Countries with higher rates of taxation tend to have happier citizens

What impact does a country’s level of taxation have on the happiness of its citizens? Using OECD data, David Binder assesses the relationship between high taxation levels and measures of citizen wellbeing/happiness. He finds that there is a correlation between high taxation and increased happiness, but that there are some important outliers such as Switzerland, which have very high levels of citizen wellbeing, but low rates of taxation.

Proponents of high taxation have long argued that greater levels of taxation generate a whole host of social benefits, from greater economic equality to better health outcomes. Alongside this, there has also been an emerging literature around the concept of ‘wellbeing’ or ‘happiness’. I thought it interesting to try and investigate whether there’s any link between high taxation and the happiness of a population. Whilst in doing in this I won’t be able to conclusively prove one way or another whether high (or indeed low) taxation is the key factor that influences an individual’s happiness, I do hope to be able to establish whether there is any sort of link between general levels of taxation and a selected number of wellbeing indicators.

My data for this task are drawn from the OECD statistical database and the following variables have been used: total tax as a proportion of GDP (2010), life satisfaction (2012, 2011 for Chile), time devoted to personal and leisure care (between 1998/99 and 2010), quality of support network (2012, 2011 for Chile and United Kingdom), employees working very long hours (2011), and a total of all variables. While in my view the first two variables are the most important, I decided to include the other four as they play a significant role in influencing one’s wellbeing and (in the case of the last variable) provide a general picture of what might be going on.

In order to establish the relationship between a nation’s taxation rate and each variable, I have given each country a ranking between 1 and 34, 1 being best and 34 being worst, and calculated the extent to which it correlates with total tax as a proportion of GDP. Being able to do this enables one to establish a score between -1 and 1, with -1 referring to a perfect negative correlation (i.e. the country with the highest percentage of tax has the lowest life satisfaction) and 1 referring to a perfect positive correlation (the country with the highest percentage of tax has the highest life satisfaction). A score of 0 would mean no correlation either way.

Where do countries rank in terms of tax revenue as a proportion of GDP?

First, let’s take a quick look at where the countries rank in terms of taxation as a proportion of GDP. Table 1 illustrates how each nation fares.

Table 1: Ranked list of countries by taxation as a percentage of GDP in OECD countries (2010)

Note: Countries are ranked from highest percentage to lowest (i.e. Denmark has the highest taxation rate as a percentage of GDP in the OECD). Source: OECD

Having done all of this, what do we find? Well, when attempting to correlate total taxation as a proportion of GDP with each of the variables (separately and combined), we find that there are positive correlations across all five variables. In other words, we find that there is a link between total tax revenue and certain happiness indicators: i.e. the higher the total tax revenue, the higher the levels of happiness.

However, the extent of positive correlations varies considerably across each of the variables studied. Life satisfaction (which I noted earlier was one of the more important variables) achieves a correlation score of 0.20, meaning that although there is a positive link, it isn’t especially strong. Other variables on the other hand achieved correlations that were substantially more positive. Employees working very long hours, for example, achieved a score of 0.64, while time devoted to leisure and personal care gained a score of 0.61. Quality of support network achieved a score of around 0.38. Finally, and perhaps most importantly, the combined variable, which takes account of all the variables above, obtained a score of 0.61, a significantly positive result. Table 2 summarises these findings.

Table 2: Correlation between taxation as a percentage of GDP and five variables of wellbeing/happiness

Note: The number in the right column indicates the correlation between taxation as a percentage of GDP and each variable. A number above 0 indicates that the two variables are positively linked (e.g. higher taxation is linked to higher life satisfaction). A number below 0 would show that the two variables are negatively linked (e.g. higher taxation is linked to lower life satisfaction), while 0 would show that there is no correlation at all.

Thus, while on this basis there does seem to be a link between high taxation and wellbeing indicators, the dangers of concluding here are numerous. Not least, we potentially lose sight of any intriguing outliers that potentially confound the general hypothesis of ‘high taxation = high happiness/wellbeing.’ Therefore, in order to identify outliers, Table 3 highlights for two of the variables (the total of all variables and life satisfaction) nations that go against the hypothesis. For the purposes of this article, I have defined an outlier as a nation that has a difference of 10 or greater between total tax revenue as a proportion of GDP and each of the two said variables in terms of the rank it achieved for each.

Table 3: Outliers for total of all variables and life satisfaction

Note: Countries in red are those whose ranking for tax as a proportion of GDP is at least 10 places higher/lower than their ranking for the total of all variables (left) and life satisfaction (right).

This table is striking in that it markedly demonstrates that despite the positive correlation noted earlier, a number of outliers confound the hypothesis. In the total of all variables ranking, for instance, despite 8 of the top 10 nations for highest tax as a percentage of GDP also appearing in the top 10 for the total of all variables, outlier nations such as Italy and Switzerland do appear, along with 4 other nations. In the case of Italy, for example, despite tax as a proportion of GDP being 4^th highest in the OECD, Italians appear to be relatively unhappy with their lot, while with Switzerland the opposite seems to be the case. Although there is an overall correlation between higher rates of taxation and citizen happiness, these outliers should induce caution before this conclusion is stated too strongly.

Indeed, outliers are even more pronounced in the case of life satisfaction. There are 15 in total here, more than a third of the OECD, which explains the noticeably weaker correlation cited earlier. As before, Switzerland appears as an outlier, with the Swiss seemingly appearing the most satisfied with life despite living in a country with a comparatively small total tax burden.

So, does higher taxation equal happiness?

There is a positively correlated relationship between high taxation and a range of happiness/wellbeing indicators. However, the extent of this positivity varies considerably between the variables and as shown above, a number of outlier countries appear to buck the trend. Nonetheless, despite these outliers positive correlations are present.

However, a correlation does not prove causation. It might be the case, for instance, that in EU countries such as Denmark, Belgium, Sweden, and the Netherlands there are common characteristics (apart from high taxation rates) within their cultures that lead them to experience greater levels of wellbeing/happiness. Nevertheless, one could feasibly argue that higher levels of taxation receipts might allow for governments to invest more in public services (‘progressives’ frequently assert this line of argument) such as publicly funded leisure and personal care services (one of the variables used in this study.) It might also be the case that higher levels of public taxation leads to better healthcare, education, transport and other provisions, which are all areas that could have an influence on an individual’s happiness.

Given that there does appear to a positive correlation present, the above questions are worthy of consideration by academics and policy makers alike, although it also must be recognised that individual factors distinct to certain countries might be hard to replicate in other states. It should also be emphasised that increasing taxation might not lead to good results overnight, given that many of the nations where correlation is greatest (such as in European countries like Denmark, Sweden, Belgium, Norway, and the Netherlands) have had high rates of general taxation in place for a number of decades.

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Note:  This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.

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About the author

David Binder David Binder is a Family Fiscal policy Consultant for the Christian social policy charity, CARE, where he conducts in-depth research on Family Tax, Welfare and Benefits. In addition to writing extensively on these issues, David explores other areas relating to society and culture, evangelical christianity (of which he is a believer) and criminal justice. David’s blog can be read at: www.thoughtsofbinder.wordpress.com

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