On the Edge: Declining Marginal Utility and Tax Policy

Abstract:     
Tax policy and scholarship generally assume that income has declining marginal utility (that is, that the next dollar is worth less to a wealthier person than to a poorer person). This assumption provides an easy justification for redistributive taxation. But the legal literature provides no firm grounding for the assumption of declining marginal utility. The Article shows that while some evidence does support declining marginal utility, other evidence suggests that a significant number of people actually experience increasing marginal utility, at least over some range of wealth. If some people’s marginal utility increases, a non-egalitarian welfarist analysis still supports redistribution, but not, or at least not only, from the rich to the poor: it also supports redistribution from (some) less wealthy people to (certain) wealthier people. A welfarist who finds poor-to-rich redistribution unpalatable could explicitly incorporate equality into his analysis (by, for example, adopting a social welfare function that somehow incorporates equality). Or he could continue to use a nonegalitarian approach and assume declining marginal utility, but also acknowledge that declining marginal utility is not a fact about the world, but rather a normative judgment: a rich person should value his next dollar less than a poorer person values her next dollar, whether or not he actually values it less.

Number of Pages in PDF File: 50

Keywords: Tax, Law and Economics, Modeling, Welfarism

Accepted Paper Series