Progressive Taxation Policies – A New Perspective


What is Subjective Well-Being?

The study of subjective well-being (hereinafter referred to as “SWB/Happiness”) is field of psychology that focuses on measuring the holistic health of a being. This field of psychology is a branch of positive psychology that assess the happiness of an individual by measuring the difference between their positive factor salients and their negative factor salients. Psychologist believe there are five antecedent of SWB, i.e., attachments, relationships, social class, wealth and goal pursuit. Further psychologists have stated that there are many causes and correlation that can affect SWB such as education, income, personality, goals, health, marriage, job satisfaction and life events of an individual. 

What is the impact of Income on Subjective Well-Being?

There are several existing studies in psychology that conclude that there is a positive correlation between economic well-being (hereinafter referred to as “socioeconomic status”) and SWB/happiness. However, this positive relationship is weak and a large percentage of human happiness remains unexplained. In 2001, a study was conducted in Mexico to investigate further the relationship between subjective and economic well-being. Although the microeconomic theory of utility derives the conclusion that human well-being increases with income, it was discovered that income does not have a strong influence on neither well-being nor in the probability of happiness. However, people tend to over-stress the impact that additional income would have on their subjective well-being. This fact could explain the importance that people place on increasing their income level, and it could possibly explain the relative sense of dissatisfaction once a higher income level is achieved. [1]

Evidence has been produced that although in the short-term happiness and income go together, i.e., happiness tends to fall in economic contractions and rise in expansions but in the long term there exists a nil relationship between happiness and income for most developed as well as for a number of developing countries. This phenomenon is known as the happiness–income paradox or the Easterlin Paradox, which states that at a point in time both among and within nations, happiness varies directly with income, but over time, happiness does not increase when a country’s income increases. [2]

Psychologists like Ed Diener and Robert Biswas-Diener conducted several researches on the correlation between wealth and happiness and concluded that people in richer nations are happier than people in poorer nations. Secondly that an increase in national wealth within a developed nations have not, over recent decades, been associated with increases in happiness. Furthermore they concluded that within-nation differences in wealth show only small positive correlations with happiness and that an increase in personal wealth does not typically result in increased happiness. They also went on to conclude that people who strongly desire wealth and money are more unhappy than those who do not. [3]

Since it has been concluded through researches that at any given point the individuals at the top of the income distribution express greater happiness than those with lower incomes, but any additional income affects the happiness of the poor more than that of the rich. This suggests that individuals place greater concern with their relative position in the society rather than their absolute income. [4] This shows that individuals do not just derive happiness from their income but also from factors such as rivalry with respect to their income and leisure. This was proven in a survey in Sweden, where majority respondents stated that even a reduction in the absolute income was acceptable in exchange of a higher relative income.[5] This means that there will be a positional gain of one individual but a positional loss of another. 

What is a Progressive Taxation Policy?

A progressive tax policy is one in which there is a larger percentage of income tax for high-income groups and a lower one for low-income groups, such a policy is based on the concept of ability to pay. A progressive tax system works on a tax slab system such as that in India and the United States. The strongest argument for progress tax is that transferring income from richer to poorer individuals through a combination of taxation and government spending increases total welfare or utility in the society.[6]

Progressive tax systems often allow for a number of adjustments to taxable income, such as exemptions, deductions, and tax credits. Such tax incentives can be used to provide additional relief to low-income citizens as well as to encourage business investment or investment in higher education. Progressive Tax has various merits that include shifting the tax burden to the one who is most able to pay it, this progressive taxation policy also helps prevent political and social instability and inequality by limiting the gap between classes. While many economists suggest that governments can get the most revenue from a progressive tax system, there are various demerits of the same such as brain drain, or the fact that inflation can push taxpayer into a higher tax bracket with no real increase in income after adjusting for inflation, furthermore progressive taxation also might discourage business investment and expansion as additional profit will also be taxed at higher rates. 

