The Uneasy Case for Progressive Taxation
By David Henderson
I posted on David Cay Johnston’s article on taxation recently. I appreciate his acceptance of my apology and his willingness to discuss the issues. In his comment on another comment by Joe Barnett, Mr. Johnston defends “progressive” taxation, that is imposing a higher marginal tax rate on income as income rises. He writes:
perhaps reading upon marginal utility will help you understand why your analysis is not supported by standard economic theory.
I assume by “upon” in the quote above, Mr. Johnston means “up on.” I also assume that what he is getting at is the principle of “equal sacrifice,” the idea that the tax system should impose equal sacrifices across people. With diminishing utility of income, this principle does imply higher taxes for the high-income person, but it does not imply a higher tax rate for the high-income person. Indeed, it is consistent with a lower marginal tax rate on the high-income person because even a lower marginal tax rate above some income level will take more money from the high-income person than from the low-income person. [I’m assuming away another problem, which is that we can’t do interpersonal utility comparisons.] You need a much stronger assumption, specifically, a very steep decline in the marginal utility of income, to get Johnston’s conclusion.
Here’s how Arthur Pigou put the issue in his 1951 book, A Study in Public Finance:
All that the law of diminishing utility asserts is that the last ₤1 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income does. From this datum it cannot be inferred that, in order to secure equal sacrifice . . . taxation must be progressive. In order to prove that the principle of equal sacrifice necessarily involves progression we should need to know that the last ₤10 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income; and this the law of diminishing utility does not assert.
Walter J. Blum and Harry Kalven Jr. quote this passage from Pigou in their 1954 classic, The Uneasy Case for Progressive Taxation.
Of course, it’s possible that I have not stated Mr. Johnston’s argument at all.