Taxed Happy

Two economists provide legislators with another reason to boost taxes.


Life in Connecticut got a whole lot happier in April. More joy has descended on New York, and it 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 March study by two Massachusetts Institute of Technology (MIT) economists, the 61-cent-per-pack bump should decrease unhappiness among Connecticut's potential smokers by nearly 10 percent.

Economists like to play the role of academic bad boys, making proposals that spark controversy and reveal shocking truths. If you want to minimize traffic accidents, according to a typical economist's reasoning, you shouldn't look to the latest in bumper and airbag technology. By reducing the cost of accidents, these innovations only encourage reckless driving. Instead, install a knife pointing outward 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, its estrangement from the reality of daily life, or both. But first, you may want to take a look at the analysis that predicts an outbreak of happiness in my New Haven neighborhood. (The study is available online at econ-www.mit.edu/faculty/gruberj/papers.htm.)

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. Smokers, even if addicted, figure the pleasure derived from smoking today is more desirable than the beneficial future health effects of giving up the coffin nails.

Another theory, however, says that even if smokers are happy in the present with cigarettes in their mouths, they'd be even happier in future years if they were tobacco-free. Economists would say that smokers' preferences are characterized by "time inconsistency." In the future, they'd like to be nonsmokers. But in the present, they prefer to smoke.

The idea is more easily understood in financial terms. Offer a person the choice between $100 today or $150 tomorrow, and he may refuse to wait the extra day for the extra $50. But give him a choice of $100 25 days out or $150 on the 26th day, and the same person may happily wait the extra day to grab the $150. If people take the long view, they'll be happier waiting the day for the extra dough. But their short-term behavior prevents them from achieving the highest levels of happiness. From the outside, it appears to be rational for people to restrict their freedom in the short term in order to maximize happiness days, months, or years down the road.

The MIT paper makes this argument, positing that there are "self-control benefits of taxation." The authors test this hypothesis with survey data on the self-reported happiness of Americans and Canadians. The Americans were first interviewed in 1973, the Canadians in 1985. In the U.S., the study finds, unhappiness among potential smokers (the data didn't allow assessment of actual smokers, so the economists had to profile) declines by 0.156 percentage point for every penny increase in excise tax.

This study is quite innovative. Traditionally, economists have restricted their inquiries to the consequences of policies on human action, not human happiness. They have 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 or attends church on Wednesday night? The very fact that someone does these things is taken to mean that it adds to her happiness.

"Human action is necessarily always rational," wrote the seminal free market 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. Nobody is in a position to decree what should make a fellow man happier."

It is dangerous for economists to expand into measuring happiness among "potential smokers" and other groups, given the profession's penchant for palling around 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 government tries to restrict our freedom in order to increase the happiness of a subset of the population—in this case, smokers who want to quit sometime and need the financial push.

Not that the legislators' goal would be to make smokers happy. Smokers are being hit because the legislators want more money and smokers are an unpopular group whom they can tax. That it may increase their happiness is simply another argument legislators will deploy in their effort to gather more revenue.

Just consider what one of the study's authors, Jonathan Gruber, told The New York Times. Gruber is a former Treasury Department official in the Clinton administration who was embarrassed to tell other bureaucrats that adults should not be coerced into not smoking, so long as they are hurting only themselves. Now that he's back in academia, he has produced a paper that arms his former colleagues with one more argument to limit freedom.

"We all know smokers who really want to quit, but there's nothing in the private market that can force them to quit," Gruber told the Times. "The government can provide that."

Actually, the government can't force them to quit either. And free individuals do indeed come up with mechanisms to align their short- and long-term happiness. Automatic savings plans, from Christmas club accounts to prearranged transfers from checking accounts, are examples of dealing with time inconsistency in the financial arena. Flat-fee health club memberships, which may increase the average cost of exercising even as they reduce the marginal cost to only time and transportation, are an example of individuals choosing to bind themselves in the short term to achieve long-term health ends.

Smokers bind themselves by announcing to friends and loved ones that they are quitting, which raises the stakes of lighting up. If time inconsistency were a serious problem for individuals, they could tax themselves for smoking by paying a fine to a worthy cause if they slipped up.

The idea of legislators helping people deal with self-control problems is laughable. But those chuckles will turn to tears when one considers those "self-control benefits of taxation," especially when budgets get tight, which is just about every year.

Commuters' happiness may correlate with staying home, for instance, so why not increase 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 pay for 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 that claim to be making progress in state capitals.

The smoker, the driver, the couch potato, the junk food fan: Each, as Mises would predict, is maximizing his happiness. Alas, they have neglected to consider the happiness of the tax-hiking state legislator and the activist toiling to coerce the rest of us into changing our lives.