M'Lord Layard and Taxation

Richard Layard has been arguing about (and for) happiness as a national goal for several years now. Worth perhaps expanding on a Guardian piece about it all today:

When do income rises stop making us happier? Around $20,000, according to Layard. Or, in sterling, £10,128.89. After that there is an inverse relationship between more money and happiness. Quite a lot of you might be thinking you should apply for massive salary cuts, but that's to misunderstand Layard: he's talking about average national incomes rather than individual pay rises.

No, he's not quite talking about average national incomes either. Certainly, he does say that up to £10k, £12k, happiness increases with income as there's a certain basic minimum lifestyle that needs to be reached for one to be happy (or as happy as one can be). When we start talking about incomes above that, it's not so much the incomes themselves that make us unhappy, it's both the distribution of them and the observance of them that makes us unhappy.

Inequality makes us unhappy (runs the argument) and so does thinking that we've got to work harder so as to gain the physical amenities which we see those around us enjoying (the so called "hedonic treadmill"). Whether you actually agree with this isn't my point here: rather, it's the implications of what Layard is saying for tax policies.

For he quite specifically points out that one individual earning more than that 10/12k number causes unhappiness in those around them and that the cure for this externality, as with most other negative externalities, is to impose a tax. He recommends 30%.

Hmm, so the tax policy that makes us all as happy as we can possibly be would be one that does not tax incomes below £10,000 and then taxes those above them at a flat rate of 30%. Strangely, despite providing the underpinning for such a flat tax regime, it's not one that the Noble Lord actually advocates himself.

Odd that, don't you think? Although there is something of the self hoisting petard here, as so often happens with those who attempt to provide an argument for an optimal tax policy: all too often, we find out that such optimal rates are in fact a great deal lower than the ones we already pay, which is why such arguments about optimality so often become rather quiet once that sinks in.