Responding to the ongoing debate among economists about Congresswoman Alexandria Ocasio-Cortez’s proposal of a 70% tax rate on the very richest Americans, Chris Dillow says: “I’ve never been comfortable with the marginal utility argument for high top tax rates. One reason why the rich are rich is that they value an additional dollar highly”. I disagree. I think the marginal utility argument is the strongest argument against inequality, and that it is consistent with higher tax rates on the rich (also, to the extent that marginal utility weakens the case for higher taxes, I think it is correct to do so).
The ‘marginal utility’ argument is that inequality is bad because poor people get so much more benefit from extra money than the rich. If £10,000 went missing from a billionaire’s bank account, the chances are that they would barely notice the loss, whereas for many of the poorest people that sum of money would be life changing. A world in which the billionaire’s taxes were raised to pay for lower taxes, income support or better services for the poor is therefore clearly better.
Yet while the argument seems pretty clear cut at the extremes of billionaire and pauper, Dillow points out that the generalisation that poorer people have more desire or use for money doesn’t always hold. As he says, at least one of the reasons why rich people are rich is because they care a lot about having money, and have prioritised getting rich over other things. It isn’t so obvious that a comfortably-off middle class person would get more enjoyment from an extra £10,000 than a millionaire. If I got that much money, it would probably top up my pension. Perhaps they would be able to buy a particularly fine wine or something and get more pleasure from that, I don’t know.
I have to say, I’m sceptical Dillow’s objection holds in most cases – I think the empirical evidence suggests that if you took any random pair of people, the one who would benefit more from a bit more money would typically be the poorer one. But I do expect that there would be a non-negligible number of instances where the richer person would benefit more (most likely where the difference in affluence is small, or where one of the pair is particularly materialistic or non-materialistic).
Dillow thinks that such cases undermine the marginal utility argument. I’m inclined to disagree. In my view, to a certain extent, we are all naturally inclined towards different tastes and interests, and some of these are more difficult to satisfy than others (what in the philosophical literature is referred to as ‘expensive tastes’). Some people love travelling to places, others are happier reading about them. Some people are connoisseurs of the fine dining, others genuinely can’t tell the difference from ordinary fare. If everybody had the same amount of money, those with more expensive tastes would be less happy (see G.A. Cohen for a more detailed discussion of the idea of expensive tastes, arguing for a somewhat different conclusion). So I think it is fair enough for them to have more.
Does that imply I should be against high taxes on the very rich? I think not, for a number of reasons. First, expensive tastes may mean that some degree of inequality is optimal, but it doesn’t justify any level of inequality. I can easily accept that some people need two or three times more resources than others to reach similar levels of wellbeing, but it seems implausible that the super rich really need incomes hundreds of times larger than the rest of us. Second, while I accept that the rich are more likely to have expensive tastes, the correlation is unlikely to be perfect. I’m not convinced that enough of the rich have expensive tastes and enough of the poor have modest ones for redistribution not be a good idea. Third, a person’s expensive tastes may reflect a mistaken understanding of their own wellbeing. For example, there is evidence to suggest that people overestimate how happy material goods make them. This would imply that high taxes on the rich might have some paternalistic value – encouraging them, for example, to take more leisure for their own good. Fourth, preferences are not necessarily fixed, and can perhaps be influenced by policy (both directly and through social norms). An economic system that encourages material competition among elites is one that is liable to produce more expensive tastes. By contrast, higher taxes may encourage more modest lifestyles. I don’t want to over-emphasise this, as I’m sceptical as to how sensitive such preferences are likely to be to policy, but it is at least possible.
Finally, and crucially, inequality has all sorts of spillover effects – it is not just about how well off each individual is, but also shapes their interactions. High levels of inequality plausibly lead to all manner of undesirable social relations: the development of ghettoes and social segregation, domination of the political process by the rich, the stigmatisation of the poor and the undermining of their self-esteem (see Martin O’Neill for a fuller discussion). (Against this, of course, we should at least consider the ‘trickle down’ argument that permitting inequality encourages economic innovation and development in a way that benefits the poor).
There’s clearly a lot of supposition, speculation and open questions here. Nevertheless, I think I’ve said enough here to show that the marginal utility argument is unlikely to push strongly against higher taxes on the rich.