8/20/2012 2:15 PM ET|
Rx for happiness: Tax the rich?
A study of 54 nations found a connection between progressive taxation and citizens' happiness. Good news for those who favor a tax system where the wealthy pay more.
Discussions about taxes tend to cause otherwise reasonable people to go from zero to apoplexy in 3.5 seconds. So I groaned inwardly when my editor suggested I write about a study of 54 countries showing that the more progressive a nation's tax system, the happier its citizens are.
Oh, great. I thought. I could see the headline: Soak the rich and you'll feel better.
Then I read the study, which also concluded happiness was not enhanced by higher government spending. In fact, bigger government outlays were associated with less happiness.
Which made me feel better about this assignment. At least the study was an equal opportunity offender.
The study, which was published in the Association for Psychological Science's journal Psychological Science, was conducted by psychologist Shigehiro Oishi of the University of Virginia with Ulrich Schimmack of the University of Toronto at Mississauga and Ed Diener of the University of Illinois.
Oishi's previous study for the journal noted that income inequality was associated with unhappiness. The wider the gap between people's own fortunes and those of the better-off, he found, the more likely people were to feel that others were less fair and less trustworthy, and to experience a diminished sense of general well-being.
The solution, he posited then, might be a more progressive tax system, which typically reduces income inequality.
Some background we should cover before going further:
- A progressive tax system is one where the tax rate increases as income goes up. The idea is that the more money people earn, the more disposable income they have after covering the basic costs of life. Thus they can afford to pay more taxes. The U.S. has a progressive income tax system, with federal income tax rates that currently range from 15% to 35%. (Our top income tax rate has been as high as 91% in the past.)
- A regressive tax system is one where the tax burden increases as people's ability to pay it declines. Sales taxes are often cited as a regressive tax, since they take a bigger share of a low-income household's disposable income.
- A proportionate, or flat, tax system taxes everyone the same amount. One example is Medicare taxes: Everyone who works pays 1.45% of his or her earnings into the Medicare system. A few countries have flat-tax systems, including Bulgaria, the Czech Republic, Iraq, Latvia, Russia and Saudi Arabia. Some Republican presidential candidates (notably Steve Forbes and more recently Texas Gov. Rick Perry and Herman Cain) have touted flat-tax systems as a way to make the convoluted U.S. tax system simpler.
OK, end of tutorial.
The researchers started with a 2007 Gallup poll that measured national happiness, selecting 54 countries and nearly 60,000 individual respondents to study.
The poll measured happiness in three ways. First, respondents were asked to rate their current life on a scale ranging from 0 (worst possible life) to 10 (best possible life). Then, interviewers asked 10 questions meant to gauge the positivity of daily experiences:
- Did you smile or laugh a lot yesterday?
- Were you proud of something you did yesterday?
- Did you learn or do something interesting yesterday?
- Did you feel enjoyment during a lot of the day yesterday?
- Did you feel love during a lot of the day yesterday?
- Would you like to have more days just like yesterday?
- Did you feel well-rested yesterday?
- Were you treated with respect all day yesterday?
- Were you able to choose how you spent your time all day yesterday?
- Did you have good tasting food to eat yesterday?
The Gallup interviewers then asked about negative daily experiences, asking respondents whether they felt worry, sadness, depression, boredom, anger or shame "during a lot of the day yesterday."
The researchers averaged the responses to the Gallup poll to create a score for each nation studied and then averaged how satisfied each nation's respondents were with seven "public and common goods": public transportation, availability of quality health care, availability of good affordable housing, educational system or the schools, roads and highways, air quality and water quality.
They compared all that data with how progressive each country's tax system is, measured in part by the difference between the lowest and highest income tax brackets. The researchers also took into account effective taxation, which adds in social security taxes and backs out tax benefits.
Sweden has the most progressive tax system of the countries studied, with the biggest difference between highest and lowest tax rates. At the other end were the flat-tax countries. The U.S. and Canada were on the lower end of the progressive scale.
What the researchers found, Oishi said, was a strong relationship between a tax system's degree of progressiveness and personal happiness, even after they controlled for other factors that affect well-being. On the national level, those factors include total wealth and income equality. On the personal level, they include income and marital status.
The study concluded that "if two nations were equally wealthy and income distribution was the same, people living in the nation with a more progressive taxation policy were more satisfied with their lives in general and had more positive daily experience and fewer negative daily experiences than people living in the nation with the less progressive taxation policy."
There were various outliers. People in flat-tax Saudi Arabia were about as happy as people in Israel, which has one of the more progressive systems. On the other end, folks in Latvia, another flat-tax country, were about as bummed as those in China, which also has a very progressive tax system.
But overall, the relationship between more progressive tax systems and more happiness was pronounced, the researchers said.
It's important to note that the study isn't saying flat out that more progressive tax systems cause more happiness. As in other studies of this type, the researchers found a relationship but can't say definitely why that relationship may exist.
"Of course we statistically controlled for the wealth of the nation, or income inequality . . . (but) there are many potential third variables/alternative explanations, as we recognize in the paper," Oishi told me in an email.
Still, people living in countries with more progressive taxation tended to be happier with the "public and common goods" that their taxes paid for.
"We showed that satisfaction with public goods seems to be one reason for the association," Oishi said.
Two factors weren't linked with greater happiness: Tax rates for the average worker and government spending as a percentage of economic output.
"Our findings therefore do not provide support for the simple 'big government' idea that the larger a role the government plays, the better the quality of life becomes," the researchers wrote. "Indeed, government spending as a percentage of GDP was associated with lower levels of subjective well-being."
So clearly, all we need to do is combine the two ends of the political spectrum: the Tea Party's mania for smaller government plus Occupy Wall Street's obsession with soaking the rich. Then everybody will be happier, right?
Riiiight . . .
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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