Thread: Marginal Utility

Originally Posted by goober

I doubt it


You didn't read any of it, and if you did, you didn't understand it.

I read it and fully understood. You obviously did not understand it at all.

The work of Diamond and Saez is exactly what I've been talking about (except they take like 20 pages of equations and economic theory)
But it all boils down to high incomes should be taxed at much higher rates

Absolutely.

because the marginal utility of a dollar of higher incomes is so much less than the marginal utility of a dollar of a lower income.

No way, especially as it applies to the over all economy (which in turn helps the poor more.) You completely over look the investment value of those extra $$$ to the higher earners as they apply to creating jobs, many of which are marginal jobs which suit the lesser trained and capable people Diamond and Saez want to tax the rich to give to the poor instead of creating jobs.

No matter how hard you try, with every post you fall into a deeper hole relative to economics in your quest for more $$$ redistribution to the poor. Helping the poor is OK and I support it, but NEVER at the expense of taxing beyond government revenue enhancement. You on the other hand would rather reduce overall government revenue to give to the poor even if it does reduce government revenue. (or so your posts suggest)

Originally Posted by Wlessard

Wind and Solar are good things BUT they are good on an individual basis. As a big proponent of Hydrogen Fuel Cells, I always wonder why it is not pursued. Billions to subsidize Wind Power and they take away funding for HFC.

I think hydrogen fuel cells are viewed as more dangerous an issue when distribution is considered. Anything we can do to develop alternative energy sources is good, but I wouldn't want to be around a hydrogen explosion at a hydrogen distributor.

Originally Posted by goober

OK here's a Nobel prize winning economist The Simple Analytics of Soaking the Rich (Wonkish) - NYTimes.com

Krugman’s opinion piece is seriously flawed and is not presenting an original argument that you have not tried before. You do know that Krugman is, like Galbraith, just another Keynesian wannabe.

Take that argument against the cut and past from wikipedia, that apparently neither of you actually understand...

Please show where and when I have cut and paste from wikipedia. It has been clearly established who understands economics and that would not be you. And that is not the judgment of only those right leaning posters on the forum. Conservatives, libertarians, and classical liberals have utterly destroyed your arguments and have corrected your mythological falsehoods you parade as facts. And your Krugman blog post, lets look at that:

The Simple Analytics of Soaking the Rich (Wonkish) - NYTimes.com
Update: I see that some people are saying, “But taxes discourage work!” Um, that’s what the supply curve in the figure measures; if taxes didn’t have any effect on work, it would be a vertical line.

So President Obama is going after the Ryan plan; good. And better yet, he’s taking on the underlying economic premise, which is that low taxes on the rich are the answer to, well, everything, and good for everyone. For this premise is just bad economics.

Krugman begins with a false mischaracterization of the Ryan plan, but the straw man argument is standard practice for Krugman and the left. Krugman’s characterization of the Ryan plan is complete false bullshit propaganda.

I’ve written about this before, drawing on Diamond and Saez, but I thought I’d try a different take.
The way Diamond and Saez do the analysis is to argue that because the rich are rich, their marginal utility of income is very low, which means that at the margin their income doesn’t matter for social welfare.

This logic has already been disputed by myself, dnsmith, and others. If the a rich person puts their money in a hole in the back yard, yes that money will have diminishing utility, but if that rich persons invests that money will increase in utility.

So they should be taxed at the rate which maximizes revenue, which is 1/(1+ε) — where ε is the elasticity of labor supply from the rich.

What a joke! 70% does not maximize revenue for the government. Once the Laffer effect takes effect revenues fall.

And since we have a lot of evidence suggesting that ε is quite low, the appropriate tax rate for the rich is quite high — 70 percent or more.

Krugman needs to clarify what he means by rich and then he needs to explain how placing obstacles to capital accumulation can help an economy grow. What happened when the tax rate was at 70%? Like the 90% before, no one paid at that 70% tax rate, since the wealthy shift their income into tax shelters rather than invested in high yield high risk high taxed investments.

But what if the rich in their Galtian goodness supply something nobody else can? Call it J, for jobcreation. Doesn’t the imperative to encourage J mean that we should keep their taxes low? Actually, no.

Nice theory and nice how Krugman frames the discussion. The wealthy do not invest in “jobcreation,” they invest in industries, companies, and people with the hope of a return on that investment. Unfortunately Krugman’s theory is contradicted by the facts and history of what happens when tax rates are decreased and when they are increased.

So here’s my alternative way to think about it: we can think of society as a whole — or, if you like, society not including the top 0.1 percent — as having monopsony power over the rich. The picture looks like this: marginal utility 040312krugman4-blog480.jpg

That picture would be accurate if J stood for an actual product, rather than a mythic “jobcreation” which cannot be found anywhere in the real world.

