Personal tools
 
Views

Argument: Progressives wrongly assume wealthy dollars have less utility

From Debatepedia

Revision as of 14:29, 1 July 2010; Lenkahabetinova (Talk | contribs)
(diff) ←Older revision | Current revision | Newer revision→ (diff)
Jump to: navigation, search

Parent debate

Supporting quotations

Friedrich A. Hayek. "Taxation and Redistribution". The Constitution of Liberty. 1960 - the agitation for progressive taxation reappeared in a new form. The social reformers, while generally disavowing any desire to alter the distribution of incomes, began to contend that the total tax burden, assumed to be determined by other considerations, should be distributed according to "ability to pay" in order to secure equality of sacrifice" and that this would be best achieved by taxing incomes at progressive rates. Of the numerous arguments advanced in support of this, which still survive in the textbooks on public finance, one which looked most scientific carried the day in the end. It requires brief consideration because some still believe that it provides a kind of scientific justification of regressive taxation. Its basic conception is that of the decreasing marginal utility of successive acts of consumption. In spite of, or perhaps because of, its abstract character, it has had great influence in making scientifically respectable what before had been admittedly based on arbitrary postulates.

Modern developments within the field of utility analysis itself have, however, completely destroyed the foundations of this argument. It has lost its validity partly because the belief in the possibility of comparing the utilities to different persons has been generally abandoned and partly because it is more than doubtful whether the conception of decreasing marginal utility can legitimately be applied at all to income as a whole, i.e., whether it has meaning if we count as income all the advantages a person derives from the use of his resources. From the now generally accepted view that utility is a purely relative concept ( i.e., that we can only say that a thing has greater, equal, or less utility compared with another and that it is meaningless to speak of the degree of utility of a thing by itself), it follows that we can speak of utility (and of decreasing utility) of income only if we express utility of income in terms of some other desired good, such as leisure (or the avoidance of effort). But if we were to follow up the implications of the contention that the utility of income in terms of effort is decreasing, we would arrive at curious conclusions. It would, in effect, mean that, as a person's income grows,, the incentive in terms of additional income which should be required to induce the same marginal effort would increase. This might lead us to argue for regressive taxation, but certainly not for progressive. It is, however, scarcely worthwhile to follow this line of thought further. There can now be little doubt that the use of utility analysis in the theory of taxation was all a regrettable mistake (in which some of the most distinguished economists of the time shared) and that the sooner we can rid ourselves of the confusion it has caused, the better.


Edwin R. A. Seligman. "Progressive taxation in theory and practice". American Economic Association. 1894 - The Value of the Last Dollar

To rationalize their inapposite view, these economists sought the support of “marginal utility” analysis; they argued that the “utility” of the rich man’s “last dollar of income” must be considerably less to him than the utility of the poor man’s last dollar to the poor man. To take more of what the rich man valued less was, to these economists, a way of achieving tax justice. They based their theory of tax gradation from bracket to bracket on the old plea-sure-pain calculus of the English utilitarian philosophers: obviously, so they said, there must be more pleasure and pain involved in satisfying (or in failing to satisfy) basic hungers than in buying a Rolls-Royce or subscribing for a seasonal box at the opera. By taking more of the supposedly less-valued “Rolls-Royce dollar” than of the highly-valued bread-and-beer dollar, “equality of sacrifice” could theoretically be translated into a law which would satisfy the ethical sense of the majority.

Superficially considered, there is a certain amount of rough practical justice in this way of regarding the “last dollars”—or the upper brackets—of a man’s income. If it is merely a question of satisfying the basic hungers for food, shelter, clothing, and the minimal cultural decencies, “last dollars” undoubtedly mean much; they may even mean life and death. But this is an argument for a basic exemption from taxation, not for levying progressively steeper surtaxes in the middle and upper brackets.

Beyond a certain subsistence and cultural minimum, the idea that “last dollars” can be rated in accordance with a scale of “marginal utility” to the individual becomes a fiction. Since men differ by inherited temperament, by circumstance, by ambition, and by training, every living human being values his “last dollars” differently. If intensity of avarice could be measured, the French peasant clutching his franc of profit and Hetty Green clutching her millions might come out at the same place. A Huckleberry Finn—or an ascetic St. Simeon Stylites seated on his column—will care little enough even for a “first dollar,” whereas a Major Armstrong, intent on raising the money needed to protect his patent rights to a radio amplifier, may desperately value—and need—his “last million.”

Who is to say whether the “last dollar” of a poor man taking a flyer on the “daily double” at the race track is worth more to the individual than the “last dollar” of a biochemist who wishes to buy a year’s leisure to experiment with rare bacterial cultures? Who is to say whether the last dollar spent by a housewife on a new Easter hat is worth more to its owner than the last dollar thrown into the kitty by a Rockefeller to plant Easter lilies or tulips at Rockefeller Center?

“Equality of Sacrifice”

Money has such protean uses that its personal valuation can take a thousand-and-one turns. It can command leisure, freedom, security, adventure, education, veneration, esthetic gratification, and appendicitis operations—plus the whole economic gamut of ordinary goods and services. It can command both power and the protection of the individual against power. As a cynical wit has put it, though you may be able in some instances to buy happiness with money, you can’t buy money, with happiness—which could conceivably give the “last dollar” of income a “one-up” position even to a man in love.

To make the attempt to force “equality of sacrifice” by taking more of what the well-to-do man presumptively values less is, then, to pursue a chimera into a quagmire. The utility of a dollar—any dollar—to an individual is a purely subjective phenomenon, and cannot be measured in any known unit. One cannot multiply quantities by qualities and get a mathematically respectable answer, as Sir Isaac Newton observed long ago. To suppose that anybody values his “last dollars” less than anybody else is to substitute mind reading (and emotion reading) for objective measurement. It puts a self-righteous and wholly tyrannical power into the hands of a majority, or into the hands of the politicians who represent what they think is the majority.

As for the value of an individual’s last dollar to society, this depends wholly on the uses to which it is put. It is the responsibility, the ingenuity, and the creativity of the individual which establishes the social “marginal utility” of the last dollar of income. But here, also, utility cannot be expressed in a priori terms, by taxing a man because he might waste his tax dollars.

The pleasure-pain calculus is wholly impotent when it comes to comparing a poor man’s ticket to the dog races (theoretically of little use to society) and a rich man’s investment in a job- creating business. Or, for that matter, the poor man’s contribution to the Red Cross and the rich man’s evening dissipation at the Copacabana. Even where the comparisons are freighted with seemingly unarguable moral distinctions, there are quicksands within quicksands. A night club might support a struggling musician while he is composing a great rhapsody, and a dog track could conceivably lead to far-reaching discoveries in canine genetics. On the other hand, charity—or a newly-created industry—may result in prodigious waste.

Used in price analysis, marginal utility has something objective to work on: the amount of goods which clear the market when the price is either raised or lowered. By utilizing theoretical supply-and-demand curves, one can even make reasonable guesses about the future. But marginal utility, which is of no use whatsoever in judging the intensity of personal feelings, cannot legiti mately be used to give society a right to political dictation of the social uses of “last dollars.” To tax possible investment capital on the theory that “society,” as represented by government, might invest it better is to indulge in a wild guess. Measurement (via a tax) cannot be undertaken before the dollars are spent. This is why men have traditionally been left the use of their dollars to spend them or to invest them as they please. When the market decides, there is no uncertainty about the comparative rating of men’s desires.

Problem with the site? 

Tweet a bug on bugtwits
.