What Does Happiness Research Tell Us About Taxation?

This paper analyzes the consequences of happiness research for taxation. It focuses on the finding that happiness depends on status as well as income, examining how adding status concerns to standard optimal tax models changes the results. It then compares the empirical findings of the happiness literature to see whether they provide the type of data needed to parameterize the models, arguing that the models need different types of data than most happiness studies emphasize. The paper also looks at Robert Frank's arguments for a progressive consumption tax based on the findings of the happiness research. It finds that these claims are not supported by the current models or empirical data. Finally, the paper considers a number of other potential implications of happiness research for taxation, including marriage penalties or bonuses, special tax rates for the disabled, and age-dependent taxation. (c) 2008 by The University of Chicago. All rights reserved.