• Can higher taxes discourage work?

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    Higher taxes can indeed have the potential to discourage work, according to several experts discussed in various podcasts.

    1. Labor Supply Elasticity: Labour supply for full-time employed males is relatively inelastic, meaning they don't significantly change their working hours in response to higher taxes. However, other studies suggest that overall lifetime working hours can be sensitive to tax rates, particularly at both ends of the lifecycle. In European countries, higher taxes correlate with fewer working hours over a lifetime compared to the U.S. This suggests that higher taxes might discourage employment or push people out of the labor force at various stages of life 1 2.

    2. Marginal Tax Rates and Work Incentives: The concept of marginal tax rates is crucial. Higher marginal tax rates reduce the additional income individuals keep from extra work, making additional work less appealing. This disincentive effect can be particularly significant for those who are already employed and deciding whether to work additional hours 3.

    3. Substitution and Income Effects: Michael Munger discusses the substitution effect, where people might substitute work for leisure if working more results in losing certain benefits, like subsidized housing or reduced-price lunches, because they exceed income thresholds. Such "cliff effects" can discourage people, especially the poor, from increasing their work efforts, since earning more can result in losing significant benefits 4.

    4. Business and Economic Growth: On a broader level, increasing taxes can reduce the capital available for businesses to innovate, invest, and grow, which in turn can limit job creation and economic growth. Sal Di Stefano points out that higher tax rates don’t necessarily lead to higher tax revenues because they can stifle economic activity, which ultimately can also impact the motivation to work more 5.

    These insights reflect a consensus among experts that tax policy can significantly influence work incentives.

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