Subjective wellbeing impacts of national and subnational fiscal policies

Abstract

We study the association between fiscal policy and subjective wellbeing using fiscal data on 35 countries and 130 country-years, combined with over 170,000 people’s subjective wellbeing scores. While past research has found that ‘distortionary taxes’ (e.g. income taxes) are associated with slow growth relative to ‘non-distortionary’ taxes (GST/VAT), we find that distortionary taxes are associated with higher levels of subjective wellbeing than non-distortionary taxes. This relationship holds when we control for macro-economic variables and country fixed effects. If this relationship is causal, it would offer an explanation as to why governments pursue these policies even when they harm economic growth. We find that richer people’s subjective wellbeing is less harmed by indirect taxes than for people with lower incomes, while “unproductive expenditure” is associated with higher wellbeing for the middle class relative to others, possibly reflecting middle class capture. We see little evidence for differential effects of fiscal policy on people living in different sized settlements. Devolving a portion of expenditure to subnational government is associated with higher subjective wellbeing but devolving tax collection to subnational government is associated with monotonically lower subjective wellbeing.

The impact of fiscal policy on economic happiness: evidence from the countries of the MENA region

“…This refers to an increase in happiness by 1%, a decrease in the ratio of nondistortionary taxes to GDP by 13%. This finding is consistent with the results of Grimes et al (2016) and Eklou and Fall (2020) who mentioned that nondistortionary taxes have a negative impact on happiness. Moreover, GMM model results are also consistent with the finding of Ram (2009) that is the nonexistence of evidence in supporting the hypothesis, including the relationship between public expenditures and happiness.…”

“…Barro (1990) and King and Rebelo (1990) predicted that distortionary taxes and productive expenditures would affect economic growth in the long run. Grimes et al (2016) argued that although Barro's model includes income taxes and lump sum taxes only, the treatment of the job supply is completely inelastic and makes the consumption taxes equivalent to a flat tax. So, indirect taxes, such as consumption taxes, sales and value-added taxes are seen as distortionary taxes in many empirical studies.…”

“…Although happiness is the goal of governments by adopting a fiscal policy, economic growth is only a means, not an end. Grimes et al (2016) asserted that most of these studies dealt with one aspect of fiscal policy, such as taxes or government expenditures without addressing all aspects of fiscal policy. Few of them directed sufficient attention to government budgetary constraints testing the effects of taxes without controlling how revenues were spent or testing the effects of government spending without controlling how revenues were increased.…”

“…(6) Grimes et al (2016) emphasized the importance of recognizing the constraints of the government's budget, when analyzing the effects of fiscal policy because it does not occur in a vacuum and it needs expenditure that must be financed and taxes that must be spent or saved. If any variable is studied individually, such as productive expenditure and the conclusions are built upon it, then it will not be gotten a clear picture of its effect on subjective well-being or happiness.…”

Sustainability and wellbeing: the dynamic relationship between subjective wellbeing and sustainability indicators

“…In order to test whether each sustainability measure helps to predict subsequent SWB changes, we control for a set of variables which prior literature shows to have high explanatory power for SWB (Di Tella et al, 2001;Gnègnè, 2009;Grimes et al, 2016;Welsch and Kühling, 2016;Novak and Pahor, 2017). Equation ( 1) illustrates a baseline model in levels:…”