Friday, September 01, 2006

Grading papers

Update: Ah, the numbers in Spot's example are cocked up. He'll fix 'em later. S

Further update: The numbers are fixed. S

Does everyone have their papers turned in? Grasshoppers Swiftee, Jambo and Sticks? Good. Let’s discuss the equal marginal sacrifice principle of taxation. Spot asked Captain Fishsticks in particular to discuss the term in A tongue-twister for Sticks. Before we get to the answers submitted, a brief discussion of what the equal marginal sacrifice principle (mostly just the “principle” hereafter) is.

The principle is a, well, principle of public finance. Spot’s public finance professor, lo these many years ago, was prone to the spontaneous Spoonerism, and he used to mangle equal marginal sacrifice principle of taxation in hilarious ways! Well, Spot thought they were funny anyway.

The principle is rooted in a moral philosophy called utilitarianism. It sounds like government by and for the electric and gas companies, which is maybe what we have, but that’s not what it means. Utilitarianism has been around a while:

Utilitarianism was first proposed by the Chinese philosopher Mozi, who lived some time between the years of 479-381 B.C. during the Warring States Period. He was the founder of the school of Mohism in ancient China and advocated a utilitarian ethical system some 1,800 years before it was promoted as a viable principle in Europe.

European Utilitarianism was originally proposed by Jeremy Bentham. From the principle of utility, Bentham found pain and pleasure to be the only absolutes in the world: "nature has put man under the governance of two sovereign masters: pleasure and pain." From this he derived the rule of utility: that the good is whatever brings the greatest happiness to the greatest number of people. Later, after realizing that the formulation recognized two different and potentially conflicting principles, he dropped the second part and talked simply about "the greatest happiness principle." [italics added]

Spot commends the linked Wikipedia entry if you are interested in more about utilitarianism. We can see right away that utilitarianism does not appeal at all to social Darwinist hunter gatherers like Captain Fishsticks. You see, utilitarianism doesn’t view Sticks’ individual happiness as The Most Important Thing. Heresy to Sticks.

The principle itself is often attributed to John Stuart Mill. Mill’s godfather was the aforementioned Jeremy Bentham. The goal of the principle is to minimize the pain to society in collection of the taxes needed to run the government. Minimizing pain is the flip side of maximizing happiness. Again, we’re talking aggregate pain here, more heresy to Sticks. How do you do that?

Start out with the proposition that everyone “deserves” to be pained by taxes more or less equally. That’s not an outrageous notion, unless you think that some people are more equal than others.

Let’s start out with Joseph and Mary. Joseph has an income of $100 per unit of time, say a week or a month or a year or whatever, and Mary, who lives in Silicon Valley, has an income of $1,000 over the same unit of time. Boy, that Mary is doing pretty well! Let’s also say we need $200 from these two to run the government. How do we raise it?

That’s easy, say the social Darwinist hunter gatherers. Charge ‘em a hundred buck apiece. That leaves Joseph with nothing and Mary with $900. But hey, life is hard.

We could also charge them each 18.2% of their income, which would raise $18.20 from Joe and $182 from Mary. This would also leave us with a budget surplus of twenty cents, which Tim Pawlenty would recommend be returned to the people. That would leave Joseph with $81.80 and Mary with $818. That seems more equitable to most people.

But if $81.80 is close to what it takes to feed, house and clothe a family of four, that $18.20 probably hurt Joseph a lot more than the $182 paid by Mary. Maybe it means no ice cream bars for Joseph’s kids on Saturday night, while it only means that Mary goes to Aruba once this year instead of twice. This is where the utilitarian might say, we can do better than that in distributing the burden fairly.

What if, say we had a rule that said everybody pays 10% on the first hundred, just so we’re sure they get by, 15% on income between $200 and $500, and, say, 27% on income between $500 and $1,000? Spot wonders how that would work out? Give Spotty a moment . . . well, Spot’s a monkey’s uncle! It raises exactly the money we need. Here’s how.

Joseph and Mary pay $10 each on their first $100 of income; that’s $20 in the aggregate. Mary pays $45 on her income between $200 and $500. On that last $500 of income, Mary pays $135 in tax.

Unfair! Unfair, say the social Darwinist hunter gathers. To which you might get these answers:

The utilitarian would say that the aggregate pain to Mary and Joseph is minimized by such a system. The marginal dollars that Mary parts with on her higher income cause her less pain that if she or Joseph lost those first dollars. That’s kind of what Jambo is getting at in his comment about the “decreasing marginal value of money.” Jambo, the money doesn’t decrease in value; it decreases in utility to it holder. Confirmation of this fact can be had by strolling through Southdale and seeing the high-priced low-utility baubles for sale.

A pragmatist might add that it is fair for Mary to pay more because she benefits a lot more from the government. It regulates the stock market that people have (some) confidence in that allowed Mary to take her company public. It also created and maintains an intellectual property system of patents, copyrights, and trademarks that permitted Mary to leverage her intelligence and protect the fruits of her imagination.

And then there would be Spot’s answer. Spot says he doesn’t give a rat’s arse whether the SDHGs think it’s fair or not. Their oral stage views of fairness are of no interest to Spotty.

What Spot has laid out is, of course, the raison d’être for a system of progressive taxation. Obviously, Spot’s example is distorted because it had only two taxpayers, one poor and one wealthy. In real life, of course, there are many taxpayers and they are all over the map in income.

We already considered Jambo’s comment above. Swiftee says that the principle is “lefty newspeak for socialist type wealth re-distribution.” It’s hardly newspeak when its antecedents are an ancient Chinese philosopher and John Stuart Mill. As far as wealth re-distribution is concerned, not a single dollar of Mary’s went into Joseph’s pocket. In real life, of course, there are social services delivered to the poor, but Spot says they don’t compare to the value of what the government does for the wealthy. This subject is, in fact, a good one for a future post.

Which leaves us with the dog’s breakfast. Spot is loathe to quote Sticks extensively, but will on this occasion because Sticks did not turn in his answer but rather put it up on his own site:

For the record, the equal marginal sacrifice principle applied to taxes would say something like taxes should be levied such that the last tax dollar everyone pays has the same economic impact on each and every individual. So for example, if the poorest person in the land pays $50 in taxes and as a result cannot purchase a winter coat, then I must be assessed taxes to the point where I can not purchase a winter coat and Bill Gates must also be taxed to the point where he cannot afford a winter coat. We all make an equal sacrifice to pay our taxes.

If you're thinking "from each, to each" you're on the right track. It’s impractical in reality and ridiculous in principle.

Sorry, Spotty. You’re going to have to go back to chasing your tail; I'm not throwing the ball for you any more.

Is that what we did to Mary, bring her down to the level of impoverishment of Joseph? No, of course not. On the first $100 of income, she paid exactly what Joseph did.

In his post, just above his discussion of the principle, Sticks says this:

I have no intention of discussing anything as foolish as the marginal sacrifice principle applied to taxes, at least with Spotty for whom discussion is little more than the hope of finding something so arcane to discuss that he appears intelligent.

Oh Sticks! Spot doesn’t consider himself intelligent – he’s a Dalmatian. Spot just throws up a little in his mouth when you think you are! Update: Sticks must have had his irony warning buzzer completely turned off when as a libertarian he accuses somebody else of discussing the arcane.

Next time, boys and girls, we’ll see how Minnesota does in the progressive taxation department.

Almost forgot. Sticks, Spot didn’t expect you to throw the ball; he expected you to chase it.

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