Should higher earners pay a higher rate of tax?

[rockofcashel]

labourlover, thanks for the comments.

my point about the asymptotic nature of the marginal utility curve is that while you are correct the trend is diminishing the extent depends on the varying slope of the tangents along the curve. it is only at high levels of income that the diminishing marginal utility kicks in. for the most part, "happiness" or utility rises as income rises. at very high levels (approaching infinity) the curve drops off to indicate that no more satisfaction can be gotten from an extra euro. it is only at very high levels, however, that this occurs.

We are now straying into a different arguement here Zawalke. While we all seem to be in agreement that DMUI is an economic factor, and is in some way related to the argument i.e. at what point income can or is shifted to increase total utility, we now seem to have the arguement boiled down to, at what point diminishing returns kick in.

However, you introduced the concept of "happiness" and there is a much wider range of economic discourse which develops this concept.

Let me first however address a point you made earlier. While I understand that DMUI kicks in as income rises, I do agree that you have to look at the family circumstance where the income will be consumed. I also accept that DMUI will kick in a lot later for a family living in Dublin with 4 children with all the attending outgoings of a car, mortgage, childminding etc, than for a single person living at home down the country with no dependents. That is why there needs to be a much wider reformation of the tax code, but also why the government, or rather society must make fundemental decisions about what type of society we wish to create.

In the past, there were tax allowances for married couples who had children but these were removed when they were classed as dicriminatory to single people with no children. Now, while I do not think someone should only benefit from an allowance because they are married (marriage being a personal choice), I do believe that we can, and should re-introduce a system of allowances for family groupings including children.

Childless or single people may complain about this, however I think the prioritisation of welfare for children is necessary. By making such allowances available once again, you would create a lot more net benefit for the family close to the higher rate cut off point, and this would compensate for the increased taxation that they may have to pay, net of the extra benefit. Single or childless people would then have to take up an extra burden.

i do not consider the incomes bandied about to be at the level suggested by the curve. in a round about way i'm saying that the use of diminishing marginal utility of income is completely irrelevant in justifying a tax of this nature.

How could it be "completely" irrelevant when taxation levels are fundamental to the actual amount of income any individual has. If taxation is irrelevant, then by implication, the whole theory would have to be dismissed as irrelevant.

the other assertion that tax creates wealth because it is spent is completely and utterly false. tax is an anchor on an economy, thats why economists, of which you are clearly not one, refer to taxation as an automatic stabiliser of the economy.

Tax of itself does not create wealth, but used correctly it is a means of creating wealth, i.e. through efficient investment by government.

you cannot tax yourself to economic success. money saved is spent on other things. do you actually think that BOI have all the money (you have saved) sitting in their vault? it has been used to lend money to someone as a mortgage. thats how the money supply works, and thats how the multiplier effect occurs. the govt raises taxes to dampen demand and lower inflation, not to stimulate the economy as you say. i can see where your idea comes from however. an expansionary fiscal policy can increase demand.

You are kind of answering my assertion here, by accepting the role of government in the CFI model, and more importantly in the control of national income via the aggregate demand model

however this arises from increased public spending and reduced taxation. google the "lynch-o'donohue boom". basically the govt abolished rates and VRT while recruiting every gormless eejit who couldn't get a job in the private sector into the civil service. it bought them the election however it cost the irish economy 17 years of economic depression and a national debt that almost drowned us (remember the gloomy 80's - well these muppets were to blame).

Unfortunately this is the perfect example of "When Governments Go Wrong". I would have doubted that such a scenario would or could ever happen again, but I'm not sure did you see the National Transport Plan announced yesterday. Have a read, and shudder.

if you want to make the taxation regime more equitable then start taxing land. but this is political suicide so SF won't advocate it.

Actually it is part of Sinn Feins overall taxation policy and proposals. Of course it is politically tough to explain. We love our land over here. However, I think if we can make a sound economic argument, then we can convince people of the benefits of this.

by the way, how much tax will the "slab" pay in this model?

