Tax Fairness

When devising his tax plan during the campaign, I bet Barack Obama saw a graph that looked similar to this. This New York Times graph shows the tax revenues, by percentage of total income.

You’ll note that a progressive tax scheme — like the one the United States has — should actually increase as you move from the poor to the insanely wealthy. The reason for this is an economic principle called “declining marginal utility” which a lot of conservatives seem to forget when discussing tax cuts. The basic idea is that with each additional unit of a good you get, (at a certain point) the utility you derive from that unit starts to decline. For example, $1 means more to someone who makes $30,000 per year than somebody who earns $300,000 per year, and much, much more than it does to someone who earns $3,000,000 per year. So if we assume fairness to mean “affects all equally”, it makes sense then that the rich to be taxed at higher rates. But even if we remove fairness from the equation, the declining marginal utility of money also stipulate it’s a good idea from a policy perspective. That is, because $1 has greater utility as your income goes down, more money at the lower end of the income spectrum is likely to mean more money spent in the economy.

Of course, there are equilibriums. The rich should not be taxed so onerously as to discourage investment, but somehow, I imagine someone who goes from an after-tax $7.9 million to an after-tax $7 million will still be able to scrounge up some change.


5 Responses to “Tax Fairness”

  1. mike Says:

    its nice to have a phrase to put with the principle. i can’t believe that % comparison though; all along i had assumed they were already paying a larger % of income in taxes. what accounts for this discrepancy? capital gains rates being so low? that shouldn’t cover the whole difference…

  2. More on Tax Fairness « Yes, Let’s Talk About This Says:

    […] Filed under: Politics, policy — Tags: economy, tax — Jon @ 11:58 am So in response to my post yesterday highlighting the fact that the rich actually pay less in taxes as percentage of total income than […]

  3. Don’t Stop Me Now « Yes, Let’s Talk About This Says:

    […] true that the top 1 percent pays 28 percent of federal taxes, but it’s also true that they pay less than middle class citizens in terms of  total income even as their tax burden has gone down relative to the income they […]

  4. jonolan Says:

    Your point has a certain validity, but in regards to personal income tax. Applying the same standards to business income taxes would erode the economy and end up costing the middle and lower classes far more in lost wages or inflated prices of mass market but low margin goods.

  5. You Should Pay Less; They Should Pay More « Yes, Let’s Talk About This Says:

    […] percent of earners carries a disproportionate share of tax revenue. This is partially true, and also something I’ve written about before, but this should piss people off at a really visceral level (via […]

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