Tax cuts are in vogue in Australia but will they make us happier? The data suggests not.

The headline announcement on Federal Budget night this Tuesday in Australia was a phased-in reduction of the low income tax bracket from 16% to 14% over two years. Acknowledged as a modest reduction under the banner of "Helping Australians keep more of what they earn", the announcement nonetheless further reduces the income tax collected on top of the substantial stage 3 tax cuts last year.

There will be few if any Australian families opposed to a cut in personal taxation rates, especially during the recent cost of living crisis. And rightly so. After all, this will put more money back in people's pockets to pay for essential items.

But will reducing tax rates actually make us happier? Could it be that higher taxation rates actually lead to happier nations, as counterintuitive as they may sound? Let's look at what the data says.

Let's first explain what the above scatter plot is showing. The World Happiness Index Ladder Score is a measure contained in the World Happiness Report, an annual publication by the United Nations Sustainable Development Solutions Network (SDSN) that ranks countries based on how happy their citizens perceive themselves to be. The report evaluates happiness levels for individual countries by examining factors that influence well-being and quality of life. Those countries with a higher ladder score are those whose citizens feel happiest. For the sake of this discussion, we'll look at the group highlighted by the orange dots, each of which have a ladder score of 7.0 or more.

The size of the dots themselves is determined by the Gross Domestic Product (GDP) per capita for each nation, relative to all nations. In essence, the larger the dot, the more national income is generated per person in that country's population. Here, countries like Luxembourg, The Netherlands, Ireland, the United States and Singapore feature prominently.

On the vertical axis is the personal income tax rate for each nation. These figures, available on the Trading Economics website, present an overview of the highest marginal tax rates applied to personal income across different countries. This enable a comparison of how governments tax individual earnings worldwide.

The chart above is interactive. You can zoom in and hover over a particular country to view its Happiness Index Ladder Score, where it ranks on that measure globally, GDP per capita and the highest marginal tax rates. You can also select a country flag below to see where it sits in the chart (some countries with similar low to mid chart rankings, primarily in Africa, have been removed so as to de-clutter the chart).

Now, for some interesting conclusions based on the data.

1. Nine countries scored 7.0 or above on the Happiness Index. Eight of those nine are higher taxing nations compared to the vast majority other nations, including countries such as the USA.

   
   

2. There is one notable outlier, Costa Rica. For those who may not be aware, ¡Pura vida! is a well-known phrase in Costa Rica, meaning "the pure life" or "simple life." It represents a philosophy of happiness, gratitude, and a laid-back approach to life. Costa Rica consistently ranks high in the World Happiness Index, partly due to its strong community values, nature-oriented living, and emphasis on well-being. Now that sounds like a country I'd like to visit one day.

   
   

3. Australia (the yellow dot on the chart) is a relatively high taxing nation but, equally, fares quite well on the Happiness Index. In fact, we are in 11th place with a ladder score of 6.97. Our GDP per capita of $64,800 is also competitive, very similar to the prosperity of a country like Denmark ($68,454).

This brings to mind the introduction of Gross National Happiness in the 1970s by King Jigme Singye Wangchuck of Bhutan. What exactly is important when we measure the health, wealth and prosperity of a nation? In either case, the 8 countries in that top right segment of the chart (those with the red dots) are doing well on both counts.

Australia is too. In fact, we are happy and have higher performing GDP per capita than many in our peer group including New Zealand, the USA, United Kingdom, Canada and Japan and Germany.

The Scandinavian countries are quite well known for socially progressive governments with a commitment to economic equality, social security, and high-quality public services. Relatively high rates of taxation pave the way for that. It seems telling that in spite of this, or perhaps because of this, the citizens of those countries consistently rank the highest across the globe.

I studied in Copenhagen for four months way back in 1989 and I can attest to the prosperity and happiness over there. Denmark is a country with excellent economic and social infrastructure. Remember the pilot experiment of integrating purpose build aged-care living with pre-schools to build social cohesion? Meanwhile, back in Australia, concepts such as "welfare state" are met with derision and generally unchallenged.

Yet I do wonder why there is such a rush in many countries like Australia to move to smaller government with the attendant risk of lower-quality public services. We seem besotted to the notion of lower rates of personal taxation without an answer to how we are going to fund the services and infrastructure we increasingly need. There is also a stubborness towards raising the rate of income support payments that provide greater economic equality and social security to those who are most vulnerable.

I come back to the data again. As personal taxation rates head south, unless we are an outlier like Costa Rica, our happiness is also likely to head south.