On the edge: Declining marginal utility and Tax Policy

Minnesota Law Review

Volumn 95, Issue 3, 2011, Pages 904-952

  Lawsky, Sarah B ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 79955926252     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (294)

1. George E. P. Box & Norman R. Draper, Empirical Model-Building and Response Surfaces 74 (1987).
2. See infra text accompanying notes 39-42 (discussing what it means for a dollar to be "worth" a certain amount).
3. See infra Part I. A.
4. Important exceptions include Thomas D. Griffith, Progressive Taxation and Happiness, 45 B. C. L. Rev. 1363 (2004)
5. and Edward J. McCaffery, Why People Play Lotteries and Why It Matters, 1994 Wis. L. Rev. 71.
6. See, e.g., LOUIS KAPLOW, THE THEORY OF TAXATION AND PUBLIC ECONOMICS 35 (2008) ("Optimal income tax analysis employs the standard welfare economic approach to policy assessment.").
7. Most crucially, everyone must have the same utility curve.
8. See Sarah B. Lawsky, Probably? Understanding Tax Law's Uncertainty, 157 U. PA. L. REV. 1017, 1024-26 (2009). For a discussion of the various assumptions that are usually incorporated into a welfarist analysis, see discussion infra text accompanying notes 28-33.
9. See infra Part I. B.
10. Walter J. Blum & Harry Kalven, Jr., The Uneasy Case for Progressive Taxation, 19 U. CHI. L. REV. 417 (1952).
11. The article was later expanded into a book, WALTER J. BLUM & HARRY KALVEN, JR., THE UNEASY CASE FOR PROGRESSIVE TAXATION (1953). Blum and Kalven do not explicitly discuss welfarism. Rather, they discuss two justifications for progressive taxation that depend on declining marginal utility: proportionate sacrifice and minimum sacrifice. Proportionate sacrifice holds that each taxpayer should be required to pay in tax an equal percentage of his utility.
12. Blum & Kalven, supra, at 455-61. For most, but not all, situations in which income has declining marginal utility, this principle of proportionate sacrifice leads to progressive taxation.
13. Id. at 459. Minimum sacrifice is essentially utilitarianism and holds that the law should bring about the greatest good for the most people, and thus government should impose taxes to "keep to a minimum the aggregate sacrifice imposed on the community as a whole."
14. Id. at 466;
15. see also id. at 470 (noting that the minimum sacrifice principle, as an adaptation of utilitarianism, "has been subjected to serious criticism and is hardly fashionable today [i.e., the mid-1900s]. The crux of the criticism has been that it reduces ethics and political science to accounting and that it does not discriminate sufficiently as to the quality of desires or satisfactions."). Thus, if income has declining marginal utility, the minimum sacrifice principle always involves transferring money from those who are wealthier (and for whom the next dollar has less utility) to those who are less wealthy (for whom the next dollar has more utility).
16. Id. at 467.
17. Blum & Kalven, supra note 8, at 477; see also discussion infra Part I. C.
18. See, e.g., Mark S. Stein, Diminishing Marginal Utility of Income and Progressive Taxation: A Critique of The Uneasy Case, 12 N. ILL. U. L. REV. 373 (1992) ("Typically, Blum and Kalven distort the argument for [diminishing marginal utility of income], thus obscuring both the force of the argument and the inadequacy of their response.").
19. See generally discussion infra Part I. C.
20. The exception is Griffith, supra note 4, which uses happiness surveys to obtain information about utility curves.
21. See discussion infra Part I. C.
22. See discussion infra Part I. C.
23. See, e.g., Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 HARV. L. REV. 1573, 1649 (2000) ("It is widely accepted that redistributive income taxation can be justified by considerations of vertical equity and the declining marginal utility of income.");
24. Joseph Bankman & Thomas Griffith, Social Welfare and the Rate Structure: A New Look at Progressive Taxation, 75 CALIF. L. REV. 1905, 1947 (1987) (introducing optimal tax models into the legal literature and noting that such models "assume that consumption and leisure have declining marginal utility, " and that "[t]he assumption that the value of an additional dollar to an individual declines as the number of dollars he owns increases ('declining marginal utility') is common in economic analysis");
25. James R. Repetti, Democracy and Opportunity: A New Paradigm in Tax Equity, 61 VAND. L. REV. 1129, 1137-38 (2008) (stating that "[one] justification for progressive rates under the benefits theory might be based on the declining marginal utility of money" and noting the conclusions that flow "if we assume declining marginal utility");
26. Stephen Utz, Ability to Pay, 23 WHITTIER L. REV. 867, 894 (2002) ("Perhaps the most popular assumption concerning... tax rates and the value of money to people is that the marginal utility of money income is not constant but diminishes.");
27. Lawrence Zelenak & Kemper Moreland, Can the Graduated Income Tax Survive Optimal Tax Analysis?, 53 TAX L. REV. 51, 52-53 (1999) (noting that in optimal tax analysis, "consumption [is] assumed to have declining marginal utility").
28. See, e.g., Lily L. Batchelder et al., Efficiency and Tax Incentives: The Case for Refundable Tax Credits, 59 STAN. L. REV. 23, 58 (2006) ("Greater income smoothing is desirable not simply because of risk aversion and the declining marginal utility of money, but also because it can reduce adjustment costs associated with economic instability and offset failures in insurance markets.");
29. Brian H. Jenn, The Case for Tax Credits, 61 TAX LAW. 549, 574 (2008) (arguing that "most consumers-taxpayers can reasonably be assumed to have convex preferences, " which means that "the marginal utility of purchasing some good or service that generates a public benefit will diminish as the amount of that good or service purchased increases, " and that "the government can most cost-effectively induce its desired behavior by offering the marginal incentive at as low a rate as possible to as broad a group as possible");
30. Jeffrey H. Kahn, Personal Deductions-A Tax "Ideal" or Just Another "Deal"?, 2002 LAW REV. MICH. ST. U. DET. C. L. 1, 22 (stating that it is "reasonable" to assume that "once the need for an amount equal to the cost of subsistence has been satisfied, the value or 'utility' of additional dollars earned will decline, " because commodities have declining marginal utility, and "there seems to be no reason why the same phenomenon would not occur when money is accumulated.... A progressive or graduated rate reflects the differences in marginal utility of dollars of income to persons with different amounts of income.");
31. Eric A. Posner, Law and Social Norms: The Case of Tax Compliance, 86 VA. L. REV. 1781, 1802 (2000) (assuming "a utilitarian social function and declining marginal utility of income" to model tax compliance);
32. Deborah H. Schenk & Andrew L. Grossman, The Failure of Tax Incentives for Education, 61 TAX L. REV. 295, 345 n. 184 (2008) ("The diminishing marginal utility of income... makes it unlikely that a poverty line taxpayer would be able to save at all.");
33. Daniel Shaviro, The Long-Term U. S. Fiscal Gap: Is the Main Problem Generational Inequity?, 77 GEO. WASH. L. REV. 1298, 1319 (2009) (adopting a utilitarian approach, and stating that "[i]f people and their circumstances are assumed to be identical in all respects except for material wellbeing, the [declining marginal utility] assumption does all the work and suggests redistributing solely from richer to poorer individuals, " though also acknowledging that our lack of knowledge about the future makes intergenerational distribution questions particularly difficult to answer);
34. David Kamin, Note, What Is a Progressive Tax Change? Unmasking Hidden Values in Distributional Debates, 83 N. Y. U. L. REV. 241, 274 (2008) (proposing a measure for progressivity that depends in part on the declining marginal utility of income, noting that "it seems reasonable to assume that a person's expected marginal utility of income declines as her income rises").
35. Joseph Bankman & David A. Weisbach, The Superiority of an Ideal Consumption Tax over an Ideal Income Tax, 58 STAN. L. REV. 1413, 1421 & n. 13 (2006).
36. See, e.g., sources cited infra notes 57, 61.
37. Ajay K. Mehrotra, Envisioning the Modern American Fiscal State: Progressive-Era Economists and the Intellectual Foundations of the U. S. Income Tax, 52 UCLA L. REV. 1793, 1851-54 (2005) (describing the importance of "marginalism, " that is, the idea that "each additional unit of a commodity, including money, was believed to be of lesser value than the previous unit, " to turn-of-the-century economists, and generally describing the impact that these economists, especially Edwin Seligman, had on the creation of the modern income tax).
38. See, e.g., Lawsky, supra note 6 (examining the assumption that rational individuals weight possible outcomes by the probabilities of those outcomes, and analyzing the implications for tax law of a subjectivist interpretation of probabilities);
39. Chris William Sanchirico, A Critical Look at the Economic Argument for Taxing Only Labor Income, TAX L. REV. (forthcoming 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1353322 (arguing against the claim that any tax on labor and savings can be replaced by a superior tax on labor only by focusing on the assumptions underlying that argument);
40. Chris William Sanchirico, Deconstructing the New Efficiency Rationale, 86 CORNELL L. REV. 1003 (2001) (elaborating upon the argument in his earlier work
41. Chris William Sanchirico, Taxes Versus Legal Rules as Instruments for Equity: A More Equitable View, 29 J. LEGAL STUD. 797, 799-800 (2000) [hereinafter Sanchirico, Taxes Versus Legal Rules]);
42. Sanchirico, Taxes Versus Legal Rules, supra at 799-800 (arguing that the result of the formal modeling laid out in
43. Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994), "follows from an implicit assumption that all agents are identical with respect to the tort system");
44. Daniel Shaviro, Beyond the Pro-Consumption Tax Consensus, 60 STAN. L. REV. 745, 750 (2007) (contending that arguments for a consumption tax rely on, inter alia, the assumptions that markets are complete and that people have stable preferences and are rational actors, and noting that "[r]eality is simply too messy for overly definite real world conclusions about the relative merits of [a consumption tax and an income tax] to hold outside the contours of stylized and simplified models"). More generally
45. see Reza Dibadj, Weasel Numbers, 27 CARDOZO L. REV. 1325 (2006), in which he argues that "traditional law and economics deeply misunderstands modern advances in welfare economics" and that "these advances point to the need for a robust administrative state";
46. Robert B. Ahdieh, Beyond Individualism in Law and Economics (Dec. 5, 2009) (unpublished manuscript), available at http://ssrn.com/abstract=1518836, wherein he argues that assumptions of individualized rationality fail to consider the limiting effects of social norms and other outside factors and explaining how these can shape one's understanding of law and economics; and the joke in which an economist solves the problem of being stranded on a desert island with a box full of canned goods by assuming a can opener.
47. See, e.g., Neil H. Buchanan, The Case for Progressive Taxation and the Case Against the use of Utility Theory in Tax Scholarship (unpublished manuscript) (on file with author).
48. See, e.g., MATTHEW D. ADLER & ERIC A. POSNER, NEW FOUNDATIONS OF COST-BENEFIT ANALYSIS 39-52 (2006) (discussing and proposing possible solutions to the problem of interpersonal comparisons);
49. Blum & Kalven, supra note 8, at 476
50. (citing Lionel Robbins's work to support the proposition that "it is not possible to make the necessary interpersonal comparisons").
51. The usual partial solution to this problem is to take an ordinal, rather than a cardinal, approach to utility.
52. See, e.g., ADLER & POSNER, supra note 20, at 43-45 (discussing Kahneman's approach to interpersonal comparisons, focusing on experiences and relating them to ordinal values).
53. Specifically, this Part presents evidence for the Friedman-Savage utility curve, so called because it was first proposed in Milton Friedman & L. J. Savage, The Utility Analysis of Choices Involving Risk, 56 J. POL. ECON. 279 (1948).
54. See generally infra Part II.
55. See, e.g., Anne L. Alstott, Work vs. Freedom: A Liberal Challenge to Employment Subsidies, 108 YALE L. J. 967, 973 (1999) ("In philosophy and constitutional law, liberalism occupies center stage.... But when it comes to taxes and transfers, liberal principles of distributive justice give way to utilitarian talk of costs and benefits, incentives and disincentives.");
56. Reuven S. Avi-Yonah, Why Tax the Rich? Efficiency, Equity, and Progressive Taxation, 111 YALE L. J. 1391, 1414-15 (2002) ("It is fair to say that since the 1950s, and even more so since the 1980s, academic legal writing on taxation has been dominated by efficiency issues and by the optimal tax approach.... Most of the writing on distributive issues [by legal tax academics, especially in some of the elite law schools,] has been done within the confining framework of optimal tax theory.");
57. Miranda Perry Fleischer, Theorizing the Charitable Tax Subsidies: The Role of Distributive Justice, 87 WASH. U. L. REV. 505, 529-31 (2010) (noting that recent discussions about the charitable deduction have emphasized efficiency over distributive justice);
58. Dennis J. Ventry Jr., Equity Versus Efficiency and the U. S. Tax System in Historical Perspective, in TAX JUSTICE 25, 25 (Joseph J. Thorndike & Dennis J. Ventry Jr. eds., y2002);
59. David A. Weisbach, What Does Happiness Research Tell Us About Taxation?, 37 J. LEGAL STUD. S293, S296 (2008) (referring to the optimal tax approach as the "now standard approach to taxation").
60. See infra text accompanying notes 38-39.
61. See, e.g., Alex Raskolnikov, Crime and Punishment in Taxation: Deceit, Deterrence, and the Self-Adjusting Penalty, 106 COLUM. L. REV. 569 (2006) (proposing a new penalty structure based on economic theory, but noting uncertainty about the economic assumption of rationality).
62. See, e.g., Alstott, supra note 23, at 973 (proposing a liberal argument against employment subsidies and stating that "positive economics is enormously useful in analyzing the effects of tax policies. But on the normative side, utilitarian talk necessarily omits core liberal values of individualism, freedom, and equality");
63. Avi-Yonah, supra note 23, at 1415 ("It is time for legal tax academics to redress the balance [between equity and efficiency]. Efficiency issues cannot be neglected.... But issues of equity and 'tax justice' must be explicitly addressed as well.");
64. Fleischer, supra note 23, at 507-08 (arguing that recent work about the charitable deductions is incomplete because it "ignores or explicitly disavows normative distributive justice concerns, " focusing instead on efficiency).
65. A middle road, advocated by Matthew Adler and Eric Posner, is "weak welfarism, " which takes welfare into account, but also gives weight to other moral considerations.
66. See ADLER & POSNER, supra note 20, at 39-52.
67. A version of this argument was presented in Sarah Lawsky, Why Declining Marginial Utility Matters, PRAWFSBLOG (Dec. 7, 2009, 10:15 AM), http://prawfsblawg.blogs.com/prawfsblawg/2009/12/why-declining-marginal-utility- matters.html.
68. See, e.g., ADLER & POSNER, supra note 20, at 28-35 (outlining three common definitions of utility);
69. Mark Kelman, Hedonic Psychology and the Ambiguities of "Welfare, " 33 PHIL. & PUB. AFF. 391, 393 (2005) (describing the "basic ongoing conceptual problems that beset welfarism, " including how one defines welfare).
70. See, e.g., RICHARD LAYARD, HAPPINESS: LESSONS FROM A NEW SCIENCE 3-9 (2005) (proposing happiness as a goal);
71. John Bronsteen et al., Welfare as Happiness, 98 GEO. L. J. 1583, 1586 (2010) ("A person's well-being is the aggregate of how she feels throughout her life.");
72. Griffith, supra note 4, at 1368-71 (using happiness surveys to obtain information about utility curves);
73. Richard Layard et al., The Marginal Utility of Income, 92 J. PUB. ECON. 1846, 1848 (2008) (defining utility as happiness).
74. See, e.g., ADLER & POSNER, supra note 20, at 35-39 (advocating a "restricted preference-based view of well-being, " which "stipulates that an outcome benefits a person if she has an appropriately 'restricted' preference for that outcome-a preference that survives idealization and concerns her own interests");
75. Kaplow, supra note 5, at 360 (noting that many "argue that social welfare should be assessed by reference to individuals' rational, fully informed preferences when they conflict with revealed preference. What is desirable for individuals should be understood 'supposing the desirer to possess a perfect forecast, emotional as well as intellectual, of the state of attainment or fruition. '");
76. Matthew Adler & Eric A. Posner, Happiness Research and Cost-Benefit Analysis, 37 J. LEG. STUD. S253, S254 (2008) ("An individual's well-being is determined by the satisfaction of her preferences-more precisely, by the attainment of those items that well-informed, rational, self-interested individuals would generally prefer.").
77. See, e.g., MARTHA C. NUSSBAUM, FRONTIERS OF JUSTICE: DISABILITY, NATIONALITY, SPECIES MEMBERSHIP 69-81 (2006) (proposing a "capabilities approach").
78. See generally MARTHA C. NUSSBAUM, WOMEN AND HUMAN DEVELOPMENT: THE CAPABILITIES APPROACH (2000). The capabilities approach may be better understood as an alternative to welfarism, rather than a definition of well-being.
79. Compare Kaplow, supra note 5, at 367 ("In considering the subject of redistribution, some economists and philosophers would not assess individuals' situations by reference to well-being [but rather by reference to] capabilities and functionings.")
80. with ADLER & POSNER, supra note 20, at 35-39 ("Traditionally, theorists of welfare have [defined welfare] in three different ways, offering mental-state accounts of welfare, objective-good accounts, or preference-based accounts.")
81. and Kaplow, supra note 5, at 369 ("Primary goods or capabilities may best be understood as ways of gauging well-being rather than as substitute concepts.").
82. See, e.g., sources cited supra note 30.
83. See, e.g., Louis Kaplow, Concavity of Utility, Concavity of Welfare, and Redistribution of Income, 17 INT'L TAX & PUB. FIN. 25, 26 (2003) ("[T]he utility functions... are taken to depend on each individual's disposable income.").
84. See, e.g., Michael B. Dorff & Kimberly Kessler Ferzan, The Perils of Forgetting Fairness, 59 CASE W. RES. L. REV. 597, 599 (2009) ("Fairness counts as a preference.");
85. Sarah B. Lawsky, Fairly Random: On Compensating Audited Taxpayers, 41 CONN. L. REV. 161, 191-94 (2008) (incorporating fairness into a welfarist model).
86. See, e.g., Kaplow, supra note 34, at 26 ("The degree of [utility]... is an empirical question....");
87. Harry Markowitz, The Utility of Wealth, 60 J. POL. ECON. 151, 158 n. 11 (1952) (noting, in the context of discussing a particular utility function, that "[w]e seek a hypothesis to explain behavior, not a moral principle by which to judge behavior").
88. This would be the utility function U (w) = w.
89. See Kaplow, supra note 5, at 44-50 (discussing various social welfare functions).
90. See, e.g., id. at 370-90 (arguing that social welfare is "a function of individuals' utilities");
91. Griffith, supra note 4, at 1364 ("How much... does redistributing income... increase total happiness...?");
92. Posner, supra note 14, at 1811-13 (proposing the most efficient way to collect taxes);
93. Shaviro, supra note 14, at 1319 (using a "utilitarian assessment of generational equity").
94. Cf. Matthew D. Adler & Chris William Sanchirico, Inequality and Uncertainty: Theory and Legal Applications, 155 U. PA. L. REV. 279, 292-94 (2006) (listing various assumptions usually made by welfarists, and noting that they adopt these assumptions because they "facilitate [the] analysis and... demonstrate that the complex issues described in [the] Article arise within mainstream social welfare analysis").
95. See Lawsky, supra note 6, at 1024-26 (describing expected utility).
96. Id. at 1025.
97. See, e.g., sources cited supra note 14.
98. By "income" I mean wealth (money saved) plus consumption (money spent).
99. See HENRY C. SIMONS, PERSONAL INCOME TAXATION 41-58 (1938) (defining what has become known as the "Haig-Simons" concept of income). I do not mean annual income; the annual accounting system is simply an administrative convenience.
100. But see Markowitz, supra note 36, at 151 n. 4 (discussing the Friedman-Savage curve and noting that "I wish to avoid delicate questions of whether the relevant utility function is the 'utility of money' or the 'utility of income.' I shall assume that income is discounted by some interest rate, and I shall speak of the 'utility of wealth'").
101. Whatever that means.
102. See discussion supra text accompanying notes 29-32.
103. 2 is always negative. On the advantages of a logarithmic utility function, see, for example
104. Griffith, supra note 4, at 1367-68, which states that "[t]he popularity of the logarithmic utility function surely rests, in part, on its significant computational advantages. It may also roughly reflect some scholars' intuitions."
105. E.g., Matthew Rabin, Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion, in CHOICES, VALUES, AND FRAMES 202, 202 (Daniel Kahneman & Amos Tversky eds., 2000) ("Within the expected-utility framework, the concavity of the utility-of-wealth function is not only sufficient to explain risk aversion-it is also necessary: [d]iminishing marginal utility of wealth is the sole explanation for risk aversion. ").
106. For a description of the formal version of the following explanation
107. see KENNETH J. ARROW, ESSAYS IN THE THEORY OF RISK BEARING 90-120 (1971).
108. At least, this is the common approach in the legal literature.
109. See, e.g., Shaviro, supra note 18, at 756 ("Utilitarianism motivates redistribution from better-off to worse-off individuals through the assumption of diminishing marginal utility.... If people have identical utility functions characterized by declining marginal utility, then transferring resources from better-off to worseoff individuals will increase social welfare, all else equal.");
110. Daniel Shaviro, Endowment and Inequality, in TAX JUSTICE, supra note 23, at 123, 137 ("Under a utilitarian calculus in which social welfare depends purely on the sum of people's utilities, the motive for progressive redistribution comes mainly from the assumption of declining marginal utility.");
111. Weisbach, supra note 23, at S297 ("[D]eclining marginal utility of consumption... is an important motivation for redistribution. "). This Article situates itself within the existing approach in the legal literature. It should be noted, however, that such an approach does not take into account the use that each person will make of the dollar. A rich person might, for example, invest the dollar in production, which could in turn increase overall social welfare.
112. See David Schmidtz, Diminishing Marginal Utility and Egalitarian Redistribution, 34 J. VALUE INQUIRY 263, 266-88 (2000) (arguing that redistribution might impair overall efficiency).
113. Even if this calculation somehow took into account the use that each person would make of the money, as described in Schmidtz
114. supra note 49, at 266-88, the point remains that a purely welfarist inquiry is concerned only about the aggregation of individual welfare, not about other values.
115. See, e.g., Kaplow, supra note 5, at 378 ("It is a property of a utilitarian [social welfare function] that individuals' marginal utilities count equally, whereas changes in utility levels per se are irrelevant.");
116. Joseph Bankman, What Can We Say About a Wealth Tax?, 53 TAX L. REV. 477, 482-83 (2000) ("Most utilitarians believe that money has diminishing marginal utility and that interpersonal comparisons are possible. The belief in diminishing marginal utility in general pushes for equality of wealth.... But for the utilitarian, at the margin, the discovery of an extra level of utility enjoyed only by the wealthy would lead to less redistribution, not more.").
117. E.g., Bankman & Griffith, supra note 13, at 1948 ("[A]n individual utility function is value-free in the sense that it attempts to measure what does increase an individual's utility rather than what should increase utility. A social welfare function, on the other hand, reflects an explicit normative theory of the nature of a good society.");
118. Kaplow, supra note 34, at 26, 37 (defining an individual's utility by U (y), a function of disposable income, and noting that "[t]he degree of concavity of U (y)... is an empirical question because it is reflected, for example, in behavior under uncertainty, " and finding fault with such an assertion because it "mixes empirical judgments about individuals' utility functions and normative judgments about the welfare function. The former, of course, is not a matter of the analyst's preferences. The latter may be, but ultimately must be justified").
119. See, e.g., Blum & Kalven, supra note 8, at 472 (stating that declining marginal utility seems "intuitively correct, " and suggesting that "[i]f through introspection we imagine ourselves in the two positions we are likely to feel that the loss of a dollar at the $1, 000 level would be quite a different matter than its loss at the $100, 000 level");
120. Friedman & Savage, supra note 22, at 282 (discussing "a strong introspective belief in diminishing marginal utility");
121. Martin J. McMahon, Jr. & Alice Abreu, Winner-Take-All Markets: Easing the Case for Progressive Taxation, 4 FLA. TAX REV. 1, 34 (1998) ("[W]e believe that to neglect the concept of the diminishing marginal utility of money is to ignore reality. The experiential case for the proposition that money has diminishing marginal utility is so strong that those who argue that it does not should be forced to bear the burden of proof.");
122. Joel B. Slemrod, Progressive Taxes, LIBR. ECON. & LIBERTY, http://www.econlib.org/library/Enc1/ProgressiveTaxes.html (last visited Oct. 31, 2010) (referring to the idea that "paying a dollar is a lesser sacrifice for a well-to-do person than for a poor person" as "plausible, but unprovable").
