The Problem of The Income Tax Within Political Science

Political Science is an ever-changing field of study with key policy issues almost never staying constant over the years. One issue that has broken the trend and been debated since the inception of the idea is the income tax. Nearly a century after many major nations first adopted the concept, it is still as divisive if not more so an issue then it was in the past. Some ideologies believe in higher taxes to provide a strong welfare system, others prefer low taxes with only essential welfare systems, and still others want to abolish it all together calling it “theft.”

At the end of 2017, President Trump and congressional Republicans in the US passed a sweeping tax cut that divided public opinion sharply. In other areas of the developed world, taxes have crept up to over 50% and remained there for many years. Others have chosen to attract investment by never adopting an income tax. Many politicians on the political right say lower taxes lead to more spending and thus more growth while politicians on the left believe higher taxes especially on the rich can lead to a fairer system that allows more people to succeed and lead better lives with less income and wealth inequality. This seemingly endless debate continues to impact lives and so the need for objective research continues.

When one looks to the end goal of politics or even society in general, many will argue that leading a happy life is the most important goal that people should work to secure. While others may answer freedom or rights, sustained happiness is often impossible without the security of those concepts. Therefore, if it is accepted that happiness is the most important concept that a country should aim to achieve, it is also important to examine whether the happiest nations have a similar pattern of taxation and subsequent income inequality. Thus, the correlation of income tax rates and income inequality to happiness (as defined by the World Happiness Index) will be the focus of this research paper more specifically “What correlation (if any) do income taxes and wealth inequality have in relation to happiness?”

Literature Review

The importance of the concept of happiness and the significance of income tax rates may lead one to believe that a considerable amount of research has been conducted on the relationship between the two, however this in fact is not true. Much of the research done on the topic contains the relationship as a subfactor or simply a note in the larger scheme of happiness or taxation studies. Studies that do directly examine the relationship are quite recent in large part due to the measurement of happiness itself has been quite scattered until the measurement which will be used in this study which is the United Nations backed report. Reviewing available literature, I will discuss available information in studies on the direct relationship between taxation and happiness, studies on related income and happiness inequality, and challenges to the claim that happiness should even be an aim of society and if money/taxation even affect the measure.

The association between income tax rates and happiness being the focus of the research paper, this aspect of the literature review is the most prudent, but it also should be noted as being relatively weak in terms of relevant literary sources. Dorrenberg and Peichl (2013) provided one of the stronger isolations of the variables of taxation (though specifically progressive) and happiness. Their research revealed a measurable link between the positive morale of a people and less tax evasion. They also found a link between progressive tax nations and less evasion which when concluded can be extended to find that progressive tax nations do exhibit a higher level of morale or happiness. Other studies found that the correlation between happiness and taxation is far too wide and needed to be narrowed down. One found a correlation between per capita GDP and happiness, but also discovered distinct discrepancies between age during a study of Brazil (Graham, 2011.) In Brazil, taxes were being cut and younger people tended to be less happy as a result while older peoples tended to be happier as a result. It was also noted that this is of course contributed to because older peoples are likely to make more than their younger counterparts and therefore pay subsequently more in a progressive tax system. Weisbach (2008) also drew similar conclusion noting that a correlation was evident, but that this was greatly impacted by age and also married status which also effects taxation rates in most countries. The most extensive study that has been conducted on the subject is perhaps that of Alesina, Tella, and McCulloch (2004). In their study, they also noted a correlation between taxation and happiness, but drew distinctive differences in the US and Europe. The poor and left wing politically in Europe cared much more about progressive taxation and income inequality then did their American counterparts. In another reversal, the rich in the United States were more conscious about these factors then that of their European counterparts. These reversals were odd and of note because while the European poor were more aware of the inequality, they suffered a less stark difference than the American poor who were much less aware. They concluded that a likely cause for this difference lay in perceptions regarding economic mobility wherein Americans felt that they could more easily rise from poverty to wealth while Europeans felt a greater sense of class stagnation.

The second area of literature to examine is the similar area of wealth inequality which is related to taxation both in that more progressive taxation has shown a correlation to lower wealth inequality and more progressive taxes are often used as a remedy to the problem of wealth or income inequality. Sachs and Sanders (2017) look more at the figures itself rather than a correlation to happiness which they more or less assume. Still, these figures they provide are quite stunning. They state that the richest 1% own half of the world’s wealth, and in the US the top tenth of the top percent of richest people own as much wealth as the bottom 90 percent. In the study over a period between 2009 and 2014, new income to disproportionately went to the rich with 58% of new income in this period going to the richest 1% of Americans. This correlated to lower levels of especially millennial satisfaction with life as 37% of Americans in their 20’s had student loan debt and as taxes have become lower and less progressive since the 1950’s wealth/income inequality is at its worst since the 1920s. While the previous study may have noted a correlation between income or wealth equality and happiness, other studies like that of Gandelman and Porzecanski (2013) reached different conclusions. Their study focused more broadly then the aforementioned US-focused study. They concluded that happiness is nearly equal among economic classes and tied their findings to the concept of decreasing marginal utility as in money can only buy so much and as more wealth is accumulated any increase in happiness would continue with diminished returns. Ono and Lee (2016) reach a unique 3rd conclusion on a similar subject manner. Their study found that social democratic nations with higher, more progressive taxation and less income inequality did not have higher levels of aggregate happiness, but did find differences in class between the rich, middle class, and poor. Their conclusion was that though aggregate happiness does not change between countries using a high tax, progressive system and low tax, free market system were not different in overall happiness, but that the burden is shifted more from the poor to the rich so that there is a smaller difference in happiness between rich and poor in social democratic nations.

The final area of literature examined were alternate studies of happiness which seem to disprove or at very least question the taxation correlation. One prominent study (Frey et al., 2008) found alternate economic indicators such as the unemployment rate and rate of inflation to be a stronger predictor of happiness in countries. In this study, they concluded that income may have a lesser effect, but voluntary work or career choices played a larger role even in the work aspect and that the utility of money was an important factor when it was found that happiness seemed to not differ greatly between economic classes. Oishi and Diener (2014) questioned whether happiness should even be a policy goal but did end up finding correlations between areas like unemployment benefits, progressive tax rates, and income equality as it related to higher rates of happiness. One of the stronger correlations for happiness in their study was the amount of government spending per person. They also found that general societal and economic conditions of a country as a whole did track well with individual levels of self-reported happiness. Their conclusion was that happiness should be closely consulted when making policy decisions. A final study noted income level as a rather minimal effect on happiness, but rather standard of living and relative income or perception to others in a society even as a more important variable (Weimann., Knabe, & Schöb, 2015).

While all these studies provide great insights on different factors and happiness, there seems to be a more general focus on individual nations and individual classes within those nations rather than focusing of comparisons between separate nations themselves. Even within that, there is a variance of results and conclusions. Part of this reason seems to be that until recent, quantifying happiness had been harder to do and was done on a more localized scale. With newer and more comprehensive data sets produced in the last few years as will be elaborated in the methodological section, questions regarding a more concrete correlative factor between income taxes, wealth, and happiness may finally be able to yield an answer.