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Willy Wonka, Robber Barons, and Marginal Utility, and Progressive Taxation
In Which Our Hero Dubiously Expounds On Economics, by Metaphor of Children's Books
Okay, for starters, I trust everybody's read Charlie and the Chocolate Factory. If not, go read it, then come back, this post will still be here. And I should be writing Nanowrimo, but that can wait. Okay, this is gonna range a bit, and I'm partly typing out loud to myself, so I could easily be wrong, and if anybody with more knowledge wants to correct me, feel free. And even without more knowledge, I'd be glad to argue. Heh
Okay, for starters. Marginal Utility. That link leads to the Wikipedia article, but I'm gonna describe it in terms of Charlie an the Chocolate Factory. Well, illustrate it, anyway. Marginal Utility is a fancy word for how much extra benefit something gives beyond the first. Like how much more useful two cars are as opposed to one, and so on. Or, more like my example, two dollars as opposed to one. Generally, marginal utility decreases beyond a certain point, adding a second car doesn't help as much as having the first, for example. Which is the underlying economic (as opposed to moral) justification for progressive taxation (where people with higher incomes pay a higher percentage of their income as opposed to those with lower incomes).
And this is where Charlie and friends come into play. See, money offers diminishing marginal utility. Sure, you can almost always find something to spend it on. But not all somethings offer the same value. Suppose, for example, you have $1. Just one, that's all. That dollar's exceedingly useful to you, since it's all you've got. You can spend the $1 to buy some chips to keep from starving, or buy a pair of socks to keep your feet from freezing, or so on. Any of those things has a lot of value to you.
Say you have $100. Sure, that's not much, and each of those dollars is important to you, but each individual one isn't as important. You can buy a real meal, buy better clothes, pay for a room. $1000, you can cover all the necessities of life for a month or so, maybe, and even possibly have a little bit left over for something nice. And so on. When you're at, say, $1mil, you can pay for your necessities, and a bunch of things you want, and STILL have money left over. Each individual dollar is less important because you have plenty of others just like it.
For illustration. Charlie was poor. His main birthday present was a bar of chocolate, for goodness sake. Every dollar mattered a lot. Now, when Charlie found some money in the gutter, it was still important, but (besides being an impulsive kid), he had enough right then that he could buy two candy bars and take the rest back to his family. Now take Veruca Salt. Besides being a spoiled brat, money didn't mean anything to her because she had plenty. Her father could buy zillions of candy bars and hire people to open them and they didn't have to worry about being thrown out on the street or anything like that. Veruca probably would have walked by the money in the gutter, because after all, she had plenty already. And then there's Willy Wonka. International Chocolate Magnate, he could afford rivers of chocolate, imported foreign minions, and a research division that'd make the Pentagon jealous. He probably dropped the money Charlie found and didn't even notice.
So how, you may be wondering, does this relate to taxes, and why am I bothering with children's books? Or you might be asleep, there's always that chance. Well, progressive taxation means you tax people with more income, which doesn't hurt them as much. To go back to Charlie again, and illustrate. Suppose you tax everybody 15%. For Charlie, that money is coming directly out of the money his family uses for food and rent, basically. Tax Veruca's family 15%, and their standard of living would be pretty much unchanged. Tax Willy Wonka 15%, and you'd get 0% because Wonka Chocolate is incorporated in Bermuda, to avoid US taxes. Okay, seriously, tax Willy Wonka 15%, it wouldn't affect his business at all, what with the profit margins and low labor costs of his indentured third world labor.
Now, suppose a progressive tax. Tax Charlie's family 10%, and that affects them at lot less, because they're barely squeaking by as is. Tax Veruca's family 20%, they may have to skip one vacation, or buy only half a zillion chocolate bars. Tax Willy Wonka at 30%, assuming you can get past his accountants, and it wouldn't affect his life at all. What can you realistically do with $10 million that you couldn't do with $7 million, just for numbers?
Economics, as my economics teacher puts it, is "The social science concerned with the efficient allocation of scarce resources for the maximum satisfaction of economic wants." Which is a rather fancy way of putting it, but. See, the efficient allocation of scarce resources part ties in to the argument for progressive taxation. Is Willy Wonka's $10mil really efficiently allocated? IS it doing the most it can? Probably not. If we, by means of government taxation, take $3 million, and then spend it on things like highways, or give some of it to Charlie's family, then the money is doing something for the actual economy, and not just sitting there. Of course, $10mil is a really really really low salary for a CEO of a giant international chocolate company, let's ask google for some real numbers. According to this CNN article, Bill Gates received $901,667 in salary and bonuses from Microsoft. Of course, he made $175.6 million from dividend income from Microsoft stock, which is the real source of most of his money. 46.6 billion in personal wealth, according to the same article. So we'll say Wonka's included dividend income too, for the sake of comparison. And even with $900,000 a year, what can't you do that you'd want to do, really?
Yes, government doesn't spend money as efficiently as it could. But here's the thing, neither does the free market, and the much lauded free market doesn't have any kind of safeguards built in to deal with corruption or to deal with inefficiencies like Bill Gates. Does Bill Gates really contribute so much more to society that his contribution is worth hundreds of thousands times the amount that, say, a janitor's, or school teachers, or mechanics do?
So that's the reason the rich pay more than everybody else, it's a matter of practicality and fairness, because as you get more money, it becomes less useful. It's not an even slope, I'm sure there's plateaus, and much of it depends on people, but that's the fundamental reason for progressive taxation. There's also fairness, attempting to prevent the creation of hereditary wealthy aristocrats, and to correct for ineffiencies in the way the free market distributes wealth. And it also justifies welfare, because giving the poorer people some of the rich's less-useful money a) increases the utility of that money and b) it's more likely to get spent, which helps the economy more than it getting put in offshore bank accounts.
