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The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?

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  • Paul Frijters
  • David Johnston
  • Michael Shields

Abstract

This paper addresses an important policy question: who gets the largest utility gain from income and does the tax system adequately reflect this? We address this question by using Australian panel data and taking life satisfaction as a proxy for utility, allowing us to identify the marginal utility of additional income for different groups of individuals. We find that optimal transfers consist of transfers from the old to the middle aged, and from the married to the unmarried. This optimal utilitarian welfare policy is then contrasted with information on who actually receives transfers and who pays for them in Australia, where we find that taxes are too high for some groups, like the young, and that they are too low for other groups, like the elderly. We believe that the methodology developed in this paper could be fruitfully applied to the issue of optimal taxation in other countries. Copyright Springer Science+Business Media B.V. 2012

Suggested Citation

  • Paul Frijters & David Johnston & Michael Shields, 2012. "The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?," Journal of Happiness Studies, Springer, vol. 13(5), pages 821-832, October.
    • Handle: RePEc:spr:jhappi:v:13:y:2012:i:5:p:821-832
    DOI: 10.1007/s10902-011-9293-3
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    Cited by:

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    2. Pierluigi Conzo & Giulia Fuochi & Letizia Mencarini, 2017. "Fertility and Life Satisfaction in Rural Ethiopia," Demography, Springer;Population Association of America (PAA), vol. 54(4), pages 1331-1351, August.
    3. Frijters, Paul & Clark, Andrew E. & Krekel, Christian & Layard, Richard, 2020. "A happy choice: wellbeing as the goal of government," Behavioural Public Policy, Cambridge University Press, vol. 4(2), pages 126-165, July.
    4. Yuta J. Masuda & Jason R. Williams & Heather Tallis, 2021. "Does Life Satisfaction Vary with Time and Income? Investigating the Relationship Among Free Time, Income, and Life Satisfaction," Journal of Happiness Studies, Springer, vol. 22(5), pages 2051-2073, June.
    5. Lalji, Chitwan & Pakrashi, Debayan & Smyth, Russell, 2018. "Can eating five fruit and veg a day really keep the doctor away?," Economic Modelling, Elsevier, vol. 70(C), pages 320-330.

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