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.
Cynics and policy Luddites might carp that, if you tax people on their answers to happiness questionnaires, everyone will pretend to be unhappy. Beyond the fact that happy people see themselves as more trustworthy (surely they wouldn’t stoop so low), there are more reliable ways to measure happiness. People who say they are happy smile more and have higher levels of dopamine and lower levels of the adrenal hormone cortisol in their bloodstream. A random blood test could determine if people are telling the truth about their contentment. Think of it as the happy-tax version of an IRS audit—and surely less painful.
An additional potential benefit of a happiness tax is that if governments want to increase revenues, a simple approach would be to make people happier. The disappointment here is that just as the government has proven pretty bad at lifting income-growth rates, we aren’t too clear on how to raise average reported happiness, either. Lykken and Tellegen (of the twin studies) estimate that less than 3 percent of the variation across people in happiness scores is explained by a raft of factors, from education, income, and marital status to religious commitment. So it’s hard to know what policy levers would work to significantly increase happiness scores. The role for government in certain of these areas might be controversial. Even if religious observance is associated with happiness, for example, strict constructionists and judicial activists alike might chafe at the idea of a legal requirement to attend church on Sunday.
A further practical problem: While the happy tax should be Mankiw-approved (at least in theory), it may face opposition from less-principled Republicans. That’s because the right isn’t just richer on average; its happier, too. A 2008 Pew poll reported that fully 37 percent of Republicans were very happy, compared to only 25 percent of Democrats. It also happens that, as Joseph Fried reports in his book on the differences between supporters of the two major parties, Democrats are also three-quarters of an inch shorter, suggesting that Mankiw’s proposal could also be in trouble with Republicans, even if he ends up sitting in the Old Executive Office building next to the White House. Whether you tax size, smiles, or salaries, it’s likely the Grand Old Party will oppose it.
Professor Mankiw was not entirely serious in his proposal. He used his paper on taxing height to make a point about weaknesses in the economic theory around optimal taxation. A happiness tax might suffer from those same weaknesses. But for aficionados of benefit-cost analyses and other true believers in maximizing the utility of the greatest number through government policy, the happiness tax should be a slam dunk.