Any questions?
Okay, for starters, I trust everybody's read Charlie and the Chocolate Factory. If not, go read it, then come back, this post will still be here. And I should be writing Nanowrimo, but that can wait. Okay, this is gonna range a bit, and I'm partly typing out loud to myself, so I could easily be wrong, and if anybody with more knowledge wants to correct me, feel free. And even without more knowledge, I'd be glad to argue. Heh
Okay, for starters. Marginal Utility. That link leads to the Wikipedia article, but I'm gonna describe it in terms of Charlie an the Chocolate Factory. Well, illustrate it, anyway. Marginal Utility is a fancy word for how much extra benefit something gives beyond the first. Like how much more useful two cars are as opposed to one, and so on. Or, more like my example, two dollars as opposed to one. Generally, marginal utility decreases beyond a certain point, adding a second car doesn't help as much as having the first, for example. Which is the underlying economic (as opposed to moral) justification for progressive taxation (where people with higher incomes pay a higher percentage of their income as opposed to those with lower incomes).
And this is where Charlie and friends come into play. See, money offers diminishing marginal utility. Sure, you can almost always find something to spend it on. But not all somethings offer the same value. Suppose, for example, you have $1. Just one, that's all. That dollar's exceedingly useful to you, since it's all you've got. You can spend the $1 to buy some chips to keep from starving, or buy a pair of socks to keep your feet from freezing, or so on. Any of those things has a lot of value to you.
Say you have $100. Sure, that's not much, and each of those dollars is important to you, but each individual one isn't as important. You can buy a real meal, buy better clothes, pay for a room. $1000, you can cover all the necessities of life for a month or so, maybe, and even possibly have a little bit left over for something nice. And so on. When you're at, say, $1mil, you can pay for your necessities, and a bunch of things you want, and STILL have money left over. Each individual dollar is less important because you have plenty of others just like it.
For illustration. Charlie was poor. His main birthday present was a bar of chocolate, for goodness sake. Every dollar mattered a lot. Now, when Charlie found some money in the gutter, it was still important, but (besides being an impulsive kid), he had enough right then that he could buy two candy bars and take the rest back to his family. Now take Veruca Salt. Besides being a spoiled brat, money didn't mean anything to her because she had plenty. Her father could buy zillions of candy bars and hire people to open them and they didn't have to worry about being thrown out on the street or anything like that. Veruca probably would have walked by the money in the gutter, because after all, she had plenty already. And then there's Willy Wonka. International Chocolate Magnate, he could afford rivers of chocolate, imported foreign minions, and a research division that'd make the Pentagon jealous. He probably dropped the money Charlie found and didn't even notice.
So how, you may be wondering, does this relate to taxes, and why am I bothering with children's books? Or you might be asleep, there's always that chance. Well, progressive taxation means you tax people with more income, which doesn't hurt them as much. To go back to Charlie again, and illustrate. Suppose you tax everybody 15%. For Charlie, that money is coming directly out of the money his family uses for food and rent, basically. Tax Veruca's family 15%, and their standard of living would be pretty much unchanged. Tax Willy Wonka 15%, and you'd get 0% because Wonka Chocolate is incorporated in Bermuda, to avoid US taxes. Okay, seriously, tax Willy Wonka 15%, it wouldn't affect his business at all, what with the profit margins and low labor costs of his indentured third world labor.
Now, suppose a progressive tax. Tax Charlie's family 10%, and that affects them at lot less, because they're barely squeaking by as is. Tax Veruca's family 20%, they may have to skip one vacation, or buy only half a zillion chocolate bars. Tax Willy Wonka at 30%, assuming you can get past his accountants, and it wouldn't affect his life at all. What can you realistically do with $10 million that you couldn't do with $7 million, just for numbers?
Economics, as my economics teacher puts it, is "The social science concerned with the efficient allocation of scarce resources for the maximum satisfaction of economic wants." Which is a rather fancy way of putting it, but. See, the efficient allocation of scarce resources part ties in to the argument for progressive taxation. Is Willy Wonka's $10mil really efficiently allocated? IS it doing the most it can? Probably not. If we, by means of government taxation, take $3 million, and then spend it on things like highways, or give some of it to Charlie's family, then the money is doing something for the actual economy, and not just sitting there. Of course, $10mil is a really really really low salary for a CEO of a giant international chocolate company, let's ask google for some real numbers. According to this CNN article, Bill Gates received $901,667 in salary and bonuses from Microsoft. Of course, he made $175.6 million from dividend income from Microsoft stock, which is the real source of most of his money. 46.6 billion in personal wealth, according to the same article. So we'll say Wonka's included dividend income too, for the sake of comparison. And even with $900,000 a year, what can't you do that you'd want to do, really?
Yes, government doesn't spend money as efficiently as it could. But here's the thing, neither does the free market, and the much lauded free market doesn't have any kind of safeguards built in to deal with corruption or to deal with inefficiencies like Bill Gates. Does Bill Gates really contribute so much more to society that his contribution is worth hundreds of thousands times the amount that, say, a janitor's, or school teachers, or mechanics do?
So that's the reason the rich pay more than everybody else, it's a matter of practicality and fairness, because as you get more money, it becomes less useful. It's not an even slope, I'm sure there's plateaus, and much of it depends on people, but that's the fundamental reason for progressive taxation. There's also fairness, attempting to prevent the creation of hereditary wealthy aristocrats, and to correct for ineffiencies in the way the free market distributes wealth. And it also justifies welfare, because giving the poorer people some of the rich's less-useful money a) increases the utility of that money and b) it's more likely to get spent, which helps the economy more than it getting put in offshore bank accounts.
Any questions?