Feed on

My readers should spend time reading Tim Taylor’s fine blog regularly. Today he discusses very clearly and coolly the possible reasons why economists disagree on what the “optimal” top tax marginal rate is. In that post he discusses that part of the reason for disagreement is some disagreement about what the “marginal utility of an extra dollar” is for a rich person versus a poor person. While it may seem obvious that a rich person values his next $1 less than you or I do, I wished Professor Taylor and others would comment clearly on the difficulties of making this kind of a claim. It is not a value-less, positive economic statement. The mere act of translating income flows into something economists call “utility” and then claiming that we understand the functional form of utility is itself a value judgment. There is nothing in economic theory to suggest that this is the “correct” way to map income to utility, even IF our demand curves suggest that we experience diminishing marginal utility.

But my bigger beef is that all this discussion of “optimal” tax theory never actually gets to the point of what “optimal” really means. Of course, people like me don’t matter, but if you are like me and are morally opposed to most forms of taxation, it is nowhere near “optimal” to tax people marginally at 48%. Those values don’t matter I suppose, and they certainly are not included in the marginal utility assumptions mentioned above. But who cares about my ethical values? What else this discussion misses is that “optimal” in the sense of what the top tax rate should be doesn’t say anything about the “cheapest” way to raise a particular amount of tax revenues, or even the “fairest” way. For example, a head tax of $15,000 per year levied on every single American would raise enough revenue to fund government, and would eliminate well over $2 trillion of waste every single year from scrapping the current tax code (one day I’ll show you where that $2 trillion comes from – it is a conservative estimate in my view). But this is most certainly NOT what the academic “debate” on optimal taxation has been about. Keep your eye on the ball – no one here is trying to get a fair and efficient (in the sense of least distortions) tax code out of this discussion.

Finally, as I’ve said before, it’s not even clear to me that we want an “optimal” rate of taxation on income – but that’s neither here nor there these days.

2 Responses to “Two Cents Again on Optimal Tax Theory”

  1. Speedmaster says:

    The optimal level to left-leaning politicians can be derived using this formula:
    Optimal Rate = Current Level + 5%

  2. Rod says:

    New 1040 REALLYEZ:

    Line 1: List all income, wages, tips, gambling winnings, et cetera, et cetera.
    Line 2: Send it in.

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