# How higher/lower taxes can affect reward system and overall satisfaction of someone

I'm curious about how the tax system affects the reward center in the brain and how that influences the perception of happiness with one's life.

My hypothesis is that subject A would make \$3500 a month doing something he/she loves in a city he/she likes, etc. The subject pays a 20% overall tax in order to receive the \$3500, so the actual value before tax would be \$4200. Subject B makes the same amount of money, doing exactly the same in the same city, etc. What I'm interested in is in isolating the tax variable, so in this case Subject B would pay 50% tax (that would make it$7000 before tax).

So both subjects have the same life-style and make the same amount of money, but what I'm guessing is that A feels more rewarded than B, and if so, Subject B would feel more entitled to pursue more money (reward) because he feels that the reward is lower than what he should be getting. By pursuing this extra reward then, Subject B would fall into the trap of constantly struggling to feel rewarded (because of the high tax value marked on his payslip and this alone). On the other hand, to prove that Subject A was "happier", we could actually launch a second hypothesis where A would make \$3000 and B the same \$3500, and A would again feel more rewarded because of the lower tax rate he paid to get his salary (20% on A vs. 50% on B).

This in turn would open a bunch of other interesting questions, like how to navigate the thin, invisible line that might trigger minor/major complaints on people about the feeling of being happy with their salary/government.

My question then is: has this been studied in depth before (I imagine so), and if so, where can I read about it?

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## 1 Answer

This is pretty close to being a classic example of a framing effect (wikipedia), originally described in the literature by Tversky & Kahneman (1986).

In essence, our subjective valuation of a choice or outcome isn't invariant, as economic theory says it should be, but instead is influenced by contextual effects, such as riskiness, and if the outcome is seen as a loss or a gain.

I don't know much specifically about framing effects and framing effects and taxation, and haven't time to do any research, but a Google Scholar search for the terms throws up this and this, among other articles, which seem to cover what you're talking about (although they may be behind a paywall, I don't know).

Looking back at your question, your hypothesis seems about right: while both people end up with the same amount of money, person B will perceive a greater loss due to taxation, and so, when both are thinking about their earning from this perspective, should be less satisfied.

However, if decades of research have shown us one thing, it's that high-level cognitive effects like this are extremely context dependent. What happens when both individuals aren't thinking about their income in terms of taxation, but with reference to the minimum, or average, wage in that region? Or what if the comparison happens in a context where public services, like education, are salient? Would person B be happier, because they feel they have contributed more to their community? Where I'm going with this basically that psychology can be very very hard, and that context always matters.

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