Saturday, July 09, 2011

Compensation v Incentives

The last couple of papers from the Happiness Research Conference had an interesting point-counterpoint kind of style regarding taxation and incentives.

Let's assume for a moment that married people have approximately $100,000 worth of extra happiness over their lifetime (this is the population average for the U.S.).  So if you were creating an ideal tax system, would your goal be to compensate for this by creating a marriage penalty that over a lifetime would give a single person an extra $100,000?  Or would you create an incentive for people to get married by giving a tax deduction for it and expect that the lost tax revenue is worth the extra happiness you have created.  But would marriages that are pushed by tax incentives create the same happiness as natural ones?  Maybe you are decreasing happiness because you are motivating some mad marriages.  Wow, this social engineering is tough.

There was a similar debate on age.  We have all heard that it is important to invest when you are young because of the magic of compound interest.  This article complements that thought by suggesting a high consumption tax on status-building goods.  If one person buys a status-building product, he/she gets happier but everyone else gets less happy.  So the aggregate societal happiness goes down.  We should discourage this (according to one argument) by having high taxes on these goods.  It is worse when young people do it because it creates a lifetime of one-ups-man-ship and middle aged people feel worse when younger people have status products that they don't.  So we could have high taxes on status-building products that are graduated so that we let older people enjoy the money they have earned but tax the young people;s status consumption and try to shift their money into investment.

The papers really are putting up strawmen as examples of what governments could do.  None of the authors are suggesting actually doing any of this.  But it does get you thinking.