May 21, 2012
An article by CGD senior fellow Charles Kenny was featured on Bloomberg Businessweek.
From the article:
As the presidential campaign kicks off, both Mitt Romney and Barack Obama are looking for popular ways to reduce a still-ballooning deficit. However sensible, proposing deep cuts in Medicare or defense spending has little political appeal. Raising the income tax rate—at least on anyone earning less than a million a year—appears equally unpalatable. There is, however, at least one revenue-generating tool that’s simple, fair, and very efficient, at least in theory: a tax on happiness. Remember the famous (if elusive) “Laffer curve,” which suggests that if you raise income taxes, people won’t work as hard, so tax revenues will fall as a result? The idea of optimal tax policy is to find taxes that don’t put people off earning money. Traditional theory has a solution to this problem: Tax people based on their innate abilities to earn money, rather than on what they actually earn, which is based on some combination of ability and effort. If you tax people on the basis of productive characteristics they can’t change, you won’t reduce their incentive to work. In recent years, economists have devised novel policy prescriptions using this theory of taxation. In a paper that he co-authored, “The Optimal Taxation of Height,” Gregory Mankiw, a Harvard economist who is former Chairman of the Council of Economic Advisors and current adviser to candidate Romney, argued (PDF) that we that should tax tall people. This is on the grounds that the tall earn more, at least in part because they are loftier. Other things being equal, an individual who is six feet tall can expect to earn $5,525 more per year than someone who merely reaches five feet, five inches. Presumably they earn more, Mankiw suggests, because the height-advantaged are innately more productive. As a result, according to theory, a tall person making $50,000 should pay about $4,500 more in taxes than a short person making the same income. Ludicrous, right? Well, ludicrous only because it’s an insufficiently robust application of the theory. The people you ought to be taxing are not the people who need extra leg room, but those who are smiling all the time. They are born happy, and it makes them rich. There are all sorts of reasons to conclude that people who report themselves happy earn more as a result. A recent review in the Psychological Bulletin found that happy job-seekers are more likely to find employment and that happy employees go on to be considerably more satisfied with their jobs, which means they’re also less likely to call in sick or quit. In turn, that’s probably why economist Andrew Oswald from Warwick University estimates that happy workers are 12 percent more productive. Brookings Institution researcher Carol Graham found that Russians who reported themselves happier in 1995 went on to earn much more in 2000 than people who were unhappy at the start of the study. Most researchers have assumed that lucre brings laughter, rather than the other way around. But the evidence suggests that the power of happiness to increase incomes is greater than the impact of money on contentment. A recent study by Ada Ferrer-i-Carbonell and Paul Frijters of Holland’s Tinbergen Institute followed 7,000 Germans over time and looked at changes in both their reported happiness and income levels. The results suggested that it would take an 8,000-fold increase in income to raise the average person’s reported happiness by just one point on a 10-point scale. So is smiling more the secret to success? It doesn’t hurt. The sad fact is, however, that most variation in happiness within countries at a given time is hard-wired. In other words, you are born happy—or not. Based on studies of twins, professors David Lykken and Auke Tellegen of the University of Minnesota conclude that 80 percent of the differences in happiness-poll answers offered by respondents is due to permanent features of personal character. All of which brings us back to optimal tax policy. People are born happy, which makes them more productive. Theoretically, then, it makes sense to tax that happiness. The higher you are on a 10-point scale, from depths of despair at zero to ecstasy at 10, the more you pay. Don’t worry that paying higher taxes will make happy people miserable: Not only is the link from income to happiness very weak in general, but people who say they are happy also care less about money. A study by Martin Binder at the Max Planck Institute followed a group of British respondents over time and found that the higher people score on the happiness scale, the less important income is to their happiness. A happy tax could transfer money from those who get the least joy out of it to those who get the most.