Ah come on Z, you can do better than this. Please don't give the cretins a way into this thread. Notice how the many "bashers" have yet to make any contribution. What does that tell you about many of them ?

[michael1965]

labourlover, thanks for the comments.

my point about the asymptotic nature of the marginal utility curve is that while you are correct the trend is diminishing the extent depends on the varying slope of the tangents along the curve. it is only at high levels of income that the diminishing marginal utility kicks in. for the most part, "happiness" or utility rises as income rises. at very high levels (approaching infinity) the curve drops off to indicate that no more satisfaction can be gotten from an extra euro. it is only at very high levels, however, that this occurs. i do not consider the incomes bandied about to be at the level suggested by the curve. in a round about way i'm saying that the use of diminishing marginal utility of income is completely irrelevant in justifying a tax of this nature.

the other assertion that tax creates wealth because it is spent is completely and utterly false. tax is an anchor on an economy, thats why economists, of which you are clearly not one, refer to taxation as an automatic stabiliser of the economy. you cannot tax yourself to economic success. money saved is spent on other things. do you actually think that BOI have all the money (you have saved) sitting in their vault? it has been used to lend money to someone as a mortgage. thats how the money supply works, and thats how the multiplier effect occurs. the govt raises taxes to dampen demand and lower inflation, not to stimulate the economy as you say. i can see where your idea comes from however. an expansionary fiscal policy can increase demand. however this arises from increased public spending and reduced taxation. google the "lynch-o'donohue boom". basically the govt abolished rates and VRT while recruiting every gormless eejit who couldn't get a job in the private sector into the civil service. it bought them the election however it cost the irish economy 17 years of economic depression and a national debt that almost drowned us (remember the gloomy 80's - well these muppets were to blame).

if you want to make the taxation regime more equitable then start taxing land. but this is political suicide so SF won't advocate it.

by the way, how much tax will the "slab" pay in this model?

I see Sean Healy of CORI is calling for a land rent tax as you suggest? And why would it be political suicide for Sf to advocate a land tax? I doubt it would cause a problem in their constituency. I mentioned yesterday I am in favour of property taxes. I think the problem with creating any "new" tax is the idea that everyone (or most) will end up paying more, but if such a new tax is tightly connected to a reduction in income tax, and if it ends up being reasonably fiscally neutral for a lot of people, then I don't see why it can't succeed.

Instead of calling it a "property tax", call it a "property and income-rebate tax" :idea:

[zakalwe]

i had a long and comprehensive post responding to RockofCashel and Michael1965's posts. alas it was lost.

[LabourLover]

labourlover, thanks for the comments.

You're welcome.

my point about the asymptotic nature of the marginal utility curve is that while you are correct the trend is diminishing the extent depends on the varying slope of the tangents along the curve. it is only at high levels of income that the diminishing marginal utility kicks in. for the most part, "happiness" or utility rises as income rises. at very high levels (approaching infinity) the curve drops off to indicate that no more satisfaction can be gotten from an extra euro. it is only at very high levels, however, that this occurs. i do not consider the incomes bandied about to be at the level suggested by the curve. in a round about way i'm saying that the use of diminishing marginal utility of income is completely irrelevant in justifying a tax of this nature.

With all due respect, you clearly don’t understand the concept of marginal utility. You are confusing total utility with marginal utility. Total utility does rises as income rises, but marginal utility (the change in total utility due to each additional unit of income) diminishes with increasing income.

I’ll give a basic example to illustrate marginal utility. A person gets a utility of 10 for the first donut they eat (the numbers are just for illustration). The first donut is always the best and gives the most satisfaction. As the first donut has taken the edge off hunger or greed, the second donut does not give as much satisfaction or utility. Therefore, it gives a utility of 8. Total utility has increase to 18, but the marginal utility of the second donut has diminished to 8 compared to the first. The third gives a utility of 6, the fourth gives a utility of 4, and so on to the 7th, which starts to make the person feel sick and has a marginal utility of -2. It is only at this point that total utility declines, but marginal utility has been declining from the beginning. Now imagine you have 2 people, and there are 6 donuts available. If one person has 5 donuts and the other has 1, then total utility will be 40. If however, the government makes the person with 5 give 2 donuts to the other person and they both have 3, then total utility has increased to 48.

