The relationship between taxes, benefits and life satisfaction

This paper examines how tax-benefit systems relate to subjective well-being in European countries using both micro- and macro-level data. At the micro level, net transfers are strongly and positively associated with life satisfaction among the bottom half of the income distribution, while net taxes have only weak or slightly negative associations for the top income quintile. At the aggregate level, the tax burden is negatively associated with life satisfaction, but this relationship is weaker, or even offset, in countries with high government effectiveness. Overall, inclusive tax-benefit systems can enhance subjective well-being when combined with good governance.