This isn't some startling, new finding. In fact, it's 30 years old. Gwartney and Stroup wrote about this phenomenon in the American Economic Review.
What is new is that the folks in the Obama White House apparently didn't take the time to read Gwartney and Stroup and to learn from economic history when they were cobbling together the income tax rate increases that would pay for Obamacare. Remember: Chief Justice John Roberts approved Obamacare because it was a tax not an imperious edict.
But, Matt Mitchell of the Mercatus Center did the math. Here's what he found.
First: What behavior could the income tax incentivize?
- "The income effect." Some economists believe the income tax encourages people to work more, because the tax reduces income. Workers desire to earn more money to meet their pre-tax standard of living.
- "The substitution effect." The income tax discourages work, because it makes not working a less expensive alternative. Because the time not working costs less, it becomes much more attractive than the foregone income.
The question is: Which of the two incentives ultimately control economic behavior?
The substitution effect wins out once government spending is introduced into the mix. That is, government doesn't just tax income, but it uses some of those revenues to fund programs to subsidize citizens (e.g., welfare, disaster relief, farmers). That transfer of funds offsets the income effect because individuals believe they can afford to work less, as those subsidies make work less attractive.
Why would anyone work if not working is a less expensive alternative and the government offers all sorts of goodies (that become "entitlements") simply because an individual isn't working?
Second: Now that they've unleashed Obamacare, what should the folks in the Obama White House do?
It's well known that welfare discourages work without some type of "welfare to work" provision and the substitution effect explains why. Obamacare will also discourage work. In fact, the folks in the Obama White House have already figured that out. But, instead of incentivizing people to work, the folks in the White House are doubling down on their original error in basic economics and compounding the problem.
After President Obama stated so in his 2014 State of the Union Address, haven't you heard the talking heads in the mainstream media touting how working <40 hours/week is a wonderful thing? Now parents can spend more time at home with their children and not live in fear of not having healthcare insurance.
That's gotta be true, of course, because the mainstream media talking heads are saying it on television. And all of those who are working--not just the 1%--will be paying more taxes so their fellow citizen won't have to fear losing their heathcare insurance.
Oh...and by the way...there are still 30M+ people in the USA without healthcare insurance.
Let the discussion begin...
To read Matt Mitchell's analysis, click on the following link:
"Does an Income Tax Make People Work Less?"