Friday, December 14, 2007

 

Progressive Taxation. Should tax rates be higher on the wealthy than on the poor? A well-known reason is that the marginal utility of income is lower for the rich, so redistributing wealth to the poor could raise total utility. Another reason might be to get the amount of government spending right. A rich person would be willing to give up more of his income than a poor person for a typical good,including perhaps for a typical public good such as defense spending. The rich man might be willing to pay 20,000 dollars for a new mortar whereas each of two poor men would pay only 3,000 dollars. If the mortar costs 15,000 dollars, a tax system whereby each person paid equal amounts of 5,000 each would result in the poor men voting against the mortar. Both the rich man and the poor men would prefer a tax system in which the poor men paid 1,000 each and the rich man paid 13,000, because everyone would vote for the mortar and everyone would get positive surplus. Not just fairness, but correct incentives for voting require that tax rates match with desired spending. This is probably not a new idea, but I'll note it here anyway.

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