Income has Externalities
[Content Warnings: suicide]
A study by the Federal Reserve found that, after controlling for various factors (including family income), county income was positively correlated with suicide rates . Recall that income actually correlate with lower suicide risk, so it’s peculiar that the average income of the county you live in actually positively correlates with suicide risk. If we interpret this as causation, this implies a 10% gain in county income causes a 3.2% increase risk in suicide for a family whose income doesn’t rise.
If you live in a county of households, and your income goes up by 10% the average, then you’ve increased the average income by percentage points. This means you’ve increased the risk of suicide by percentage points for households. This is equivalent to increase one household’s risk of suicide by 3.2%. So, effectively, by earning 10% more income, you effectively increase someone else’s risk of suicide by 3.2%. That’s an expected change of about 4-in-a-million suicides. The externality is, thus, $7.
The median household income was $53,657 in 2014, so this brings us to the conclusion that there should be a 0.13% tax on income to account for the externality of increased suicide. On the other hand another study found an association between income inequality in a neighborhood and suicide rates in New York City among people aged 15 to 34 (but not 35-64) , so maybe this only applies to young adults.
Suicides, Utility, and Happiness
If you combine this data with the statistics concerning how richer people are less likely to commit suicide, you find that they more-or-less cancel. So, essentially, making more money transfers suicide-risk from you to your neighbors.
In a previous post, I attempted to argue that we could use differences in suicide-attempt-rates between different demographic groups to estimate the differences in their average utility levels. If you accept this interpretation and also accept that the lethality rate of suicide is the same regardless of income-level, it follows that raising your income improves your utility by almost the exact amount it reduces your neighbors’.
Indeed, we do see that self-reported happiness does not generally increase as a country’s income rises   , but happiness does increase as your particular income rises. If happiness from income is actually a zero-sum game, then this implies that me making more does have a very large externality on society. This would support a very high level of taxation, because it would imply that we’re basically all “trapped in a rat race,” and should instead spend our time doing things that actually make us happy without reducing anyone else’s happiness.
Obviously, however, the taxing of income has benefits beyond internalizing this externality. The revenue supports a wide variety of government projects, but I thought these line of reasoning was interesting.
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