Marginal utility of money & progressive marginal tax rates

Posted on: March 11, 2018 at 11:39:31 CT

Micro economic marginal utility theory of income holds that the first dollar of income earned by an individual has a certain amount of utility (worth, usefulness, etc) to the individual. The second dollar of income has slightly less utility and so on with each additional dollar of income. Each additional dollar has slightly less utility than the prior dollar.

It is argued a "fair" tax system is one that takes an equal percentage of the total utility the taxpayer has received from each taxpayer. As income increases, a higher and higher percentage must be taken in taxes in order to assure that the percentage of utility given up by the taxpayer is the same it is for lower income taxpayers.

I.e. if A has $50,000 of income and B has $500,000, the theory says the last $1,000 of income for A has more utility to A than the last $1,000 of income to B. Therefore, to take the same percentage of utility from both, more dollars have to be taken from the last $1,000 of B's income than from A's income. Thus, you have progressive income tax rates.

That's the economic argument as to why progressive rates are "fair".

Another theory that is often used to support progressive marginal rates is the higher income earner has derived greater benefits from our society (that's why he or she has a higher income) and therefore, a fair tax system requires him to give up a greater percentage of that income than a lower income earner.

Most everyone wants a "fair" tax system. The issue is what is "fair". My personal view is in a fair system, I pay no taxes whatsoever and if that's the case, I really don't care what you pay.