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One justification for progressive income taxation is that a dollar of additional income to someone earning $600,000 per year in income is not valued nearly as much as a dollar of additional income to someone earning $18,000 per year. I’d like to point out three implications/observations based on this justification.

  1. If you use this as your justification for having higher marginal tax rates on higher income, then it follows that when income is taken from the wealthier then it must be distributed, dollar-for-dollar, to the poorest on up. Why? Because it must follow from this observation that the poorest people benefit the most from a dollar of income – so taxation for this reason requires us to increase the income of the poorest person up until their utility matches the utility of the next poorest person, then increase the incomes of the two poorest people until their utility equals that of the third poorest, and so on. This should continue until the politically chosen appropriate amount of redistribution has been met. Furthermore, when you hear folks argue that the rich ought to pay more in order to fund national health care, or social security, or corporate bailouts, I argue that you cannot use as justification that the rich value their marginal dollars less than the rest of us. You might have some other justification, but not that one. I bet the other justifications are uglier than the one under consideration.
  2. How come I never see the same argument applied to political agencies? Seriously. If the rich value the next dollar less than the poor, then wouldn’t one have to argue that government “values” the 7 trillionth dollar less than the trillionth?
  3. Some discussions of this topic invariably redound to saying that progressive taxation is justified because others’ utility is included in my utility function. Thus, if I am rich, and I get utility from the poor having increased utility, then there is a case for disproportionate taxation. Sure. But this raises two additional questions. First, do the rich experience diminishing marginal utility over other people’s utility? If so, it suggests that merely pointing to the lower overall utility of the poor, or higher marginal utility of the poor, is not justification enough to support progressive taxation on these grounds alone. Second, and this point is likely to have you uninvited from the upcoming National Championship Game cocktail parties … is it plausible that some lower income individuals obtain positive utility from someone else having more income? I completely understand the tendency to compare ourselves to others, that relative positioning is important, and that my dollars go a longer way when I don’t have much than when I have a lot, but to totally ignore that the possibility that wealthy folks’ income can have a positive coefficient in a poorer person’s utility function is a bit more than tomfoolery. If I am a middle income blind person, I sure as sh*t get a lot of pleasure knowing that some rich eye doctor may obtain more income by working on cures for blindness. In a world solely characterized by poor blind people and rich eye doctors it would not at all be obvious that anyone would prefer to live in a world of progressive taxation. Yet that is totally presumed away in casual discussions (and some professional ones) of the topic.

2 Responses to “Progressive Taxation and the Diminishing Marginal Utility of Income”

  1. jb says:

    I question the assertion in the first place, that people with higher income value the next dollar less than do people with lower income. I know lots of people who became rich because they love money, and I know low income people who will readily admit that they “derive utility” from things like good friends, family and a simple lifestyle uncluttered by goods they see as unnecessary.

    I was a dishwasher at age 16 (my first w-2 job). The place was owned by a local guy who owned several local restaurants. He was worth well over $1 million. One day I dropped a $5 plate that broke to pieces. He was apoplectic, I got the worst chewing out I have ever received (and I spent 8 years in the military, played some football, etc.) It ruined his day, he was miserable.

  2. Michael says:

    If they value that extra dollar so much less, how come they work so much harder to get it? Getting rich isn’t exactly easy, after all.

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