I've been reading a book recently, titled simply "Happiness: Lessons from a New Science", by economist Richard Layard (Penquin Press, NY 2005). Interestingly, it makes an argument for viewing taxation in a different way from the way normally seen by tax policy economic gurus, who talk about the distortive effects of taxes as a given. As he notes in the preface, today "economics equates changes in the happiness of a society with changes in its purchasing power--or roughly so. ...[but] the new psychology of happiness makes it possible to construct an alternative view, based on evidence rather than assertion. " Layard goes on to make the case for viewing taxation as a positive force that helps societies to avoid the rat race of longer hours, harder work, higher incomes and no greater happiness.
The eighteenth century philosopher Jeremy Bentham, he reminds us, was well aware that societies should be judged by whether their citizens are happy or not. Both public policies and private behavior should be judged by whether they produce the greatest happiness. And as he also notes, this "Greatest Happiness principle" is "fundamentally egalitarian: everyone should be happy, and no one's happiness is more important than any other's. Yet over time, this principle was replaced by religious zeal and then rampant individualismt based on self-realization.
The question Layard addresses is why, then, are people in the UK, US or Japan not happier today than they were fifty years ago, since average incomes have more than doubled, permitting more food, better clothing and housing, and more comfort all around. The answer, he suggests, is that happiness requires a concept of the common good to which we all contribute--the reinvigoration of the Happiness principle as a kind of "Golden Rule" of caring for others as much as we care for ourselves. People engage in self-defeating races for status--defeating, because if one does better in a status race, someone else must do worse. And they want security and trust, both of which depend on a social organization that permits people to interrelate.
Layard notes that "in any given society richer people are substantially happier than poorer people." Id. at 30. People compare their income with what other people have and what they are used to. So if their own incomes increase compared to others, they tend to be happier. But when average incomes go up, people are no happier. Therefore, Layard says, these two forces make it difficult for economic growth to improve human happiness. "The first person to get a BMW feels really good. But when everybody has one, they may all feel much the same as when they all had Fords." at 43. In fat, the benefit from extra income is less the richer the person, so if money is transferred from a rich person to a poorer one, the poorer person gains more happiness than the rich person loses. "Thus a country will have a higher level of average happiness the more equally its income is distributed." Id. at 52. Not surprisingly, "[t]he most classless socieites in the world are those in Scandinavia, where taxes are high, basic education is good and there is a culture of mutual respect." Id. at 52-53. Happiness ends up being a complex state of mind affected by family relationships, finances, work, community and friends, health, personal freedom and personal values. Id. at 63.
But Western societies seem to be off track on happiness. Here's Layard's explanation.
"The two dominant ideas in the weast are now Charles Darwin's 'natural selection' and Adam Smith's 'invisible hand.' From Darwin's theory of evolution many people now conclude that to survive you have to be selfish and to look after No. 1: if you don't you'll only get taken for a ride. From Adam Smith they also learn, conveniently, that even if everyone is completely selfish, things will actually turn out for the best: free contracts between independent agents will produce the greatest possible happiness. These ideas need a direct challenge. ... First, I challenge social Darwinism and show how people can cooperate in the pursuit of a common good. Next, I propose 'the greatest happiness' as our concept of the common good. And then I show how Smithian laissez-faire (even as modified by modern economics) is not sufficient to achieve that objective." Id. at 92-93.
Where does tax policy come in? Layard notes that the race for status creates massive problems, since the total amount of status is fixed. It's like having someone stand in front of you. Your view is obscured and you stand too. Soon everyone is standing and no one's view is better than it was when all were seated. Similarly, people tend to work to hard to raise their relative incomes, lowering the relative incomes of others. Layard's proposal--tax provides the cure for this kind of pollution. It forces people to note external costs they would otherwise ignore. So taxation that causes some people to work less is not distorting but in fact corrective (discouraging overwork that is undesirable). Similarly, our habituation to income leads to considering each higher level of income a necessity. Layard's proposal--tax provides a remedy for this kind of habituation, as it does for smoking, drinking and other harmful habits. He explains it in this way:
"When economists think about taxation, they normally assume that all taxes on income or spending are distorting. This means that [one dollar] collected in tax actually hurts more than the simple loss of [one dollar]--the difference being called the 'excess burden' of the tax. This makes taxes harder to justify. However, if the tax is corrective rather than distorting, the excess burden is negative. So the case for public expenditure becomes stronger and so does the case for taxation."
* * * "Taxes are clearly performing some useful function, beyond that of raising money to pay for public expenditure: they are holding us back from an even more fevered way of life." Id. at 155
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