Friday, July 10, 2009

Going 'Galt' May Be Hard-wired Into Our Psychology

Instapundit recently posted this email from a reader:
Interesting article, and somewhat parallels my experience. I’ve “gone Galt” myself, taking 6 weeks leave without pay. Business is very slow, we’ve already got too many people wasting away on overhead. SinceI don’t need the money (right now), I volunteered to take some time off in the hope that someone else won’t get laid off.

The one positive in all this is that I think that (at my marginal tax rate) I’ve denied the (state and federal) government some $4,000 in income taxes.

Here's an economics research paper that may give some insight into the 'Going Galt' phenonmenon (emphasis added):
A Behavioral Laffer Curve: Emergence of a SocialNorm of Fairness in a Real Effort Experiment


This paper demonstrates, through a controlled experiment, that the “Laffer curve” phenomenon does not always reflect a conventional income - leisure trade-off. Whether out of reason or out of emotion, taxpayers may also be willing to punish intentionally unfair tax setters by working less than they would under the same exogenous circumstances...

...1. Introduction

The quest for American independence grew as issues like taxation without representation in the British government angered the local population of the former British colonies. When the British decided to tax the colonists to pay a share of their expensive war against the French and Indians, the colonists were angry and rallied behind the phrase, “No Taxation without Representation”. The British were then forced to remove (1764-1767) most of the unfair taxes (tax on sugar, Stamp Act, Townsend Act) that they had been trying to enforce unilaterally. Two centuries later, the same scenario repeated in California as property taxes went out of control. Taxpayers were losing their home because they could not pay their property taxes, yet the government maintained the burden. California taxpayers stood up and passed Proposition 13 (1978) that reduced property taxes by about 57%. The tax revolt that swept the country had a worldwide impact.

Since then, tax revolts have been closely associated with the name of Arthur Laffer who forcefully defended as a simple rule of public finance that there is a unique optimal tax rate which maximizes revenue collection. If the tax level is set below this level, raising taxes (more specifically, marginal tax rates) will increase tax revenue. However, if the tax level is set above this level, then raising taxes will decrease tax revenue. This proposition, now called the “Laffer curve”, had considerable influence on fiscal doctrine, and fuelled the “supply side economics” argument that a tax cut would actually increase tax revenue if the government is operating on the right side of the curve.

The Laffer curve was based on conventional economic analysis: tax revenues are obviously zero if the tax rate is zero, and are still zero if the tax rate is equal to one, as rational agents would withdraw from the market to evade tax or consume untaxed leisure. However, our paper demonstrates that the Laffer curve phenomenon does not always reflect a conventional income - leisure trade-off. Consistent with the history of tax revolts, we demonstrate the existence of a “behavioral Laffer curve” that will arise as a reaction to the perceived unfairness of taxation by a Leviathan government. Whether out of reason or out of emotion, taxpayers are willing to “punish” tax setters who intentionally violated the social norm of fair taxation by working less than they would under the same exogenous circumstances. We further point out that the behavioral Laffer curve peaks at a substantially lower tax rate than the conventional Laffer curve...


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