While the American right favors tax cuts, the left sometimes proposes tax increases. One argument advanced by the right against increasing taxes is the demotivation argument. The gist of the argument is that if their taxes are increased, the rich will become demotivated and this will have negative consequences. Since these negative consequences should be avoided, the conclusion is that taxes should not be increased.

In assessing this reasoning, there are two major points of concern. One is whether a tax increase would destroy the motivation of the upper class. The other deals with the negative consequences, their nature, their likelihood of occurring and the extent and scope of the harm. I will begin with the alleged consequences.

The alleged consequences are many and varied. One is based on the claim that the top economic class includes the top innovators of society and if they are demotivated, then there will be less innovation. This could range from there being no new social media platforms to there being no new pharmaceuticals. While this is a point of concern, this assumes that innovation arrives primarily out of the top economic class—which can be tested. While some top earners are innovators, innovation also come from the lower economic classes—such the people doing research and engineering. The idea that the rich are the innovators does match the fiction of Ayn Rand but seems to miss the way research and development usually occurs.

Another alleged consequence rests on the claim that the upper class serves as the investors who provide the capital that enables the economy to function. Since they control the capital, this is a reasonable concern. If Americans with the most money decided to reduce or stop investing, then the investment economy would need to rely on foreign capital or what could be provided by the lower classes. Since the lower classes have far less money (by definition), they would not be able to provide the funds. There are, of course, foreign investors who would happily take the place of the wealthy Americans, so the investment economy would probably still roll along. Especially since American investors might find the idea of losing out to foreign investors sufficient motivation to overcome the demotivation of a tax increase.

There is also the claim that the upper class contains the people who do the important things, like brain surgery and creating the new bubble that will be the destroy the world economy next time around. While this has some appeal, much of the important stuff is done by people who are not in the upper class. Again, the idea that the economic elite are doing all the really important stuff while the rest of  us are takers rather than makers is yet another Randian fantasy.

Fairness does, however, require that these concerns be properly investigated. If it can be shown that the upper class is as critical as its defenders claim, then my assertions can be refuted. Of course, it worth considering that much of the alleged importance of the upper class arises from the fact that it has a disproportionate share of the wealth and that it would be far less important if the distribution were not so grotesquely imbalanced. As such, a tax increase could decrease the importance of the economic elites. I will now turn to the matter of whether a tax increase would demotivate the rich.

An easy and obvious response to the claim that a relatively small tax increase would demotivate the rich is that the rest of us work jobs, innovate, invest and do important things for vastly less money than those at the top. Even if the rich paid slightly more taxes, their incomes would still vastly exceed ours. And if we can find the motivation to keep going despite our low incomes, then the rich can also do so. When I worked at a minimum wage job, I was motivated to go to work. When I was an adjunct making $16,000 a year, I was still motivated to go to work. Now that I am a professor, I am still motivated to go to work.

It could be replied that those of us in the lower classes are motivated because we need the income to survive. We need to work to buy food, medicine, shelter and so on. Those who are so well off that they do not need to work to survive, it could be claimed, also have the luxury of being demotivated by an increase in their taxes. Whereas someone who must earn her daily bread at a crushing minimum wage (or less) job must get up and go to work, the elite can allow themselves to be broken by a slight tax increase and decide to stop investing, stop innovating, and stop doing important stuff.

One reply is that it seems unlikely that the rich would be broken by a tax increase. Naturally, a crushing increase would be a different story—but the American left does not seriously suggest imposing truly crushing tax burdens on the rich. After all, crushing burdens are for the poor. Another reply is that if the current rich become demotivated and give up, there are many who would be happy to take their place—even if it means paying slightly higher taxes on a vastly increased income. So, we would just get some new rich folks to replace the demotivated slackers. The invisible hand of the market to the rescue again.