Written by Tim Worstall (Fellow, Adam Smith Institute)
GDP is not the be-all and end-all of our existence; it talks of value added to economies but has little to say about anything else.
Richard Layard and Joseph Stiglitz (one a Nobel Laureate, the other one of those who tried to jam some economic understanding into my brain) rightly tell us that gross domestic product isn't in fact the be-all and end-all of how we should be measuring life, the economy and everything. They also, again correctly, point to various alternative ways in which we might measure, thus set as our target, things which are more important than merely the value added in an economy.
What is always interesting is to take such suggestions and follow them to see where they lead: so let's do exactly that with the proposal from the professor at the old alma mater, my Lord Layard.
So I propose a campaign for the Principle of the Greatest Happiness. This says I should aim to produce the most happiness I can in the world and, above all, the least misery. And my rulers should do the same.
Sounds like a plan, so, using only the professor's own work, where will this lead? Specifically, where will this lead us if we try to design a tax system which accords with this principle (that's the "rulers should do the same" bit)?
Vital clues can be found in his book Happiness, something which if you haven't read you probably ought to. There are two major points made about the taxation of incomes in it and we'll add just one commonplace observation from the world around us to reach what we must assume will be the taxation system that will produce the maximal amount of happiness: the top fluffy kitten count, if you will.
The first point is that happiness does indeed rise with income – but only to a certain point. That point varies a little, dependent on where you are and with exchange rates and so on, but a reasonable estimate is about £15,000 a year. Less than that and earning more money makes you happier simply because you're earning more money. More than that and you might be happier or not, but it's not the extra money that's making you so.
Excellent. So the first and most obvious principle of our high kitten-cuteness tax system is going to be that we're not going to tax incomes below £15,000. This would clearly make people less happy, as it would take them below that number where higher incomes make them happier.
The second point is a little more complex. The contention is that when we earn more than £15,000 we create a kind of pollution. It's never quite really nailed down: one way of describing it would be jealousy, the green-eyed god, over the fact that others have more than we do. Layard's description is more gentle, in that others having more impels us to emulate them; we try to keep up with the Joneses. In doing so we strive for higher incomes, despite the way that these will make us no happier, at the expense of the many other things that will make us happier – time with family, with friends and so on.
Thus those earning more than £15,000 are imposing an externality of unhappiness on those around them: and we all know what happens to such negative externalities in welfare economics. We tax them! This is exactly the same economic argument behind carbon taxes, the congestion charge and air passenger duty. The polluter must pay the social cost of their pollution. Turning the argument around the other way, that positive externalities should be subsidised is exactly the economic argument used for tax contributions to basic science and such things as universal primary schooling. There's nothing odd or strange about the economics here, only the aspect of life to which it is being applied.
Layard's estimate is that the unhappiness caused by those on higher than £15,000 incomes is some 30% of the amount of those higher incomes. Someone on £1,015,000 a year is causing £300,000 of unhappiness elsewhere while someone on £45,000 is causing £10,000s' worth (umm, OK, I'm using one third not 30%, but you get the picture). We should thus tax the two, respectively, £300,000 and £10,000 for the externality of the non-fluffy kitten time they are imposing on those around them.
Our third point is simply the commonplace that people do not like to pay taxes. Yes, yes, I know, there are endless screeds here at Comment is free insisting that no, really, offering up the sweat of our brow to the state is such a pleasurable experience that we'd all do it willingly, without the compulsion of law. Actually, this seems not to be the case. Last time I got the figures from the Treasury (for the tax year 2005), it turned out that only five people across the entire nation had voluntarily paid more than was their legally demanded due – and four of those were dead. So if we adopt the entirely uncontroversial economic idea of revealed preferences (don't look at what people say but what they do) we can be sure that for the vast majority of the population taxes are not something paid for the joy of them. They are, in fact, something which make us unhappy.
This now gives us the details which we need to build our tax structure for optimal happiness. We can and should tax those who cause unhappiness in others by the value of the unhappiness they create through their higher incomes. We should not tax more than this for we will be creating unhappiness by doing so. Finally, we should not be taxing incomes below £15,000 a year because taking money below that sum will again increase unhappiness.
So our tax system with the highest fluffy-kitten count, the one that will "produce the most happiness" as our rulers should strive to do, just as we ourselves should, is a flat-tax system of 30% with a high personal allowance of £15,000 a year.
While this is, of course, very different from our current tax system, it is still progressive (yes, it is: work out the maths for yourselves – as incomes rise so do the portions of those incomes paid in tax) and it ticks all the boxes that will lead to maximal happiness.
In the UK, the US and Germany, happiness has been stagnating for decades. A civilisation based on the Greatest Happiness Principle would be a great improvement. Yes, indeed it will, as long as we actually accept the implications of that Great Happiness Principle as laid out for us by one of the great researchers into that principle, Richard Layard himself.
The only conundrum left is that there are only two organisations that I know of (that I am a member of both of them is entirely coincidence) which actually have as suggested policy anything close to this top cute-kitten system: Ukip and the Adam Smith Institute. But then the reason that I am a member of both is because they are both well ahead of the progressive crowd, in so many important ways.
Published on guardian.co.uk here.