A Progressive Tax On Consumption Would Increase Happiness For Everyone

For most consumer goods, evidence suggests that consuming more doesn''t make us any happier. Indeed, many other ways of spending our time and money would increase our overall satisfaction. The trouble is we get caught up in the rat race of ''conspicuous consumption''. The answer, according to Professor Robert Frank of Cornell University, writing in the November issue of the Economic Journal, is to introduce a progressive tax on consumption, which would encourage people to spend their money on improving the quality of their lives rather than on consumer goods. The resulting gains, he believes, would be more than several trillion dollars a year in the United States alone.

Frank points to the many studies showing that most people would be happier if the resources they currently used to support more expensive cars and larger houses were used instead to support more time with family and friends; more time for exercise; a shorter, less stressful commute to work; safer, cleaner, and more aesthetically pleasing public spaces; greater safety and autonomy in the workplace; and various other forms of ''inconspicuous consumption''

Then why, he asks, don''t we simply rearrange our spending patterns in these ways? Some social critics have argued that individuals are simply no match for the sophisticated manipulations of corporate advertisers. But the problem, Frank argues, is not that people fail to perceive their interests as individuals or to pursue those interests with sufficient diligence; on the contrary, it is that they do so only too well.

Frank''s claim is that individual consumption decisions are strongly driven by context: people like living in ''nice'' houses, or driving ''high-performance'' automobiles. But these qualities are inescapably relative. Thus when everyone spends more on houses and cars, we see parallel shifts in the frames of reference that define minimally acceptable properties of these goods.

If everyone spent less on material goods, and more on less conspicuous forms of consumption, satisfaction levels would be higher. But people can only control what they themselves spend, not what others spend. The problem is analogous to the military arms race, Frank explains:

''Just as no nation can solve a military arms race by unilaterally reducing its expenditures
on armaments, no individual consumer can unilaterally escape the influence of community
consumption standards. In both cases, reductions are attractive only if all cut back.''

A simple policy change would stimulate just such an across-the-board cutback, Frank concludes. This change is to abandon our current progressive income tax in favour of a much more steeply progressive tax on consumption. A progressive consumption tax is administratively essentially the same as the current income tax except that it would exempt savings. A family''s income minus its savings is the amount it consumes, and it would be a simple matter to impose tax rates that rise steeply with this difference.

A large standard deduction would ease the burden on families whose consumption is already at extremely low levels. For everyone else, the resulting real increase in the price of consuming more would encourage greater savings and the devotion of more time and energy in pursuit of untaxed forms of inconspicuous consumption.

''The Frame of Reference as a Public Good'' by Professor Robert H. Frank of Cornell University, Ithaca, NY 14853, USA is published in the November 1997 issue of the Economic Journal.