The optimal thing, from the point of view of the non-rich, is to set a tax that makes the cost of hiring rich people to produce J equal to the true marginal cost of that J, a cost that includes the fact that buying more drives up the price of inframarginal purchases. And if you grind through, you find that the optimal tax is … 1/(1+ε).

And when you look at history you find that a 70% tax rate causes tax revenues for the government to fall. Remember this quote? From Arthur Laffer’s Amazon.com: Return to Prosperity: How America Can Regain Its Economic Superpower Status (9781439159927): Arthur B. Laffer, Stephen Moore: Books History teaches us the high tax rates don’t redistribute income to the poor and the middle class. I recently reviewed IRS tax-return data by income group going back to 1972. The results are jaw-dropping. In 1972, when the highest tax rate on the rich was 70 percent and the top capital-gains tax rate was 35 percent, the richest 1 percent of Americans paid 17 percent of the income-tax burden. Today, with a top income-tax rate of 35 percent and capital-gains at 15 percent, they pay over 40 percent. [internal Revenue Service Statistic of Income, Table 1.]
With higher income-tax rates the rich shelter more income through tax carve-outs, they invest less here in the United States and more abroad, and they work less. …
Lower tax rates also lead to more rich people -- which, in my opinion, should be the goal of good tax policy. Bush’ investment tax cuts have had a stunning effect in this regard … the number of Americans who declare more than $1 million in income on their tax returns. In just three years, a blink of an eye, there were almost twice as many millionaires. The tax payments more than doubled. [Internal Revenue Service]
Why? Two reasons. First, lower tax rates expanded the economy and helped move more people up the income ladder into a category that was once considered super-duper rich. Before this past economic collapse, millionaires were everywhere in America. Second, lower tax rates incentivized people to work more and to declare more taxable income.
There was a huge surge in dividend income after the tax cuts. Capital-gains income, which can be sheltered by not selling an asset, more than doubled from 2003 to 2006. [NCPA Policy Report No. 307, January 2008] And the rich simply invested less in tax shelters and more in higher-return taxable ventures. That is to say, there was a Laffer Curve effect at the top of the income scale from the lower tax rates on investment and income.
Americans are not made poorer because Bill Gates, Warren Buffett, Tiger Woods, and the members of the Walton family have gotten fabulously wealthy. In fact, each of these people in their own way have not just gotten rich themselves, they have created jobs and higher incomes for many others.
It is estimated that Bill Gates alone, whose personal wealth is estimated at $50 billion, is responsible for making ten thousand people millionaires, including former Microsoft secretaries. The same is true of the people who got in on the ground floor of Google and eBay.
These entrepreneurs not only carry other people with them as investors in their journey to super wealth, they also provide meaningful jobs and high-quality products at low cost. Consumers and workers benefit above and beyond where they otherwise would have been. …
When entrepreneurs and investors get rich, they tend to make a lot of other people rich with them. This will occur on a substantially reduced scale in a high-tax environment. p. 147-148.

Even if the rich are uniquely able to supply the magic of job creation, they should face much higher taxes than they do.

Bullshit propaganda.

And this is all perfectly standard economics — indeed, Econ 101.

Garbage. This is all perfect propaganda dressed up in economist speak which rationalizes the theft from those the government deems unworthy to give to those the government deems worthy of its largess.

So what’s the basis for claims that we must tax the rich lightly?

The historical record about the effects of taxing the rich lightly and the historical record of the effects of taxing the rich heavily.

Often, it seems as if conservatives believe that there are somehow big positive externalities to what the rich do; it’s as if they believe that industrial policy is nonsense, unless the industry in question is jobcreation by the rich, in which case loose arguments about huge spillovers are just fine.

Could there be a more disingenuous characterization of the arguments of conservatives?

But the simple analytics say that we should soak the rich, hard.

False. The analytics and the historical record say the opposite.

Now you can respond with his usual ridicule and ignore the substance of this post.

tashi deleks,

M

Originally Posted by Mahasattva

Krugman’s opinion piece is seriously flawed and is not presenting an original argument that you have not tried before. You do know that Krugman is, like Galbraith, just another Keynesian wannabe.



Please show where and when I have cut and paste from wikipedia. It has been clearly established who understands economics and that would not be you. And that is not the judgment of only those right leaning posters on the forum. Conservatives, libertarians, and classical liberals have utterly destroyed your arguments and have corrected your mythological falsehoods you parade as facts. And your Krugman blog post, lets look at that:



Krugman begins with a false mischaracterization of the Ryan plan, but the straw man argument is standard practice for Krugman and the left. Krugman’s characterization of the Ryan plan is complete false bullshit propaganda.



This logic has already been disputed by myself, dnsmith, and others. If the a rich person puts their money in a hole in the back yard, yes that money will have diminishing utility, but if that rich persons invests that money will increase in utility.



