Finally, excise and sales taxation will affect work incentives in still another way. Such taxes reduce the money incomes of certain income receivers below the levels which would otherwise prevail. An excise tax on watches and clocks, for example, will lower the earning power of workers who are highly skilled in watchmaking, and these effects are likely to spread to all who do the same type of high-precision, fine-scale work. As we have already seen the incentive effects on these people may go either way. Lower income levels induce more effort, but reduced rates of pay have the reverse effect. Until we know more about the types of workers whose incomes are reduced by different kinds of sales and excise taxes and the extent to which these reductions take place—and this whole area of analysis is currently undergoing extensive reexamination we cannot formulate a complete picture of the incentive-disincentive effects of sales and excise taxation.
The Effects of Labor Market Rigidities So far we have not concerned ourselves with the extent to which the worker is free to satisfy his own preferences with regard to the amount of labor services he supplies to the market. The great maj ority of workers, of course, must either have a full-time job or none at all. We cannot, however, count on this fact to neutralize, for such workers, the potential incentive or disincentive effects of income taxation. For one thing, their preferences may be only temporarily frustrated. Future bargaining with employers may restore the balance. In addition, workers typically have ways of changing their labor supply other than by altering the number of hours worked a week or the number of weeks worked a year. Overtime opportunities may be available and be refused or exploited more fully, other members of the family may enter or leave the labor force, proposed ages of retirement may be altered, or absenteeism on a day-to-day basis may change. These possibilities must be kept in mind in evaluating the results of empirical studies. Inflexible behavior in one area or disincentive effects in another do not necessarily imply either insensitivity or reduced incentives as far as the labor supply as a whole is concerned.
as noted in the preceding section, may vary their supply of labor in a number of different ways, and full information on these various possibilities is not always available even for groups that have been studied rather extensively. In addition, it has frequently been difficult to be certain that the behavior actually observed was due to changing pay rates rather than to other factors which also exert an influence on work incentives. Nevertheless, the evidence so far compiled warrants careful consideration because it is both extensive and consistent as to the direction in which it points. For the most part it appears that income taxes exert relatively little influence on work incentives, and that when they do they induce greater effort as frequently as they deter it.
Thomas H. Sanders, for example, concluded, on the basis of an extensive postwar study of executive behavior, that. . . the cases in which the evidence showed executives to be working harder were at least equal in number to those indicating less effort, and the former were more definitely recognizable as a tax influence.
In addition, there was evidence that high taxes induced more wives of business executives to enter the labor force and, in general, led the executives themselves to postpone their dates of retirement from active participation in the business. Offsetting these tax incentives, however, was a tendency for some to refuse promotions and advantageous offers from other companies when the change meant greatly increased burdens and relatively little increase in net compensation. Finally, it was noted that a good deal of executive effort was being diverted into a study of tax laws and of ways of reducing tax burdens.
Another study of a small sample of 7 surgeons with incomes between $36,000 and $115,000 led the author to conclude ". . . we would judge that increased taxes have not reduced the surgeons' incentive." He also noted that 4 of the 7 doctors planned, at the time of interview, to retire later than they had previously planned (before World War II) because they had been unable to accumulate sufficient capital. These reactions might be attributed to the influence of higher taxes or higher prices, or both.