Occupy the Tax Code

There is a substantial literature in social psychology relating both income and income inequality to happiness. In summary:

• Relative income is important. In all societies, there is a positive association between personal income and happiness. That is, the rich are happier than the poor.
• When comparing relatively affluent countries, the most important variable affecting happiness at the societal level is income inequality. The greater the difference in income between the rich and the poor, the less happy the people in that society are.

In view of the importance of inequality and its relevance to the Occupy Movement, I'm going to post a series of articles summarizing this research and its implications, probably beginning next week. However, the current post is about a new study looking at one of the ways to reduce inequality—progressive taxation.

First, let's be clear about terms.

• A progressive tax system is one in which as income goes up, the tax rate increases. Our income taxes are, in theory, progressive. The rate varies from 15% to 35%. However, the fact that capital gains are taxed at a lower rate than other income and the existence of various loopholes make the system less progressive than it otherwise would be.
• A regressive tax is one in which the poor pay a higher tax rate than the rich. Sales taxes are regressive, since low income people spend a higher percentage of their income.
• A flat tax is one in which everyone pays the same rate. Everyone enrolled in Medicare pays the same rate (1.45%) regardless of their income.

One way to reduce income inequality is through progressive taxation. The rich are taxed at a higher rate, and some of that money is redistributed either in the form of direct payments to the poor (welfare), or through public goods such as education, health care, or public transportation. Oishi, Schimmack and Diener looked at the effect that progressive taxation has on the general level of happiness among countries. Since they were looking only at progressive taxation, they statistically eliminated the effects of average income, income inequality, the average tax rate, and government spending. (In case you are wondering, average income is positively related to happiness, inequality is negatively related, and both the average tax rate and government spending are mostly unrelated.)

Happiness data were collected from 54 countries by the 2007 Gallup World Poll. It was measured in three ways. Global life evaluation asked people to rate their life on a 10-point scale from worst to best possible life. Positive life experiences refers to the average answer to ten questions about yesterday, such as whether the participants smiled or laughed a lot, or were treated with respect. Negative life experiences is the average answer to seven questions about whether they experienced negative emotions, such as sadness or anger, yesterday. The results were fairly consistent regardless of which way happiness was measured.

Degree of progressive taxation was defined at the difference between the highest and lowest tax rates in the country. (They calculated some other more complex indexes of progressivity, but the results were the same.) As predicted, the more progressive the tax system, the greater the happiness of citizens. Depending on which measure of happiness is used, progressivity accounted for between 24% and 52% of the variation in happiness. Here is a chart showing the scatterplot with the countries labeled.

You will notice that the United States has one of the less progressive tax codes among the 54 countries. Our happiness is a bit higher than would be predicted on the basis of the overall data (as indicated by the best fit straight line). That's probably due to our higher per capita income.

The authors were also interested in why progressive taxation was related to happiness. They predicted that the effect was due to people's satisfaction with the “public and common goods” progressive taxation allows the country to provide for its citizens. Participants were asked to rate their satisfaction with seven public goods: public transportation, health care, education, housing, roads and highways, air quality, and water quality. As expected, the relationship between progressive taxation and happiness was mediated by satisfaction with public goods. That is, progressivity predicts satisfaction with public goods, and satisfaction with public goods predicts happiness. (See my earlier post on IQ and conservatism for an explanation of how mediational hypotheses are tested.)

The authors did many other analyses, too numerous to mention here. One that I found interesting was that the positive relationship between personal income and happiness was greater in countries with less progressive tax systems. That is, in a country with a less progressive tax system, like the U. S., the rich are quite a bit happier than the poor. If the tax code is more progressive, the difference in happiness between the rich and poor is not as great.

It is important to remember that these data are correlational, so we can't say that progressive taxation causes happiness. The authors note that it is possible that some variable they did not measure, such as the general level of cohesion in the society, is the cause of both progressive taxation and happiness.

This is the kind of study that I want to shout about from the rooftops. Unfortunately, the corporate media almost never report studies like this. Maybe they think they're too complicated. A more likely explanation is that the results don't support the political agenda of their owners. (Here's one exception I found. The author adopts a skeptical tone.)

All four of the remaining presidential candidates in the Elephant Party have submitted tax proposals that call for making the tax code less progressive than it is now by either replacing our current income tax system with one that is more flat, by reducing or eliminating the tax on capital gains, or both. If President Obama sticks with his plan to repeal the Bush tax cuts for people making $250,000 or more, that would make our tax code more progressive.