What a joke! 70% does not maximize revenue for the government. Once the Laffer effect takes effect revenues fall.




Krugman needs to clarify what he means by rich and then he needs to explain how placing obstacles to capital accumulation can help an economy grow. What happened when the tax rate was at 70%? Like the 90% before, no one paid at that 70% tax rate, since the wealthy shift their income into tax shelters rather than invested in high yield high risk high taxed investments.



Nice theory and nice how Krugman frames the discussion. The wealthy do not invest in “jobcreation,” they invest in industries, companies, and people with the hope of a return on that investment. Unfortunately Krugman’s theory is contradicted by the facts and history of what happens when tax rates are decreased and when they are increased.



That picture would be accurate if J stood for an actual product, rather than a mythic “jobcreation” which cannot be found anywhere in the real world.



And when you look at history you find that a 70% tax rate causes tax revenues for the government to fall. Remember this quote? From Arthur Laffer’s Amazon.com: Return to Prosperity: How America Can Regain Its Economic Superpower Status (9781439159927): Arthur B. Laffer, Stephen Moore: Books History teaches us the high tax rates don’t redistribute income to the poor and the middle class. I recently reviewed IRS tax-return data by income group going back to 1972. The results are jaw-dropping. In 1972, when the highest tax rate on the rich was 70 percent and the top capital-gains tax rate was 35 percent, the richest 1 percent of Americans paid 17 percent of the income-tax burden. Today, with a top income-tax rate of 35 percent and capital-gains at 15 percent, they pay over 40 percent. [internal Revenue Service Statistic of Income, Table 1.]
With higher income-tax rates the rich shelter more income through tax carve-outs, they invest less here in the United States and more abroad, and they work less. …
Lower tax rates also lead to more rich people -- which, in my opinion, should be the goal of good tax policy. Bush’ investment tax cuts have had a stunning effect in this regard … the number of Americans who declare more than $1 million in income on their tax returns. In just three years, a blink of an eye, there were almost twice as many millionaires. The tax payments more than doubled. [Internal Revenue Service]
Why? Two reasons. First, lower tax rates expanded the economy and helped move more people up the income ladder into a category that was once considered super-duper rich. Before this past economic collapse, millionaires were everywhere in America. Second, lower tax rates incentivized people to work more and to declare more taxable income.
There was a huge surge in dividend income after the tax cuts. Capital-gains income, which can be sheltered by not selling an asset, more than doubled from 2003 to 2006. [NCPA Policy Report No. 307, January 2008] And the rich simply invested less in tax shelters and more in higher-return taxable ventures. That is to say, there was a Laffer Curve effect at the top of the income scale from the lower tax rates on investment and income.
Americans are not made poorer because Bill Gates, Warren Buffett, Tiger Woods, and the members of the Walton family have gotten fabulously wealthy. In fact, each of these people in their own way have not just gotten rich themselves, they have created jobs and higher incomes for many others.
It is estimated that Bill Gates alone, whose personal wealth is estimated at $50 billion, is responsible for making ten thousand people millionaires, including former Microsoft secretaries. The same is true of the people who got in on the ground floor of Google and eBay.
These entrepreneurs not only carry other people with them as investors in their journey to super wealth, they also provide meaningful jobs and high-quality products at low cost. Consumers and workers benefit above and beyond where they otherwise would have been. …
When entrepreneurs and investors get rich, they tend to make a lot of other people rich with them. This will occur on a substantially reduced scale in a high-tax environment. p. 147-148.



Bullshit propaganda.



Garbage. This is all perfect propaganda dressed up in economist speak which rationalizes the theft from those the government deems unworthy to give to those the government deems worthy of its largess.



The historical record about the effects of taxing the rich lightly and the historical record of the effects of taxing the rich heavily.



Could there be a more disingenuous characterization of the arguments of conservatives?



False. The analytics and the historical record say the opposite.

Now you can respond with his usual ridicule and ignore the substance of this post.

tashi deleks,

M

Another long winded, boring, exploration of the fantasy world you inhabit.

First you dismiss the work of a Nobel Prize winning economist, based on your complete lack of education on the subject.

And frankly after that, you babble on and on, offering your opinion devoid of any compelling logic.

Did you read Diamond and Saez, or are they just a couple of Keynesian wannabes?

Because they explain what they believe, and give examples, something you seem to be completely incapable of.

Instead of dismissing the work of Nobel Laureates, why don't you give an example that demonstrates that the marginal utility of money remains constant.

OR at least explain why my example of say choice of wine, is something other than a perceived diminishment of the utility of a dollar?
Remember, in the example I was a consumer of Mouton Cadet about $8/bottle, upon coming into a large sum of money I began order Chateau Margaux, a premier cru Bordeaux, about $250/bottle.
I said it because my perception of the marginal value of a dollar had shrunk, so a couple of hundred dollars was worth the wine I would consume at dinner, whereas before, I was happy with an $8 bottle of wine.

