Tax Happy

Taxing your way to self-control.


Life in Connecticut got a whole lot happier in April. More joy has descended on New York, and will soon spread to Maryland, Utah, and Nebraska. No, nobody's slipping Prozac into the water supply. This bliss is sponsored by state legislators, some of whom have just jacked up the tax on a pack of smokes and others of whom are about to do the same. According to a new study by two MIT economists, the $.61 per pack bump should decrease unhappiness among the Nutmeg State's potential smokers by nearly 10 percent.

Economists like to play the role of academic bad boys, making proposals that spark controversy. If you want to minimize traffic accidents, a story goes, you shouldn't look to the latest in bumper and airbag technology. By reducing the cost of accidents, these only encourage reckless driving. Instead, install a knife pointing outwards from the center of every steering wheel. Before long, traffic cops would have to start enforcing the minimum speed requirement.

You can decide for yourself whether examples like that reveal the power of economic thinking or its estrangement from the reality of daily life. But first, you may want to take a look at the analysis that predicts an outbreak of happiness in my New Haven neighborhood.

One might expect smokers to dislike a cigarette tax hike, as they'll end up either shelling out more cash or giving up smoking to avoid the hit. One economic theory holds that this is precisely the case. Another theory, however, says that even if smokers are happy in the immediate future with a cigarette in their mouth, they'd be even happier in future years if they were tobacco-free.

The MIT paper makes this argument, positing that there are "self-control benefits of taxation" and testing this hypothesis with survey data on the self-reported happiness of Americans and Canadians. The Americans were interviewed in 1973, the Canadians in 1985. In the U.S., the study finds, unhappiness among potential smokers–the data didn't allow a measuring of actual smokers, so the economists had to profile–declines by .156 percentage points for every penny increase in excise tax.

This is quite innovative. Traditionally, economists have restricted their inquiry into the consequences of policies on human action, not happiness. They built models and analyzed the world based on many assumptions, one of which is that once a person determines what she wants, she will pursue it rationally. The desirability of her goal is generally regarded as outside the purview of the profession. Who knows why someone watches the Oxygen channel, attends church on Wednesday night, or spends a weekend daredeviling at the Tex Games? The very fact that someone does these things is taken to mean that he maximizes his happiness at that given point in time.

"Human action is necessarily always rational," wrote the economist Ludwig von Mises, who included in that category acts, such as smoking, that detract from your health but enhance your life in other ways. "The ultimate end of action is always the satisfaction of some desires of the acting man." Mises adds, "Nobody is in a position to decree what should make a fellow man happier."

It is dangerous for economists to assume that they can measure happiness among "potential smokers" and other groups, given the profession's penchant for hanging out with legislators and bureaucrats. The government's job is to provide the framework in which free individuals can pursue their own happiness. It's a giant step backward when it tries to maximize our happiness for us, especially when all it has to go on is survey answers.

The idea of legislators helping people deal with self-control problems is laughable. But those chuckles will turn to tears when you consider those "self-control benefits of taxation," especially when budgets get tight. Commuters' happiness may correlate with staying home, for instance–so why not increase the gas taxes to $10 a gallon and improve their lives? I'm sure exercise correlates with happiness, so why not ding activities that grow couch potatoes? Put a big tax on daytime movies, and force people to rent time in coffee shops during prime workout hours.

If those possibilities seem ridiculous, consider this one. Suppose you want to eat healthy but lack the self-control to pass up a bag of Fritos for a banana. Why not put special taxes on "unhealthy food"? This is actually a goal of two national pressure groups, and California recently considered such a tax on soda pop.

The smoker, the driver, the couch potato, the junk food fan–each, as Mises would predict, is maximizing his happiness. If these happy consumers made a mistake, it was to forget the happiness of the tax-hiking state legislator and the activist toiling to coerce the rest of us into changing our lives.