Monday, September 12, 2011

A Happy Correlation Between Progressive Taxes and Well-Being of People

A new study suggests that the more progressive the tax policy of a country is, the happier its citizens are:
The way some people talk, you'd think that a flat tax system -- in which everyone pays at the same rate regardless of income -- would make citizens feel better than more progressive taxation, where wealthier people are taxed at higher rates. Indeed, the U.S. has been diminishing progressivity of its tax structure for decades.

But a new study comparing 54 nations found that flattening the tax risks flattening social wellbeing as well. "The more progressive the tax policy is, the happier the citizens are," says University of Virginia psychologist Shigehiro Oishi, summarizing the findings, which will be published in an upcoming issue of Psychological Science, a journal of the Association for Psychological Science. Oishi conducted the study with Ulrich Schimmack of the University of Toronto at Mississauga and Ed Diener, also at University of Illinois and the Gallup Organization.
I'm quite willing to believe that less income inequality does create a happier society. But studying happiness is very tricky and finding a correlation between the progression of taxes and reported levels of happiness is not sufficient to prove causality.

Countries with more progressive taxes may also have other values which contribute to greater levels of expressed happiness, such as more social mobility, better access to health care and higher education. How the tax system is organized may affect happiness directly and/or it might stand as a proxy for all those other goodies which greater governmental funding offers citizens.

On flat taxes (as a fixed percentage of all income levels): Flat taxes have major problems, not easily apparent to those who like the simplicity of the system. The biggest of these is that making people give up the same percentage of their earnings in taxes does NOT make the sacrifices equal.

This is because the value or utility of every dollar is much greater for a poor person than a rich one. Ideally, such a system is supposed to reflect "equal" sacrifices, but in practice the sacrifices would be much greater for those with lower incomes. Put another way, a poor tax-payer might have to choose between paying those taxes or eating enough to stay healthy. A rich tax-payer would not face similar harsh choices.

The usual remedy for this problem is not to tax very low incomes. But once remedies like that are introduced, we are back in a system with a certain amount of progression.

I believe that progressive taxes are fair taxes, myself.
Added to clarify: The above is not meant as a criticism of the possibility that progressive taxes (either directly or through what they allow governments to finance)
indeed make people happier. I just wanted to point out that proving that with studies like this is very tricky to do.