In case anyone cares, here's what marginal utility is from Milton Friedman's book Price Theory:

Price Theory - Milton Friedman - Google Books
(page 36)

Marginal Utility is defined as the rate of change of utility as the quantity of one commodity is increased while the quantity of other commodities is held constant

Of course since 'utility' is part of that definition, here is the definition of that term too:
(page 35)
Paraphrased: "Utility is the common characteristic that makes comparisons of different goods possible"

Originally Posted by Disillusioned_1

In case anyone cares, here's what marginal utility is from Milton Friedman's book Price Theory:

Price Theory - Milton Friedman - Google Books
(page 36)

Marginal Utility is defined as the rate of change of utility as the quantity of one commodity is increased while the quantity of other commodities is held constant

Of course since 'utility' is part of that definition, here is the definition of that term too:
(page 35)
Paraphrased: "Utility is the common characteristic that makes comparisons of different goods possible"

So what happens when income is increased, and other goods are held constant?

Originally Posted by goober

Another long winded, boring, exploration of the fantasy world you inhabit.

First you dismiss the work of a Nobel Prize winning economist, based on your complete lack of education on the subject.

And frankly after that, you babble on and on, offering your opinion devoid of any compelling logic.

Did you read Diamond and Saez, or are they just a couple of Keynesian wannabes?

Because they explain what they believe, and give examples, something you seem to be completely incapable of.

Instead of dismissing the work of Nobel Laureates, why don't you give an example that demonstrates that the marginal utility of money remains constant.

OR at least explain why my example of say choice of wine, is something other than a perceived diminishment of the utility of a dollar?
Remember, in the example I was a consumer of Mouton Cadet about $8/bottle, upon coming into a large sum of money I began order Chateau Margaux, a premier cru Bordeaux, about $250/bottle.
I said it because my perception of the marginal value of a dollar had shrunk, so a couple of hundred dollars was worth the wine I would consume at dinner, whereas before, I was happy with an $8 bottle of wine.

My but you do believe a Nobel Laurette cannot be wrong. Don't forget, those people are selected by socialists because they match the selectors mold, not because they are super smart. Just look who they selected for their last 2 American peace prize recipients. Isn't that enough to turn you off of nobel forever? Maha.... gave you historical graphs and data which proved irrefutably you are wrong. Yet you dismiss his wisdom and instead try to believe the Wizard of Oz like. Your example of the marginal utility of the dollar again represents at most your own perception. Obviously you don't invest all over what you NEED to live and waste it on a super expensive wine which has its value only because it is in short supply.

Originally Posted by Disillusioned_1

In case anyone cares, here's what marginal utility is from Milton Friedman's book Price Theory:

Price Theory - Milton Friedman - Google Books
(page 36)




Of course since 'utility' is part of that definition, here is the definition of that term too:
(page 35)
Paraphrased: "Utility is the common characteristic that makes comparisons of different goods possible"

The operative word here is "goods" which does not correspond the the so called marginal utility of money.

Originally Posted by goober

So what happens when income is increased, and other goods are held constant?

What happens is, the individual can now happily take care of his needs and invest the rest. Simple isn't it?

OK I tried, so it's me, the Nobel Prize winners and the economics faculty of MIT, vs the opinion of people who don't understand economics.
Lets leave it at that....

Originally Posted by goober

OK I tried, so it's me, the Nobel Prize winners and the economics faculty of MIT, vs the opinion of people who don't understand economics.
Lets leave it at that....

Or more accurately, the people who have argued their case, rather intelligently with both data, logic and reason and used said same to shoot down your weak examples of something you don't understand.

Your running to perceived authority and inability to argue your case doesn't make it more valid.

Originally Posted by dnsmith

I think hydrogen fuel cells are viewed as more dangerous an issue when distribution is considered. Anything we can do to develop alternative energy sources is good, but I wouldn't want to be around a hydrogen explosion at a hydrogen distributor.

That is where public perception is wrong. A HFC system as well as the storage for it is not a hydrogen bomb.

It is safer than gasoline and under catastrophic failure it will blow like a butane torch where gas actually explodes.

Originally Posted by goober

OK I tried, so it's me, the Nobel Prize winners and the economics faculty of MIT, vs the opinion of people who don't understand economics.
Lets leave it at that....

The problem is not you, Nobel Prize winners and the economics faculty of MIT talking about economics. The problem is then using the principles offered but only in politically convienent ways to justify 50% or greater tax rates on top earners exclusively for the purpose of buying the votes of others. Basically on the promise of larger and more inefficient government programs that seems to be immune from those same economic principles but you'll support anyway knowing full well you need to ensure continued support of those voters you have bought.