The problem with using tax cuts to improve happiness

Talk of tax reform has dominated the news cycle for much of the last month. With Republicans in control of the House, Senate, and Presidency they have been able to push through some significant tax cuts.

Republicans have asserted that the tax cuts will pay for themselves through increased growth, but I haven’t seen a single independent analysis that says that any economic growth will pay for more than about 1/3 of the tax cuts.

The discussion around tax reform seems to center around one basic theme – what’s the best way to grow the economy and increase wealth and income? There are wrinkles to this discussion, of course. Should everybody’s wealth be increased or should most wealth flow to those people who take the risks and/or provide the most value? Is it fair to have the top 1% control the majority of the assets? Who deserves more help – middle-class families with children or lower-class single workers?

These are all valid questions, and differences in ideology on how the world should work leads to differences in opinion on how taxation should work.

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Using tax cuts to improve happiness

Politicians, in general, seek to maximize their chances of being elected and then reelected. The optimist would say that maximizing the chances of election is vital because a politician can’t make positive changes if the politician isn’t in office. The cynic will say that ALL a politician cares about is being in office.

Either way, politicians know that they maximize their chances of being reelected by keeping their constituents happy.

This is where a huge assumption happens – people believe that money leads to happiness.

Most of us in the personal finance blogosphere know this isn’t the case, and I’ve written about this in the past. All the evidence shows that, past a certain point, more money does not equal more happiness.

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Happiness is weakly correlated with wealth

If people believe that having more money will make them happy, then the way for a politician to get elected is to promise to give more money to people. The demographic you target with this message is different depending on what side of the politician spectrum you’re on. If you’re a Democrat you promise greater social services to people on the less wealthy end of the spectrum, and if you’re a Republican you promise lower taxes to people on the more wealthy end of the spectrum.

Either way, you’re following the basic formula of

Make a change to social policy -> More money for constituents -> Happier constituents -> Get reelected

But what if we just cut out the middle step and instead used this formula

Make a change to social policy  -> Happier constituents -> Get reelected

The idea here is that there are things that pretty much always result in more or less social happiness. For example, pollution decreases happiness. Clean air and clean water increase happiness. War decreases happiness while peace increases happiness. Of course there are people who aren’t bothered by pollution, or who actually enjoy war, but as a whole, the rules above hold for society at large.

Similarly, higher levels of fitness increase happiness. Social interaction and greater levels of social cohesion increase happiness across society. This is all pretty basic, non-controversial stuff.

Given that there are very clearly a number of things that are basically always a positive or a negative for society as a whole, it seems obvious to me that rather than hoping to indirectly improve happiness through tax policy we should use public policy to increase happiness directly. That is, we should build parks, improve public transportation, encourage biking, make education more affordable, and find ways to provide low-cost or no-cost health care to more people (especially children).

Perhaps unsurprisingly, these are all ideas supported by the counties which routinely top the lists of the happiest counties in the world. The list of happiest counties is dominated by socialist counties. The 10 top countries are, in order:

  • Norway
  • Denmark*
  • Iceland
  • Switzerland*
  • Finland
  • Netherlands*
  • Canada*
  • New Zealand*
  • Australia*
  • Sweden*

Having been to 7 of the top 10 counties (the ones marked with a *) I can attest to life being pretty sweet in all of them. For some reason “socialism” is a dirty word in the US. I’m not sure how or why this has happened, but given the large number of socialized services we already enjoy (roads, military, police, fire fighting, air traffic control, food safety services, national parks, etc.) it’s clearly more of a perception issue than an actual issue with socialized services.

Conclusion

Ultimately, I believe that many of our problems boil down to the incorrect assumption that more money will lead to more happiness. This is especially untrue when much (or most) of the benefits of increased prosperity flows to those people who already have plenty of money.

One of my favorite quotes on this topic comes from Arnold Schwarzenegger: “Money doesn’t make you happy. I now have $50 million but I was just as happy when I had $48 million.” Study after study has found that this is true – everybody thinks that if they had just a little more money they’d be happier, but past a certain level (which is around $200k/year) this just isn’t true. You quickly adapt to higher levels of wealth and any increase in happiness is fleeting. A tax policy that turns a billionaire into a decabillionaire isn’t going to improve society’s happiness.

The problem is that virtually everybody still believes that if they had more money they’d be happier. As a result, we continue to vote for politicians that promise us more money, more economic growth, and tax cuts, all in the hopes that these policies will make us happy.

If the money that will be spent on lower taxes were to go to paying down the national debt and funding health care, parks, education, and other social services, we’d get much more happiness for each dollar spent.

 

What are your thoughts on using governmental policies to maximize wealth vs. maximizing happiness? What are some policies and/or spending priorities that you think would provide huge increases in social happiness?

 

2 thoughts on “The problem with using tax cuts to improve happiness

  1. I like your analogy and it’s certainly true that there is no correlation between money and happiness. But honestly, I’m not sure that the happiness equation ever pops into the minds of the few who control the many, history tells us that it never has and I believe that it never will. The Greeks said it right many years ago, consolidation of power does whatever it can to stay in power and the control of money is key to that centralization of power, along with control of the military, police, information, education, elections, etc., etc. Let’s face it, money is so cheap right now for corporations, practical free, coupled with historic low labor costs, if corporations wanted to increase productivity or if they wanted to move operations back to the US, there hasn’t been a better time in decades. So, at risk of sounding too conspiracy-ish, there’s got to be a game plan we’re just not seeing, time will tell.

    1. I think you’re right that very little thought is put into improving happiness. The reality is that, by and large, people don’t seem to understand happiness. They don’t understand what makes themselves happy and what makes other people happy. So, to keep things simple, people just reduce the problem to a simple, “give people money” solution. The economist would say that giving people money allows them to purchase the goods and services that maximize that individual person’s happiness. The problem with that solution is that it assumes that: 1. you can purchase the things that make you happy, and 2. that individuals can purchase those things. The reality, as I discussed, is that the things that actually do make us happy are things like peace, public parks, the rule of law, and other things that can’t be purchased and must instead be put into place by government.

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