As many know, I don’t buy all the arguments of the standard economics repertoire, especially as now interpreted by mainly mathematical economists. But some of the ideas they have abused are very obviously right. One is the diminishing marginal utility of income.
The idea of this is very simple. What it says is that the first £1 you earn is worth more than the second, and so on. Actually, the evidence may well be that there’s almost no tailing off for quite a long time – new research suggests until about £22,000 of income is reached – but thereafter there’s no doubt that each individual pound (or yen or dollar or euro) is relatively worth less than the one before.
Until you reach the point Nigella Lawson reached where you don’t check or notice that your staff have spent £600,000 of your money because there’s so much that simply passes unnoticed.
There is, however, an important point in this. The fact is that if each pound is worth less as your earnings increase then each pound of tax paid also imposes less strain. The declining marginal utility of income also means that the marginal cost of tax falls as income rises too – so hat a greater part of marginal income can be paid in tax without imposing a greater real burden on the taxpayer.
This is, I think, economic fact.
It’s why we need a progressive tax system in the UK.
Yup, that’s all absolutely correct. That’s also why we have a progressive income tax system in the UK. Which is where Ritchie goes wrong, of course.
We don’t have one right now.
We don’t have a progressive tax system, no, but we do have a progressive income tax system. And our progressive income tax system is exactly based upon that idea of the declining marginal utility of income. And, as we’ve seen with the 50p rate, we’ve got that tax system as progressive as we can make it. Or if you prefer the Saez and Diamond calculations, including employers’ NI, around the peak of the Laffer Curve at 53 to 54% of income with a 45 p purely income tax rate.
We do desire a progressive income tax system. And we have one. As progressive as we can have it without reducing revenues by making it even more progressive.