Investment Changes the Utility Calculus

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In my latest column for AIER, I offer two reasons why the possibility of investing income, rather than spending it, renders invalid the familiar practice of comparing the additional satisfaction – the “marginal utility” – that a poor person would get from spending a dollar taxed away from a rich person to the utility that the rich person would get from using that dollar. A slice:

The possibility of investment also renders relevant the increased satisfactions that the rich person’s investment today makes possible for other people to experience in the future. If Bezos’s investment is successful in the market, this investment creates more goods and services for many consumers. The additional satisfactions that these consumers enjoy from these goods and services would not exist without Bezos’s investment. Therefore, when comparing the amount of satisfaction that a poor person would experience today from spending a dollar taxed away from a rich person, the comparison must be not only to the consumption satisfaction that the rich person would eventually experience from using this dollar, but also to the consumption satisfaction that many other consumers would eventually experience from the rich person’s successful investment of this dollar.

Because rich(er) people generally invest a larger portion of their incomes than do poor(er) people, as a practical matter the ‘economic’ (or utilitarian) case for progressive income taxation and for income redistribution – a case built on comparing the “marginal utility” of income or wealth enjoyed by poor(er) people to that enjoyed by rich(er) people is not as straightforward as many professors, pundits, and politicians suppose. As is so often true in economics, being attuned to more than what is immediately obvious yields insights very different from those that arise from looking only at what is immediately obvious.