What the Science of Happiness Can Tell Us About Taxes10 Jul 2013
Over the past few decades, a remarkable field of inquiry that seeks to understand the relation between income and happiness has developed in economics and psychology departments. It has revealed that happiness and income are in fact correlated and that the fiscal policies a country enacts can have a considerable effect on the happiness and wellbeing of its citizens.
In light of the recent and widely reported 30% increase in the suicide rate for Americans ages 35 to 54, which occurred over the backdrop of stagnating wages and widening inequality caused by the Great Recession, the findings of this new field are especially germane. What’s more, if its findings are right, we ought to enact more liberal fiscal policies.
According to a 2010 study by Daniel Kahneman and Angus Deaton, two Princeton professors, which draws on data from over 450,000 participants, there are two aspects of happiness with which family annual income correlates. There is emotional wellbeing, which refers to “the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant,” and there is also life evaluation, which refers to the thoughts that one has when she thinks about her life as a whole. The former aspect of happiness captures our day-to-day experience, whereas the latter aspect captures how satisfied we are with our lives more generally.
Perhaps not surprisingly, Kahneman and Deaton found that both emotional wellbeing and life evaluation correlate positively with family annual income. But when income exceeds approximately $75,000 a year, emotional wellbeing plateaus. Thus the old adage that money can’t buy happiness is true if you make more than $75,000, but false otherwise.
Life evaluation, on the other hand, continues to correlate logarithmically with income beyond $75,000. What this means is that a doubling of any two incomes, wherever they fall on the spectrum, will produce equivalent gains in life evaluation.
Moreover, “in the context of income, a $100 raise does not have the same significance for a financial services executive as for an individual earning the minimum wage, but a doubling of their respective incomes might have a similar impact on both.”
If the findings of Kahneman and Deaton are true, then when income flows uninhibitedly to the top, we experience wasted utility, in the sense that a large portion of the money in our economy is distributed in such a way that it does not improve the quality of anyone’s life. Through a more progressive tax system, or through limitations on executive pay (like tethering the highest paid employee’s salary to a multiple of the lowest paid employee’s salary), this money could be used to substantially enhance vast numbers of lives of those at the middle and bottom of the spectrum, without at all lessening the emotional wellbeing and only slightly lessening the life evaluations of few at the very top.
For each American family that earns more than $10 million a year, for instance, there is roughly $9.925 million that does not produce greater emotional wellbeing for anyone, and although this extra $9 million will produce a higher score in life evaluation, such a family could sustain a very high score even if more than a couple million dollars of income were distributed elsewhere. Meanwhile, if 1,000 people near the bottom of the spectrum, making only $15,000, say, were to receive a pay raise of $2,000 more each year from that $2 million, then their quality of life would measurably and significantly improve.
In order to bend the curve of the suicide rate back down, I believe we ought to distribute more money at the top downward in some way, given the huge gains of total happiness and quality of life that would result — this would make more people’s lives worth living and make our country a better place. But many people, I believe, will disagree with me on various grounds.
One objection to the program I advocate is that the policies involved would damage the economy. If Congress passes legislation that increases the minimum wage or that limits executive pay by tethering the highest paid employee’s salary to a multiple of the lowest paid employee’s salary, for example, then the costs of running a business would increase and many employees would have to be terminated.
I believe that this can be a sound way of thinking under many market conditions. But the conditions of today’s market do not support this reasoning. There are, of course, scales to be balanced here. We want it to be easy for entrepreneurs to start businesses and we want there to be incentives for people to rise through the ranks and become more productive. At the same time, we want people to be able to rise through the ranks and we do not want those at the bottom and middle to live in perpetual penury. The fact that CEOs of America’s largest companies make 354 times more than the average American worker and the fact that the bottom 80% of Americans hold only 7% of the country’s wealth — these facts tell us that the scales are unbalanced and that our CEOs could take home less of the pie so that there would be more for the rest of us. In 1980, for comparison, CEO pay was only 42 times that of the average worker.
Another objection to my proposal steams from the notion that it would probably require raising taxes on our top earners. If we impose higher taxes on top earners or limitations on executive pay, many people think, we would penalize productivity and hence damage the economy. The argument is that businesspeople will not be motivated to work harder and entrepreneurs will not be motivated to start new businesses because, if taxes are higher, their payoffs will be less. But this way of thinking is not borne out by history. Our economy grew during the 1950s when the marginal tax rate was in some cases 91% and it continued to grow through the ‘60s and ‘70s when the marginal rate was 70%. What’s more, even “under those burdensome rates,” writes Warren Buffett in an Op-Ed article, “both employment and gross domestic product increased at a rapid clip.”
More often than not I find the above arguments serve more to mask monetary selfishness than they do to solve the social and economic problems at hand. If Congress passes legislation that directs some income from top earners downward, the economy would not suffer and the quality of many American lives would improve.
If the findings of Kahneman and Deaton are right, then the fiscal policies we enact affect on our own happiness and we ought to pass legislation that produces a society that is both more equitable and more happy. The recent spike in the suicide rate ought to remind us of what’s really at stake.