Monday, April 15, 2013

Taxes and Happiness

A source of continuing amusement for me is the way some in academia attempt to reinforce their beliefs.  Witness something in the Wonkblog this morning.   I am not sure why this 2011 study (using 2007 data)  is especially timely (it was released by the Association of Psychological Science in September 2011) except that it is the day before we are all required to send in our tax forms to the IRS.   The lead author of the study commented "The more progressive the tax policy is, the happier the citizens are."   Pardon me but that result is just BS.  The research is based on a study of 54 nations using data on perceptions of "well being" on a scale of 1-10. Those perceptions are defined as whether the 54,000+ respondents thought they enjoyed positive daily experiences (like people smiling at you or having a nice restaurant meal) (I am not making this up!).   The definition of the progressive nature of the tax system was simply the difference between highest and lowest rates controlled for family size and other factors.

The US ranks with Ireland with pretty happy people but a not very progressive tax system. (At least according to the "study").  But the author also finds that more government spending does not correlate to happiness and the lead author who is from the University of Virginia comments that result is "kind of weird."   This was published in a journal of the Association of Psychological Science.  I wonder what the definition of scientific rigor is to get into this journal.   I am sure chi-squares are involved but not much careful thought.

So let's start with the simple on this "study" - Are there cultural differences between and among the 54 nations surveyed in the definition of happiness?   Do those definitions change over time?  If I were really unkind and more politically correct, I might comment that  the definition of "happy" seems to be based on "Euro-centric" values - look at who is on top and who is on bottom.   But, of course, I am not politically correct.  

Even if we could construct a reliable indicator of happiness over all the countries in the study also look the definition of  the other variable,progressivity, is nonsense.    The major variable in the study is based on the difference between the highest and lowest rates but I wonder how things like tariffs or consumption taxes are included.    Many of the nations at the top use a VAT (value added tax) which may or may not have progressive elements in it.    As important the study does not seem to account for compliance/leakage in the system.   Many of the countries on the list have tremendous levels of non-compliance in their systems.   Finally there is the element of whether the study would change over time as nations (and a lot of the ones at the top have restructured their tax systems over the last decade) - would nations that reduced the level of differences between the highest and lowest rates (to improve efficiency of their tax system and reduce compliance costs) be less happy as a result?

Adam Smith, lacking the benefit of the Gallup Survey or the chase of modern academics (publish or perish), postulated that a good tax system has four elements - ability to pay; timeliness; certain not arbitrary; and efficient.   Without all this psychobabble that might make people a lot more happy.

No comments: