3.3.1 Consequential normative reasoning

From a consequential perspective, tax policy is just one of the alternatives available to governments and, presuming that well-being aims are desirable for the state to have, the question whether states should aim for well-being through taxation for a consequentialist primarily boils down to the question whether taxation is the most efficient and effective instrument to achieve states’ well-being aims.1

Here, that question of whether taxation is an efficient and effective instrument to achieve states’ well-being aims is addressed. It was mentioned earlier in section 2.2 that the effects of taxation on well-being have been shown to be significant and robust.2 Research regarding the effectiveness and efficiency of taxation is considered hereafter, resulting in the conclusion that taxation may not always be the most effective or efficient tool available to states to achieve well-being aims.

It was briefly discussed earlier in section 3.2.1 of this research that Oishi, Schimmack, and Diener examined whether progressive taxation is associated with the subjective well-being of nations and if so, whether such a link is explained by citizens’ satisfaction with public and common goods.3 This was primarily discussed as an example of the indirect importance of taxation for well-being, namely as a means to finance the provision of public goods. In the current section, the research of Oishi, Schimmack, and Diener is discussed in light of the question whether taxation itself is an efficient and effective instrument to achieve states’ well-being aims. In order to examine whether progressive taxation is associated with subjective well-being, they used data from the Gallup World Poll, where subjective well-being was assessed by asking respondents to evaluate their current life, and by asking respondents about their positive or negative daily experiences.4 The research from Oishi, Schimmack, and Diener is therefore concerned with a specific conception of well-being in which well-being is constituted by individual experiences, feelings, self-evaluation, and satisfactions (and not, for instance, by objective indicators that are assessed independent from the attitude of the individual concerned towards those indicators).5 Oishi, Schimmack, and Diener found that residents of states with more progressive taxation policies on average reported higher levels of subjective well-being than residents of states with less progressive taxation policies.6 While they found that it is the degree of progressive taxation, and not large government spending or high average tax rates per se, that is associated with higher levels of national subjective well-being, they also found that this relation is explained by citizens’ satisfaction with public and common goods such as the quality of education and the availability of health care.7 As discussed in section 3.2.1, their research suggests that it is the use of states’ funds to provide quality public and common goods that results in increased well-being, rather than the progressive taxation policy in itself.8 Finally, Oishi, Schimmack, and Diener remarked that, after a certain point, more-progressive taxation might no longer be associated with higher levels of subjective well-being.9 Therefore, rather than suggesting that taxation is an effective or efficient tool to aim for well-being, the research from Oishi, Schimmack, and Diener suggests that how states use the funds collected via taxation matters more for subjective well-being than the way in which taxes are levied.

Research from Akay et al. tested how taxes affect subjective well-being.10 For this, they assumed that the net resources available to a person matter for individual well-being (or more concretely, they assumed that individuals with a higher living standard experience higher subjective well-being levels).11 The subjective well-being concept used by Akay et al. therefore is measured differently from the approach employed by Oishi, Schimmack, and Diener that was discussed before. Akay et al. used survey data from the German Socio-Economic Panel on individual life-satisfaction as a specific approach to well-being.12 Akay et al. found that the tax effect on subjective well-being is significant, robust, and positive (meaning that individuals have higher subjective well-being when paying taxes) when holding individual life standards constant, and suggested that this could be because of increased public goods consumption (financed through tax), because of redistributive preferences, and/or because of tax morale motivations.13 The research from Akay et al. therefore does not address the efficiency side of taxation, yet suggests that taxes levied in a certain way (e.g. redistributive or tax morale stimulating taxation) can contribute to increasing subjective well-being in the form of life-satisfaction, possibly next to increases in subjective well-being brought by how states use the funds collected via taxation.

Gerritsen generated a corrective well-being argument for taxation, arguing that workers who work too much (and therefore do not maximise their well-being) should be encouraged to work less through higher marginal tax rates, and that workers who work too little (to achieve maximum well-being) should be encouraged to work more through lower marginal tax rates.14 Gerritsen combined optimal taxation theory with empirical research on subjective well-being, using questionnaire data on people’s life satisfaction as a direct measure of well-being.15 Gerritsen’s research did not address whether taxation would be an efficient tool to achieve states’ well-being aims (for instance: how can such a system of corrective taxation based on individual work elasticities be applied? What would be the related (administrative and other) costs?), yet did remark that the corrective argument for taxation is weaker if people are less responsive to relative prices and thus taxes are less effective in influencing the behaviour of “those in need of correction.”16 Likewise, Gerritsen remarked that, where firms in part determine workers’ labour supply (e.g. if there is less demand from firms due to minimum wages that are above market wage levels), workers might be less responsive to taxes, and other instruments, such as wage subsidies to firms, might then be more effective in raising the well-being of those workers.17

Wijtvliet’s research focused on objective (rather than subjective) well-being, using a concept of well-being that includes key dimensions such as material living standards, health, education, environment, insecurity, et cetera.18 Wijtvliet concluded that a tax shift from direct to indirect taxes (and any other instrumental measure or tax expenditure that results in an unequal treatment of income) can affect well-being and its various dimensions through increasing economic inequality.19 In addressing instrumental use of taxation and tax expenditures, Wijtvliet noted that more often than not, their effectiveness is lacking or cannot be established at all.20 He called attention to inequality enhancing effects of tax expenditures and tax instrumentalism, as well as to their potentially adverse effects on investment decisions.21

Concerns regarding the effectiveness and efficiency of taxation as a tool to achieve state aims are voiced on a wider scale (not specifically regarding well-being) in literature. Non-exhaustive references to such literature are reflected here.

A consequence of taxation that is often recalled is that it is prone to cause deadweight losses, or social costs: the sum of the losses imposed by taxes on consumers and producers resulting from increased prices and reduced quantities bought and sold almost always exceeds the revenue that the taxes raise.22 The actual size of such deadweight losses depends for instance on price elasticities.23 Kleinbard referred to a calculated deadweight loss of 4 per cent of the tax collected for a certain income tax.24 Feldstein pointed to econometric work implying that the deadweight loss caused by incremental taxation may even exceed one dollar per dollar of revenue raised (or in other words, a deadweight loss of more than 100 per cent), which would make the cost of incremental government spending more than two dollars for each dollar of government spending.25 Browning and Liu argued that there are always alternatives to income taxes that are better suited to achieve Pareto optimality as regards the effects on the well-being of people and that therefore, income taxes are always distortionary.26 Shaviro remarked that all sorts of taxes penalise preferences that have no obvious distributional relevance, and burden behaviour that does not impose obvious external burdens on others.27 Aaron and Galper described that the social costs of tax-related distortions can be enormous, and that tax measures taken in isolation may actually partially offset each other and taken together produce unrecognised and unintended side effects that may bewilder taxpayers and erode the faith in the law of ordinary citizens.28 Slemrod addressed how the efficiency costs of taxation (including costs associated to administration and the coercive nature of taxation) are potentially large,29 and remarked how any tax system inevitably causes some distortions as individuals substitute away from relatively high-taxed goods to relatively low-taxed goods.30 Pigou wrote that, although there may be a presumption in favour of state intervention through taxes where such intervention would increase societal results, the lines of arguments used “do not, of course, create a presumption in favour of fiscal interference with industries selected at haphazard or operated through rates of bounty or tax so selected. It is true that particular drugs consumed in particular quantities at particular times may cure diseases; but it is no less true that the consumption of drugs in general in a miscellaneous manner is highly injurious to health.”31 Further on, Pigou concluded that “The sphere of usefulness that could belong, even under a perfectly wise and perfectly virtuous Government, to these fiscal devices is, therefore, probably smaller than it might appear to be at first sight.”32 Easson and Zolt recalled the conventional wisdom that tax incentives, particularly for foreign direct investment, are bad in theory and in practice, as they distort investment decisions and are often ineffective, inefficient, and prone to abuse and corruption.33 Tax incentives cannot compensate for deficiencies inherent in the design of a tax system or for inadequate physical, financial, legal, or institutional infrastructure, and are likely a poor response to economic or political problems already existing in a state.34 If properly designed, implemented, and monitored however, Easson and Zolt concluded that tax incentives can play a useful role in encouraging both domestic and foreign investment.35 Dorsey summarised how, even with regard to taxes on activities with inelastic demand (for instance because of the addictive nature of such activities such as with smoking), consumers might find lower taxed substitutes, or activities may be shifted to criminal black markets and outside the grasp of government altogether.36 Ogus argued that taxes, as a means to achieve efficient solutions to instances of market failures, are more problematic than typically recognised in economic models.37 There may for instance be a mismatch between the outcome intended by instrumental use of taxation and the particular aspect of behaviour to which the tax attaches or can attach.38 Then there are the issues of elasticity (as discussed earlier in this section 3.3.1) and incidence (can the tax be passed on to someone else? Who really bears the tax burden in the end?).39 Furthermore, taxpayers may change their behaviour as a result of targeted taxation, yet the substitute adopted may generate consequences as bad as those arising from the taxed activity.40 Ogus concluded that, whilst the enthusiasm shown by advocates of regulation via fiscal instruments may therefore be misplaced, the identification of such difficulties and shortcomings should also not lead to undervaluing these instruments relative to the other available alternatives.41 Tamanaha and Gribnau have both called attention to the limited potency of the law to prompt desired social and economic changes.42

From a consequential normative perspective therefore, assuming that states ought to care about well-being,43 aiming for well-being through taxation can be positively considered when taxation is the best-suited instrument for the job. However, research indicates that taxation may not always be the most effective or efficient tool available to states to achieve well-being aims, or that its effects may be insufficiently determinable.