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Taxes & happiness: a silly argument

While many of us are filing income tax returns, comes cheerful news that taxes are good for us. I'm not buying it.

The proposition that taxes are beneficial in and of themselves is based on the new "happiness research," a logical trap that has captured the mind of Lord Richard Layard of the London School of Economics. Here's the core of it:

"[M]ost people are not rivalrous about their leisure," Layard says. "But they are rivalrous about income, and that rivalry is self-defeating. There is thus a tendency to sacrifice too much leisure in order to increase income."

Taxes are clearly performing some useful function beyond that of raising money to pay for public spending, he concludes. "They are holding us back from an even more fevered way of life."

Once upon a time, it was fashionable to defend high income taxes by claiming that the elasticity of labor supply was zero - i.e. that people did not respond to higher taxes by working less. Now we encounter exactly the reverse argument: high taxes are good because they do cause people to work less!

A nice point which illustrates the weakness in Layard's argument was recently made by Don Boudreaux at Cafe Hayek. Rubella, smallpox, and polio have been virtually eliminated in modern economies, but measures of well-being anchored in relative status fail to pick up these tangible benefits. I prefer the old fashioned, hypothetical "willingness to pay" metric here: how much would you be willing to pay to avoid living in a country in which the risk of disease stood at the level of a century ago?

To add to Don's point, these diseases have disappeared due to sustained efforts by highly skilled people who are motivated to attack them. Higher taxes and less work effort implies that progress on this front will be retarded - and fighting disease is just one example.

"Happiness" studies - and all arguments based on relative status - fail to capture the many benefits from work and production. Systems of thought which ignore the fact that work yields tangible benefits for mankind are just silly. It is sad to see Lord Layard fall into that trap.