Utility Maximization and Progressive Taxation

This post was going to focus on marginal utility of money as an argument for increasing the progressivity of tax policy, but I decided that since there is a large body of literature to which I could add virtually nothing I would instead cheer myself for finally getting my CDs organized. Mrs. LaBlog deserves most of the credit for this.

If you really need some economics talk, then I will give you some. The view that I have, which is shared by most liberal economists in the world, is that one consideration of tax policy, aside from revenue-generating capacity and economic efficiency, is total well-being of the society that is effected by the policy. The unit of well-being is the utile. For most policy analysis we use money as a proxy for utiles, which is something we often forget. The basic idea which can be fairly easily demonstrated is that as one's wealth or income increases, one gets a smaller amount of utility from each additional dollar. This is diminishing utility of money. This becomes a pretty simple argument for progressive taxation. We tax higher earning individuals at a higher rate than lower earning individuals in an effort, primarily to fund expenditures but also to result in a fairly equal lose of well-being to those with the burden of taxation. Again, this is an overly simplified description of a complex concept.

One more economics related point: undergraduate economics is borderline useless. What a person learns in those courses is a series of theories that are each told as the truth without much mention given to the interplay of these theories. Price floors, like the minimum wage, will theoretically reduce consumption of a good as the price adjusts to the new market restrictions. In the example of a minimum wage, unemployment will theoretically increase as workers are priced out of the market. This assumes a perfectly competitive market and full information. The data suggest that, rather than increase unemployment, past minimum wage increases may have actually increased employment because the labor supply curve might not be linear. An basic understanding of economics is a good thing, however, it is important to remember that this is a complex field that requires critical thinking.