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This post was coauthored with my colleague Professor Michael Krassa, University of Illinois Urbana-Champaign.
Republicans recently announced the outline of a tax plan that would, among other things, eliminate the estate tax and the alternative minimum tax, lower the top marginal rate, reduce the corporate tax rate, and, overall, produce what the President promises will be an overall "gigantic" tax cut. While the details are still being worked out in the Congressional committees that will produce the actual legislation, any plan they are likely to produce will both make the tax code less progressive and reduce total tax revenues.
The obvious question is whether this is good public policy: simply put, will the Republican tax plan make Americans happier?
Research in the field of happiness economics offers two vantage points from which to consider this question. The first concerns how progressive a tax system is. Simply put, are societies happier when the wealthy bear a disproportionately higher share of taxes? The second is the total level of taxation. In other words, does a higher tax burden make people less happy, because the government takes more of their earnings, or do higher taxes contribute to happiness, because taxes for necessary government services? Let us consider each in turn.
Progressive Taxation
A recent article in the peer reviewed journal Psychological Science suggests that countries with a more progressive tax system are in fact happier than those where tax rates are flatter.
The authors compared the progressivity of a nation’s tax systems with various measures of happiness. They found clear and unequivocal evidence that progressive taxes “are positively associated with subjective well—being.” In other words, the larger the share borne by the affluent, the happier a country is. This conclusion obtained when using not just simple correlations, but very sophisticated statistical models that controlled for a large number of other national factors (such as GDP per capita and income inequality) as well as for things like income, gender, age, and marital status.
One reason for this is that the link between income and happiness is strongest for the poor and middle class. That is, happiness increases with income, but once a certain threshold is reached, the returns in terms of well-being progressively diminish, as Nobel Laureates Angus Deaton and Daniel Kahneman have demonstrated. Income lost to taxes thus harm the poor and middle class, whose happiness is tied to income, but do not trouble the affluent, whose satisfaction with life is much less affected by a marginal increase in tax burden.
Another reason might be what scholars call “tax morale,” meaning the extent to which to people accept the moral obligation to pay taxes as their contribution to society (which turn is implies an acceptance of the view the tax system is equitable). Evidence clearly indicates, as common sense would suggest, that “tax morale is higher the more progressive the tax schedule is.” Other academic research has also found “strong evidence that people with higher tax morale are happier than the others, even after controlling for the main demographic and socioeconomic determinants of happiness.” Obviously, if progressive taxation increases tax morale, and tax morale increases happiness, more progressive taxes mean higher levels of happiness.
In any case, that progressive taxation promotes well-being is not good news for Americans, given that our tax system, as a study by the Brookings Institution put it, “less progressive than the tax system of other industrial countries, and considerably less progressive than it was just a few decades ago.” (In the study from Psychological Science discussed above, the U.S. ranked near the very bottom of the 20 Western countries in the study.)
A connection between progressive taxation and happiness is also bad news for the Republican tax proposal. The highly respected Tax Policy Center’s detailed analysis of the plan clearly shows that benefits are heavily skewed toward the wealthiest: the 1% benefit handsomely, while the working- and middle-class would receive few if any benefits. Indeed, according to the summary provided by the Business Insider the consequence will be “the richest getting richer and the middle class eventually seeing a slight tax increase.” While the reasons why some aspects of the plan are regressive, such as the cut in the corporate tax rate, require careful analysis, the class differences in others do not. While the Republicans would increase some deductions for the middle-class they would remove others (e.g. deduction of state/local taxes), while at the same they actually increase the lowest tax bracket from 10% to 12%, while cutting the top rate from 39.6% to 35%. Similarly, eliminating the estate tax literally applies only to multi-millionaires, while doing away with the alternative minimum tax also benefits the wealthy. Whatever the details of the ultimate plan that emerges, it seems certain that it will result in a more regressive tax system that would likely make Americans less happy.
The Total Level of Taxation
But what about connection between the total tax burden and national levels of happiness?
Surely no one likes being taxed, but taxation is the mechanism by which society provides a great many things that people do like, such as Medicare, Medicaid, Social Security, to say nothing of good schools, good roads, and safe neighborhoods. “Big government” programs benefit everyone for the obvious reason that they reduce poverty and alienation, and by so doing, reduce the social pathologies that are the product of poverty and alienation and desperation, such as crime and suicide. In turn, it seems obvious that people—all people regardless of social class or political ideology—are happier when there is less poverty and less insecurity.
Much peer-reviewed academic research has documented just that. Whether looking across countries or across the American States, as government provides a greater array of social protections and services, people tend to be happier rich and poor alike. Hence, the closer we approach what Europeans call social democracy, and Americans think of as the New Deal agenda that conservatives deride as big government, the more people tend to find life satisfying.
If “big government” makes people happy, then we should of course find a link between tax burden and happiness, in that heavier taxation is literally the price of financing the government programs that make promote well-being. Thus, if looking across the range of the tax burden people in different countries across the Western world actually face, we should find that higher taxes are associated with greater life satisfaction. Thus, to take a few illustrative examples, according to OECD data, Denmark, generally considered the happiest country in the world, also has the highest tax burden of any of the industrial democracies (49.6% in 2014, the last year for which data are available), while the least taxed to be the least happy (such as Korea and Turkey, at 24.6% and 15.2% respectively).
We cannot of course generalize from a few examples, nor can we assume that taxation (and the spending taxation allows) are the only causes of happiness. To make strong claims about the nexus between taxation and well-being requires the rigorous and systematic analysis found in the peer reviewed academic literature. Radcliff, in his peer-reviewed (Cambridge University Press) book The Political Economy of Human Happiness finds, using individual-level data on 21 countries over three decades, that people are happier as tax burden increases, even when accounting for other factors known to affect happiness, such as one’s income, health, employment status, gender, age, race, education, religion, and so on. Similarly, he finds that the national or aggregate level of happiness also varies positively with the burden (again controlling for other factors). The same positive connection between tax burden and happiness is reported in a 2011 article in the peer reviewed journal Politics and Policy, while another peer reviewed article in Social Forces in 2014 finds that life satisfaction varies positively with the total amount of governmental “consumption” of the economy, i.e. with the level of taxation.
Taxes as the Cost of the Good Society
While the details of the eventual tax plan that will only be known when the relevant Congressional committees complete their work, it is certain to reflect core Republican values: to reduce the size of government, because this allows reductions in the tax burden it requires. They also tend to favor a flat tax because they argue it's fairer. Scholarly research by us and others suggest they are wrong on both counts, at least in so far as we are concerned with human happiness.
A familiar aphorism, usually attributed to Justice Oliver Wendell Holmes, notes that “taxes are the price we pay for a civilized society.”
We believe research into the economics of happiness would take this sentiment one step further: high taxes are the price we pay for a happy society.
A slightly different version of this article appeared in The Conversation.
