There is a simple and well-known argument that antipoverty programs are overall beneficial: antipoverty programs redistribute money from wealthier people to poorer people. According to the well-known principle of diminishing marginal utility of money, a given quantity of money will usually give more benefit to a poorer person than to a wealthier person… (150)
This is entirely false, and I refute this argument adequately in my book. Let me cut-and-past it again here.
The confusion between wealth and income may be the basis of a fallacious argument for progressive taxation from utility analysis. It is argued that a rich man benefits less from a marginal dollar than a poor man. To rob the former of $1,000 would be harming him less than so to rob to latter.
Now the argument is unscientific for two reasons: first, it depends on interpersonal comparisons of utility; second, it neglects the utility to people of money. We might argue that a rich person is rich precisely because he attaches higher utility to money and has devoted more effort to obtaining it.
Even if we let these slide, however, the argument works for wealth, i.e., if we expropriate and distribute existing fortunes.
It leads to the opposite conclusion, namely, regressive taxation, in the case of income.
For a rich man presumably benefits “little” from an extra $1,000 of money income added to his net worth, and a poor man benefits “a lot.” Surely, a panhandler on the street will glow with joy upon receiving one grand; the same amount will leave a modern-day Croesus unperturbed. In order to equalize these marginal utilities, we would need to take away most of the poor man’s wage and leave most of the rich man’s in his hands.
Progressive income taxation does not equalize total utilities, because “net worth” and “rate of increase of net worth via an income stream” are completely different variables; and it does not equalize marginal utilities for the reasons just stated. Hence, the argument fails.
But “redistributive” taxation is almost never on wealth but usually on income. In fact then, there is no utilitarian argument for looting anyone from “diminishing marginal utility.”
Note that in this case, there is no difference between the “humanitarian” and “egalitarian” approaches. (148-9) This is because this argument, if it were sensible, would insist that total utility is maximized precisely when everyone’s net worths are equal.