It's Time to Tax Happiness

As the presidential campaign kicks off, both Mitt Romney and Barack Obama are looking for popular ways to reduce a still-ballooning deficit. However sensible, proposing deep cuts in Medicare or defense spending has little political appeal. Raising the income tax rate—at least on anyone earning less than a million a year—appears equally unpalatable. There is, however, at least one revenue-generating tool that’s simple, fair, and very efficient, at least in theory: a tax on happiness.

Remember the famous (if elusive) “Laffer curve,” which suggests that if you raise income taxes, people won’t work as hard, so tax revenues will fall as a result? The idea of optimal tax policy is to find taxes that don’t put people off earning money. Traditional theory has a solution to this problem: Tax people based on their innate abilities to earn money, rather than on what they actually earn, which is based on some combination of ability and effort. If you tax people on the basis of productive characteristics they can’t change, you won’t reduce their incentive to work.