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What We Need Now Are More Taxes

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There are three words, three moderately long but ultimately rather simple words that make the argument for increasing taxes on the rich quite sensible:

Diminishing Marginal Utility.

If you're not familiar with the concept, go visit your undergraduate alma mater and punch in the neck whoever sets your school's curriculum. Why were you not required to take economics? Also, go back to your home town and punch your principle in the neck, too. And, might as well get a couple school board members as well.

The concept is quite simple, for many things, as you get more of it, the value of each additional unit decreases.

It's a hot summer day, you've been out mowing the yard, and you come in inside. You get yourself a glass of ice cold water. Boy, that's quite refreshing, 5 utils! (Again, for the economically disinclined, a util is a unit of utility, pleasure, or value; it doesn't map to a specific amount, it's just used for comparing different values.) You're still hot from being outside and a bit thirsty after the first glass, so you get yourself a second. It's refreshing, but not as refreshing as the first, 2 utils. If you drink a third glass, you may get no enjoyment at all, maybe 0 utils. At the fourth glass you're now filling up with water and it's becoming quite unpleasant to drink, -3 utils.

Diminishing marginal utility works for money as well. If you get paid $30,000 a year, you will use that money to put a roof over your head, food in your stomach, and gas in your beater of a car. Not a great life, but you've gone from being homeless and starving to having all the very basic creature comforts, 10,000 utils. If you get a raise from $30,000 to $60,000, now you can buy some decent health insurance, start saving for a new car, maybe work towards building a down payment on a house, put some away for retirement, and take a trip to Disney. Your $60,000 gets you 16,000 utils; the original $30,000 providing 10,000 and the additional $30,000 giving you another 6,000. Go from $60,000 to $90,000 and now your Scotch gets an upgrade, your car gets an upgrade, you look at saving more and pushing retirement up a few years, and your trip to Disney becomes a trip to Dublin. You're up to 19,0000 utils, with the last $30,000 buying you an extra 3,000.

At $3,000,000 a raise to $3,030,000 is going to be relatively meaningless. There are only so many yachts you can waterski behind. At this point $30,000 is buying you single-digit utility. An addition million dollars might not even be enough to get you over the hundred util mark.

 

Taxing the rich makes sense because it hurts them the least. Taking $1,000 from 1,000 poor people can cause them to have to skip meals, fall behind on their rent, or skip a much needed trip to the doctor. Take ten times as much money, $10 million, from a billionaire, and he won't even bat an eyelash.

The first objection to this is that we're engaging in socialism. That's of course stupid. Socialism isn't the taking of money from the rich, it's taking money from the rich and redistributing it to the poor. The nation has bills to pay, and the money has to come from somewhere. It makes sense to say, as a nation, that we're going to pay the bills in the way that causes the least total amount of lost utility. Tax the wealthy a lot, the well off some, and the poor very little or perhaps not at all.

Second objection is that even if we took all of the money from the rich, it wouldn't be enough to pay our bills. So... the tax rate for the rich should be 0%? Again, another stupid objection. Raising taxes on the rich might not fully solve our problems, but it would help a whole lot. We should probably also raise taxes on the very well off, the people in the $100,000-250,000 range.

Yes, that's quite an unpopular position. But, there's a whole lot of people in that range, and taking a little extra from them isn't really going to hurt that much. Since we have a lawyer audience here, there's the obvious student loan payment issue. It sucks to be taxed like you're making $160,000 a year when you have to pay $15,000 a year (after taxes) to Citibank or Sallie Mae. Easy solution: make student loan payments tax deductible. Treat them like any other cost of doing business. If you get to deduct the cost of a piece of machinery from your business's taxes, you should also get to deduct the cost of an educational investment. $160,000 also isn't a whole lot of money if you're sending 3 kids to private school. Fine. You already get a tax credit for your kids, but we'll give you a deduction for their education as well. If you have $160,000 a year after student loans and paying for your kids, you can afford to contribute a little more to the national kitty. Your vacation to Rome might have to be 7 days instead of 9. Boo-hoo.

The third, and most economically common sense, objection is that raising taxes will decrease the incentive to work. Maybe. Maybe a few people will say "You know what, $300,000 after taxes really is enough, and it's not worth putting in an extra 200 hours of work this year to go up to $330,000. $335,000, sure, but not $330,000." Those people are bizarre.

Most people don't really have that option though. If you're in a job that's putting you into a high tax bracket, you probably don't have a flex time option. There's no part-time CEOs. At that point the money is only a small part of the equation anyways. You'll work to get ahead because you want the power that comes with advancing. You want to be in charge, or you want the admiration of your peers, or you want to see the business you started grow - not for the money but for the sense of accomplishment.

And so what if the rich are disinclined from working quite so much? Maybe that's a good thing. The nature of their jobs means they're not likely to work reduced hours, but there is a chance the higher taxes will encourage them to retire sooner. Great, they're opening up jobs at the top, and as people slide up the ladder, jobs in the middle will open, and then there will be new jobs at the bottom. You might have a net reduction in the work force, but that's not job killing. Early retirement isn't job killing. If anything, it's job creating, by getting the unemployed in to the newly vacant bottom positions. Plus, these high paying jobs tend to be very time consuming, leaving little time for leisure. You know the drill, you make a lot of money but don't have the time to enjoy it. Let's give them the time to enjoy it. If they're retired they'll have more time to pump the money back into the economy rather than hording it.

 

To wrap things up, let's go back to the initial idea of diminishing marginal utility. Remember when around the 8th glass of ice water you start vomiting and rather than positive utility, you actually lost 20 utils as the water came back up? We never got to that point with income. Some will argue that any increase in income will have some increase to your total utility. The marginal rate will approach zero, but never go negative. There's good reason to think that's not the case though, that more money will actually result in more problems.

The first is the classic example of the golden handcuffs. You get used to the money and it traps you in a job you'd rather not be in. If you were making $100,000 as a Big Law lawyer, you'd probably be willing to take a pay cut and go work at that boutique that does the stuff you're actually interested in, but which only pays $60,000. If you're making $500,000 in Big Law, no way you'd take the $60,000 job, even if $60k plus a job you enjoy brings more total utility than a $500k job you hate.

But, the real negative utility comes from the millionaires and billionaires. It's not the golden handcuffs or the trappings of aristocracy. When you have a huge mountain of money, the rational thing to do is protect it. You want to see a slow steady growth of the stock market, not volatility. You want things to stay pretty much exactly the way they are. No rocking the boat. But, hoarding wealth increases the chances of social upheaval. You get what we're seeing with the Occupy Wall Street movement. This is why the Saudi royal family responds to protests with cash handouts. If you have $2 billion, it's worth giving $1 billion to keep the mob at bay. You give up some money to reduce or eliminate the risk that you might lose it all.

[Read more from The Robot Pimp]


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