The same applies to income. If you wish to maximize utility, then you should aim to have a more equal distribution of income. This is a common argument in favour of redistribution, I haven’t come up with myself.

As you say, for the most part a person’s utility does increase with income, but there marginal utility diminishes. This applies for all levels of income, not just high levels. If you can find a single link to support your argument, you may convince me.

the other assertion that tax creates wealth because it is spent is completely and utterly false. tax is an anchor on an economy, thats why economists, of which you are clearly not one, refer to taxation as an automatic stabiliser of the economy. you cannot tax yourself to economic success. money saved is spent on other things. do you actually think that BOI have all the money (you have saved) sitting in their vault? it has been used to lend money to someone as a mortgage. thats how the money supply works, and thats how the multiplier effect occurs.

I never said that any government used tax increases to stimulate demand or that you could tax yourself to economc success. I was merely pointing out that it follows from the income-expenditure model that if a government uses all tax revenue raised on government expenditure, then income rises. I’ll use a simple model of a closed economy to illustrate this point.

Y* = (1/(1-b))(C0 – bT + G +I), where Y* is income, b is the marginal propensity to consume (which is less than 1), C0 is autonomous consumer expenditure, T is taxes less transfers, G is government spending and I is investment spending. As any rise in tax only decreases total spending by bT and if that rise in tax is all used as G, then total expenditure will rise and, therefore Y* will rise. It isn’t rocket science.


This isn’t an argument for continually increasing taxes, as this would clearly have other effects. It is merely an interesting outcome of the income-expenditure model. Of course, this argument only holds if all tax revenue raised is used as government expenditure.

the govt raises taxes to dampen demand and lower inflation, not to stimulate the economy as you say. i can see where your idea comes from however. an expansionary fiscal policy can increase demand. however this arises from increased public spending and reduced taxation. google the "lynch-o'donohue boom". basically the govt abolished rates and VRT while recruiting every gormless eejit who couldn't get a job in the private sector into the civil service. it bought them the election however it cost the irish economy 17 years of economic depression and a national debt that almost drowned us (remember the gloomy 80's - well these muppets were to blame).

Governments use a combination of fiscal and monetary policies to control demand. Any increase in government expenditure above revenue raised through taxation must be borrowed. If the borrowing is unsustainable, then you get the huge economic problems that FF caused in the 80s, I agree with you there.

if you want to make the taxation regime more equitable then start taxing land. but this is political suicide so SF won't advocate it.

Just to be clear, if you read my earlier posts you’ll see that I didn’t think that the SF tax proposal was appropriate. My posts have been arguing in favour of the general principle of progressive taxation. I also agree that a property tax would be a good idea in Ireland.


Sorry is this sound too much like a lecture, and I don't claim to be an economist.

[rockofcashel]

i had a long and comprehensive post responding to RockofCashel and Michael1965's posts. alas it was lost.

Don't you just ************************ing hate that. I mean it. Its happened me a few times. Get some sort of recovery package David.

[rockofcashel]

PS, Labourlover,

Zwalke has a Masters in Economics. What you say is correct, and I am agreeing with your assertions, but when (if) Zawalke reads that, he'll probably think, cheeky bastar*d

[zakalwe]

LabourLover,

i have a problem with the underlying assumptions relating to DMUI. I don't think its as cut and dried as the theory suggests. have a look at
http://law.bepress.com/cgi/viewcontent. ... xt=usclwps
and let me know what you think.

i think it (the model, not the predictions of the model) should not be used as a means of justifying or advocating an increase in tax.

i think the example you use is a little simplistic. substitute heroin for donuts in the example and you will have increasing marginal utility. the question is whether an individuals appatite for donuts are similar to that of money. given that money is a medium of exchange i contend that it is not.

i agree that some form of redistribution of wealth should occur. i'm not sure that the most expedient way is to tax the hell out of high earners while letting corporates and property escape with minimal taxation.

