Subjective Wellbeing Impacts of National and Subnational Fiscal Policies

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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 harmed less 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. Terms of use: Documents inJEL classification: D60, E62, H50, H70, O57

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

“…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.…”

“…The study of Grimes et al (2016) is the only study as the best of our knowledge which dealt with the relationship between fiscal policy and subjective well-being using Barro's (1990) endogeneity economic growth theory considering government budget constraints. They used longitudinal data covering about 130 countries for the world value survey waves for periods 1981-1984, 1989-1993, 1994-1999, 2005-2009 and 2010-2012.…”

“…According to Barro (1990) and Grimes et al (2016), public expenditures and taxes are divided into two main categories: distortionary taxes and nondistortionary taxes and productive expenditures and nonproductive expenditures. Other expenditure excluded when model is estimated to avoid duplication of inclusion and budget surplus (BS) is excluded to avoid full autocorrelation.…”

“…Our study is based on the model of Grimes et al (2016) and the study of Bleaney, Gemmell and Kneller (2001) with modifications, where we use country-level data rather than individual data and replace some of the social and control variables. The model takes the following form:…”