What happiness research means for optimal taxation

by on July 5, 2007 at 6:27 am in Economics | Permalink

Not that much.  Here is some neglected wisdom from David Weisbach:

This simple intuition [about status] does not tell us anything about the likely effects of status on the tax rate schedule.  For example, increasing progressivity would move everyone closer together.  This might decrease status competition, because the gains from competition are smaller – it would be harder to separate yourself from the group.  On the other hand, it might increase status competition.  If you are closer to beating someone in a status race, you might try harder.  Thus, we can imagine status considerations leading to either a more progressive tax system or a less progressive tax system.

The paper basically combines the substitution effect and the threshold or portfolio effect to argue we should not be too quick to infer particular policy conclusions from considerations of relative status. 

Furthermore a consumption tax doesn’t necessarily limit status games through consumption (e.g., buying a bigger yacht), though it may postpone them.  A consumption tax encourages savings, which ends up converted into future consumption.  The status/consumption game will be all the more intense in the future.  The only way to lower the total amount of these status games is to…umm…lower real gdp.  Which is not a good idea.

1 dsquared July 5, 2007 at 8:16 am

[For example, increasing progressivity would move everyone closer together. This might decrease status competition, because the gains from competition are smaller – it would be harder to separate yourself from the group. On the other hand, it might increase status competition. If you are closer to beating someone in a status race, you might try harder. ]

This would be an interesting piece of theorising if the happiness research literature had never thought to compare countries with equal income and wealth distributions versus countries with unequal distributions. Or it might be interesting if this comparison had been carried out and the results were ambiguous. Since the empirical correlation of equality and happiness is like one of the main reasons why anyone cares about the happiness research literature in the first place, I think perhaps not so much.

2 michael vassar July 5, 2007 at 10:17 am

The goal should be to direct status-seeking towards the most socially beneficial activities possible; size of donations to the Gates Foundation, for instance, or quality of symphonies composed and added to the public domain.
In Rome, people built aqueducts as displays of wealth. In Egypt they built pyramids. The former is closer to what we want.

If diamonds are taxed so as to double their purchase price, but what people want is a $5000 diamond as a symbol of status, they can still buy one but much of their expenditure goes to the federal government offsetting some of the deficit (by default) rather than to De Beers, which isn’t even a public company. That’s a win.

3 TGGP July 5, 2007 at 8:20 pm

uch of their expenditure goes to the federal government offsetting some of the deficit (by default) rather than to De Beers, which isn’t even a public company. That’s a win.
I have come to the conclusion that, given the current activities of government, giving it more money is a LOSS. De Beers is not waging a war in Iraq, or on drugs, or doing countless other things the government does. Also, given the problems in corporate governance that might be the result of corporate regulations but also might not, I suspect that private companies would put the money to better use than public ones.

4 鑽石 April 2, 2008 at 9:00 pm

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