On Utilitarian Models of Income Taxation
John in a recent post stated the key to arguing taxation policy was the ability to discern which arguments mattered and which were superficial. Toward that end, I would insist that using statistics to demonstrate either the utility of a supply-side model or a more progressive model of marginal income tax rates misses the boat entirely. The more fundamental point is that the entire concept of utilitarian income taxation is flawed.
The philosophical foundation of marginal rate income taxation is based on the notion that the State can coerce a more equalized marginal utility distribution among it's citizens by some optimal taxation schedule of income. From a utilitarian standpoint, those with a declining marginal utility of income should pay more in income tax. It seems to makes sense, but what exactly does this model imply?
For a good introduction to the concept of marginal utility of income, I would recommend this recent post by David Friedman(Milton's son) at his blog . As Friedman demonstrates, arriving at a "fair tax" via marginal utility models is a murky endeavor.
However, a recent paper by 2 Harvard Economists questions the entire basis, or at least the simple one-variable(income only) framework of utilitarian income redistribution.
Their paper,The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution ,demonstrates that a a tall person earning $50,000 should pay about $4,500 more in taxes than a short person earning the same income. The authors openly invite the readers to question the foundations of utilitarian income redistribution and openly speculate how their model could be extended to race, sex, physical attractiveness, etc.
Let's see how this could actually be made to work in the real world taken to it's logical conclusion. On your 1040 form you fill out your gross W2 earnings(say 50K) and then input your height,age,sex,race,physical attractiveness(now that we are in the 21st century, this could be done by a biometric scan to avoid cheating) to get your Marginal Utility Adjusted Income. Say if you are a 6' white male of below 40 who is relatively physically attractive, then your MUAI would be, say, 70K. If you are a 5'8" bald male who is over 50 who is physically repulsive, then your MUAI might be 40K. The first example would then pay tax on a MUAI of 70K and the second would pay tax on a MUAI of 40K.
If this seems absurd to you, then you really should be questioning the foundations of marginal income taxation in the first place. If you are not willing to allow the state to go to this extreme to enforce equalization of marginal utility through income taxation, then arguments about "tax fairness" become moot.
- ka1igu1a's diary
- Login or register to post comments
Comments :
Friedman's analysis is kind of weak IMO
Friedman says:
I disagree with Friedman's conclusion. I'm going to go out on a limb here and assume that this proponent of a highly progressive tax was a liberal. Well, if a liberal is going to design the marginal utitlity function, it's not going to be a linear function, as Friedman uses as his example. It's going to look like this:
Now, the liberal may not visualise this graph, but the shape of the graph is implied in the liberal's vaule system-- the liberal tends to place a high value on basic necessities like food, shelter, basic health care and so on, and so the liberal places a high marginal value on the first bits of marginal income that go to these necessities. The liberal also would see little marginal utility in the jetski purchased with marginal income out beyond, say, $100,000, so the graph approaches the x- axis at high income levels. Such a graph for marginal utility can and does indeed produce progressively higher income tax rates at higher income levels, all the way along the graph.
Friedman then becomes concerned over the problem that government benefits pay the richer taxpayer less marginal utility than the poor taxpayer. He fails to see that the argument he's really making is really the liberal argument that more benefits should go to the poor, because they will get more marginal utility out of the benefits! No liberal, and no rational person really, would suggest that we design a tax system around paying back Warren Buffett an amount of marginal utility in government benefits proportional to his tax bill equal to a person making $25k per year. We'd probably have to build Warren a solid platinum castle with diamond windows to do that.
I wish that it could just be stipulated that progressive taxes are not fair, in that not everybody will pay the same amount, or the same percentage, or get back a government benefit exactly equal to what they put in. You can't be fair in any of those ways and achieve the goals which liberals want to achieve-- such as caring for the old and infirm, giving a hand up to the destitute, taking care of orphans, and children whose parents can't or won't provide for them, and so on. Many of these groupls will pay little or no tax yet receive benefits worth thousands. Yes, I guess it's not fair that I have to pay tax to support these freeloaders, but I'm glad to do it :-)
skymutt: wise and powerful... enlightened...
Friedman was not assuming the derivative of marginal utility
with respect to income is linear. Go back and carefully review his equation he wrote out. Clearly if marginal utility of income declines more than proportionally to income, you would end up with something like the inverse square curve you posted(look at his equation,"Caret" symbol means raised to an exponent and the negative sign means it's an inverse).
In any event, I referenced Friedman merely as an introduction to the concept of marginal utility of income, not as the primary criticism. The paper by the 2 Harvard professors was the main point I was raising in criticizing how convoluted utilitarian redistribution of income really is. There is nothing fair about it.
Your point of providing a safety net for the truly needy is a valid one, but I would argue that there are other ways to accomplish this other than a tax on labor.
What would be your preferred method?
Your point of providing a safety net for the truly needy is a valid one, but I would argue that there are other ways to accomplish this other than a tax on labor.
Out of curiosity, what system would you implement if you were in charge?
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
Are liberals trying to gouge the rich or help the poor?
Actually, there is nothing preventing the Democrats from making your exact point here. Nothing. In fact the Republicans are trying to help them do just that. This is why Rush Limbaugh keeps making the point the liberals have to lie about what they believe. They make up rationalizations to try and cover over the fundamental point you just raised above.
On the other hand, I would argue that you can, in some sense, have your cake and eat it too. If we shift our focus from one of gouging the rich to one of maximizing the benefit to the poor, we can raise the funds you want to cover the poor and still be at least more fair to the rich, a.k.a. the high producers. My recent diary makes this very point. In my third example we implemented what amounted to being a regressive tax in the sense that you got a lower tax rate for even higher production/income.
In other words, we gave an incentive to the proven highest producers to do even better by offering them a tax break for production levels above a certain point. The net result was more resources available for the poor and happier rich people. A win win. Note that the end result is still not fair by the measures you discuss above, in fact it makes them less fair, but your stated end goal (paying for and improving the condition the poor) has been met.
Republican Maverick at Large
-4:Strongly Disagree; 0:Meh; +4:Strongly Agree
good looking guys go on more dates, so they need more money
These articles look interesting, so I'll have to come back and read them in full...but my first whim is that non-financial utility should not be lumped together with finaicial utility.
In other words, I can't see why a good-looking guy would have less use for money than an ugly guy -- in fact, the good looking guy may have more opportunities to make good use of the money that he is given. He may have a higher success rate when he invites women on dates, or alternatively he may benefit more from going "out on the town" since he will be more likely to meet women. The point is to equalize marginal utility, not total utility.
Anyway, the very idea of comparing utility between individuals is pretty shakey.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Because ugly guys need money just to get dates ...
whereas the good looking guys get dates regardless, and they are more likely to get some action which doesn't cost them a dime. Ugly guys, like Democrat Governor Spitzer, have to pay for it.
Republican Maverick at Large
-4:Strongly Disagree; 0:Meh; +4:Strongly Agree
OMG, you have hit the nail SOOO on the head.
This makes the point about how arbitrary the whole marginal utility concept is very well. Excellent write-up!
Republican Maverick at Large
-4:Strongly Disagree; 0:Meh; +4:Strongly Agree