In response to my last post Scott Sumner asks

I don’t follow this argument. If the money isn’t coming out of consumption, then the rich aren’t really paying the tax–someone else is. The question of interest is whether taxes that reduce consumption also reduce work effort, investment, etc.

It seems like you are arguing that if the tax revenue comes out of the pockets of starving people in the Third World, then it doesn’t reduce the incentive of the rich to work. I’m skeptical, but let’s say that’s true. What are the implications? Should we impose heavy taxes on staving people in the third world?

The bolded sentence is basically my point accept phrased a different way.

My point is that if taxes crowded out charity 100% then how big of a deal could taxes be to the people who are statutorily being taxed.

That is, would they say I am not going to bother creating this company and generating great new products unless I what I get in return is the ability to give money to the International Red Cross.


But, that’s a lot of love for the Red Cross. Their whole business career is geared around what they can and cannot donate to the IRC? Seems unlikely. That tells us the economic response is likely muted. At least from an incentive perspective.


There is another issue with taxes that has to do with redistributing income away from people who are good at allocating it, but that’s another story.


Now, what’s the implication. There isn’t one. Indeed, I specifically tried to create an example where there was a lot of moral ambiguity about what was going on. Maybe the International Red Cross is better. Maybe income inequality is tearing at the fabric of the United States and the preservation of the world’s most powerful democracy depends on these taxes.

Who knows?

And, that’s precisely the point, because our analysis of whether or not taxes reduce work effort should not be clouded by our feelings about whether or not taxes are a good idea. So lets create a thought experiment where common intuition about the morality of the rich and taxes is confused, so that we can focus on the economic response.