The example you use is a perfect one to prove that increasing tax can have negative effects on an economy. if tax take (rem that consumption and tax are functions of income) increases, then in a closed economy, consumption and savings/investment spending fall. you state that if the govt spends its tax (i.e. rise in G offsets the rise in bT) then the effect of the economy is nil. i contend that an increase in G and increase in bT will adversely affect the economy by denying entrepenuers the opportunity to grow business. in effect, the government competes for available income with shop keepers (Co) and entrepeneurs (I). i've a feeling that this is an unwinnable argument as it all depends on your appetite for govt intervention.

i agree that tax should be progressive however i think that we should be careful as to where we place the burden. we do not want to drive away innovation and entrepenuerial zeal. at the moment earned income (case 1 and schedule E etc) is taxed at higher rates than unearned (case 5, CGT,CAT etc)

if you were "king for a day" and could change the current taxation system, what would you do? (Michael1965 and RockofCashel, i'm interested to hear your ideas too!)

[zakalwe]

rock,

its because i have a masters in economics i know how useless it is in real day scenarios!!!!

[michael1965]

....
i agree that some form of redistribution of wealth should occur. i'm not sure that the most expedient way is to tax the hell out of high earners while letting corporates and property escape with minimal taxation.

Whoa there! Do you mean redistribution of wealth for its own sake? I don't buy this maximising utility theor.. I haven't studied the details in the discussion, but take this simple example:

Say there are 100 taxpayers in the country and 98 of them earn Euro 100,000 per year. That's a very tidy sum, and they would probably be very comfortable with that. Now say the other two earn 1,000,000 per year. This theory would decree that the two high earners should hand over around 90% of their income so the whole country earns the same 118,000 euros, thus maximising utility. But do the other 98 deserve or even need this generosity? As it is, with our current tax system, the two boyos will be paying around 50%, which is a million between them (about 20% of the total tax take).

We can all accept that tax is necessary for the common good, but redistribution for its own sake is theft, pure and simple. when I advocated property or wealth taxes, the reason was not for redistribution (per-se) , but for a fairer tax system which encourages enterprise.

There are a couple of things about property/land taxes which I like.

1) They could be used to fund local govt. like in the uS. I think many people would accept the connection between paying for local services and the value of their house. ie if you have a big house in a nice part of town, then you are in a sense enjoying the benefit of local services more than someone who doesn't own a house in that area. (note the tax can either be charged and divvied out centrally, or by each authority individually. There are advantages/disadvantages to both)

2) It should be unavoidable (compared to income tax at least)

3) encourages more efficient use of land (causing a reduction in property prices)

.. but I'm no expert. I believe the ESRI are in favour of property taxes, but they obviously see there is no political will to make it happen. I'm also interested in understanding why the attempt at property taxes failed when it was tried here before. My memory of that period is a little vague.

[Libero]

Say there are 100 taxpayers in the country and 98 of them earn Euro 100,000 per year. That's a very tidy sum, and they would probably be very comfortable with that. Now say the other two earn 1,000,000 per year. This theory would decree that the two high earners should hand over around 90% of their income so the whole country earns the same 118,000 euros, thus maximising utility. But do the other 98 deserve or even need this generosity?

Quite apart from that question there is the question of whether the two high-earning tax payers will continue to do whatever work it is that pays them 1,000,000 a year. Sure what's the point if they face a 90% marginal tax rate?
Should they then withdraw their labour in the face of punitive taxes, community utility is reduced as not only do these two men not get to enjoy the utility of the extra income, but the economy is deprived of the positive linkages involved in the work of these men, e.g. ordering from suppliers, spending take-home pay on goods and services, etc.