Subjective Well-Being justifies Progressive Taxation

From the conclusions drawn from the psychological research conducted on the correlation between SWB/happiness and income it is obvious that income has declining marginal utility. In such a situation, it is logical to conclude that adopting a progressive taxation system will cause maximum benefit and contribution towards the economy as well as towards SWB/happiness. This is because in a progressive taxation system the high income earning citizens of the country will be paying a higher tax amount, that they can afford to, while the poor will have a lower tax burden and hence make some additional saving, such an additional saving will provide a higher unit of happiness among the low-income earning citizens of the country. Further, it would be beneficial to adopt a progressive taxation policy since it is taxed on income of the individual, unlike other consumption based taxes like luxury tax, Value Added Tax and Good and Services Tax, which can be avoided by high-net worth citizens. 

Progressive Taxation Policy in India

One must look at the study conducted by Hagerty and Veenhoven which concluded that an extra dollar of income in a poor nation, like India, produces thirty-seven time as much utility as an extra dollar while compared to a middle nation, like United Kingdom, and seventy times as much utility as an extra dollar in a rich nation, like Japan or the United States of America. [7]

India already has a progressive taxation policy in place for calculation of the income tax, there are various tax slabs rates applicable on individuals based on their income and age as well as other legal entities, such as Hindu Joint Families, domestic companies, foreign companies, co-operative societies and local authorities. These tax slabs are reviewed and revised annual by the Finance Minister in the Financial Budget that he/she presents to the Lok Sabha. These tax slabs also protect the extremely low-income individuals as the tax rates are applicable on those individuals who have an income of more than rupees three lakhs or more. 

The basis of the application of progressive tax policy in India is based on the district inequalities with respect to income of individuals as reflected by the per-capita income. Thought the application of a progressive taxation policy it is a viable option for optimal redistribution of income in the country. Such a policy would increase the post tax income of the low-income individuals and thus provide a higher unit of SWB/happiness among them.


The concept of progressive taxation is one that is essential to redistribute resources and reduce inequality in a country where there is a large discrepancy in the pre-tax income, like that in India. Such a taxation policy is applicable on the income of the individuals and does not provide an opportunity for the high-income individuals to avoid taxes that are consumption based such as luxury taxes on sports cars. This theory is supported by the economic and psychological research that determines the declining marginal utility of income.

Such a policy will also help increase the total welfare of the country, since there is a positive correlation between income and SWB/happiness. Happiness research also suggest that the expenditure of additional income on a positional good may have a little impact on the overall wellbeing of the society as the positional gain made by one individual will be offset by the positional loss made by another [8], hence, consumption based taxes will have no positive impact on the overall wellbeing of the society. 


[1] Fuentes, Nicole & Rojas, Mariano. (2001). Economic Theory and Subjective Well-being: Mexico. Social Indicators Research. 53. 289-314. 10.1023/A:1007189429153. 

[2] Richard A. Easterlin, Laura Angelescu McVey, Malgorzata Switek, Onnicha Sawangfa, Jacqueline Smith Zweig. (2010). The happiness–income paradox revisited. Proceedings of the National Academy of Sciences. 107 (52) 22463-22468; DOI: 10.1073/pnas.1015962107

[3] Diener, E. & Biswas-Diener, R. Social Indicators Research (2002) 57: 119.

[4] Thomas D. Griffith, Progressive Taxation And Happiness, 45 B.C.L. Rev. 1363 (2004), 

[5] REDRIK CARLSSON ET AL., Do You ENJOY HAYING MORE Than OTHERS? SURVEY EVIDENCE OF POSITIONAL Goons 11-12 (GOteborg Univ. Dept. of Econ., Working Papers in Economics No. 100, 2003), available at 01 /gunwpe0100.pdf. 

[6] Joseph Bankman & Thomas Griffith, Social Welfare and the Rate Structure: A New Look at Progressive Taxation, 75 C A L . L. R E V . 1905 (1987). 

[7] Michael R. Hagerty & Runt Veenhoven, Wealth and Happiness Revisited—Growing National Income Does Go with Greater Happiness,64 SOC. INDICATORS RES. 1,3 (2003). 

[8] Thomas D. Griffith, Progressive Taxation And Happiness, 45 B.C.L. Rev. 1363 (2004), 

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