It wouldn't have such high taxes if people didn't want it that way. And it's probably also worth noting that, despite its high taxes, the Danish economy does pretty well; it was recently voted the "most competitive and dynamic" economy in Europe by the World Economic Forum.

What supply-siders can't seem to internalize is that people respond to incentives differently. For instance, while some people may be incentivized to work harder by a tax cut (because they can keep more of what they generate), others might well be incentivized to work less, because they can now maintain the same standard of living while working less hours. It depends on whether you prioritize money or leisure.

Which brings me to another major problem with the supply-side narrative: many people--perhaps most--are not compensated for their labor in a way that is directly tied to their productivity or effort. If you work for a fixed salary, a tax cut is not going to provide you any incentive to work harder or for longer hours. You'll get paid the same either way. And even those who are paid by the hour are often immune to such incentives (there are only so many hours in a week and not every job allows for overtime work).

I think that supply-siders often come from the world of law firms and investment banks, where year-end bonuses are tied to hours worked, and they forget that this compensation structure is actually pretty foreign to most people. Moreover, as a lawyer at a big law firm, I can tell you that even in this setting, incentives often don't work the way supply-siders seem to think they do. I work very long hours, as do all of my colleagues. But we do so because that's what the job demands. Many of us would gladly give back a portion of our salaries if it meant having more leisure time. If my tax rates were cut to zero tomorrow, I would not be incentivized to work even a single additional hour more than required to get my work done. Not all people are like me, of course. Some of my colleagues would work long hours even if they didn't have to, but these people, at least in my experience, are motivated to work hard not by the prospect of earning more at the end of the year, but because they are workaholics who enjoy what they do. These people would work just as hard if tax rates were increased dramatically.

Long story short, the relationship between tax rates and work incentives is much more tenuous and complicated than supply-siders would have you believe. All sorts of factors influence people's incentives to work, and there is little reason to believe that marginal tax rates--except in extreme cases--are even a particularly significant factor. And even when tax rates are a factor, it's not at all clear that people actually respond to them in the way that supply-side economics says they do. People like David Freddoso want you to believe that tax rates are some sort of monocausal explanation for everything. But they really aren't.