123. A version of this argument is made in Sarah Lawsky, My Most Awesomest PrawfsBlawg Post Ever, PRAWFSBLAWG (Dec. 3, 2009, 11:48 AM), http://prawfsblawg.blogs.com/prawfsblawg/2009/12/my-most-awesomest-prawfsblawg- post-ever.html.
124. See also Ben Reeves, Why Some Franchises Need to Accept Death, GAME INFORMER, Sept. 2009, at 36 ("Why can't we end a successful video game series at its peak? Here's the problem: It's hard to keep a property fresh and exciting over a long period of time. Memorable gameplay elements are joyful the first time they happen, but their allure wanes each time they are implemented.... Economists call it declining marginal utility.").
125. See, e.g., McMahon & Abreu, supra note 53, at 33 ("The proposition that money has diminishing marginal utility follows from the empirical observation that all of the goods and services that money purchases have declining marginal utility.").
126. See, e.g., Blum & Kalven, supra note 8, at 472 ("[Declining marginal utility] seems to follow from the assumption that a man tries to dispose of his income in a way that maximizes the satisfactions which he can get from it. That is, he arranges to satisfy his most important needs first, and so on down the line."). This point was also raised early in the debates over the income tax. If it be desired to tax individual income in such manner as to press lighter, in proportion as that income approaches to the confines of bare necessity, taxation must not only be equitably apportioned, but must press on revenue with progressive gravity.... [With nonprogressive taxation a wealthy family] could not only live in abundance, but could still enjoy a vast number of gratifications by no means essential to happiness. Whereas [a poorer family subject to the same tax rate] would, with our present habits of life and ways of thinking, be stinted in the bare necessities of subsistence. Thus a tax merely proportionate to individual income would be far from equitable.
127. CONG. GLOBE, 38TH CONG., 1ST SESS. 2514 (1864) (statement of Sen. Charles Sumner)
128. (quoting JEAN-BAPTISTE SAY, A TREATISE ON POLITICAL ECONOMY, bk. III, ch. VIII, at 417-18 (C. R. Prinsep trans., John Grigg ed., 3d Am. ed. 1827)).
129. Donna M. Byrne, Progressive Taxation Revisited, 37 ARIZ. L. REV. 739, 767 (1995).
130. See generally PREFERENCE CHANGE: APPROACHES FROM PHILOSOPHY, ECONOMICS AND PSYCHOLOGY (Till Grüne-Yanoff & Sven Ove Hansson eds., 2009) (discussing recent advances in modeling and theory related to understanding preference change).
131. See, e.g., Blum & Kalven, supra note 8, at 475-76 ("It is not plausible that the most important wants of a man with a $5000 income remain his most important wants when he has an income of $25, 000. as his income changes his way of life changes. He becomes in effect a man with a different hierarchy of wants and values.").
132. See, e.g., Martin J. McMahon, Jr., Individual Tax Reform for Fairness and Simplicity: Let Economic Growth Fend for Itself, 50 WASH. & LEE L. REV. 459, 464 (1993) ("[S]imple observation tells us that... money clearly has diminishing marginal utility. Even without first hand data, one need only watch the television show 'Robin Leach's Lifestyles of the Rich and Famous' or read about Malcolm Forbes' birthday party in Morocco to realize that individuals with large fortunes or incomes are not as careful about how they spend their dollars as those of modest means-the middle class, however it may be defined.");
133. McMahon & Abreu, supra note 53, at 35 ("[S]ignificant anecdotal evidence indicates that those with very high incomes attach very little value to tens of thousands, or even millions, of dollars.... Witness the $2 million birthday party that Malcolm Forbes threw for himself in Morocco in 1989, or Bill Gates' new $100 million mansion, or consider Ross Perot and Steve Forbes's self-financed runs for the presidency.");
134. see also, e.g., CONG. GLOBE, 38TH CONG., 1ST SESS. 1876-77 (1864) (statement of Rep. Josiah Grinnell) ("It is time that extravagance in gewgaws, snobbishness in display, and that large class whose great care is to safely compound their hundreds of thousands, should feel that there is war and a demand which they have not yet felt on their purses and on their patriotism.... To equalize burdens and mete equal justice is the purpose of my amendment. Let colossal wealth... meet the full share of burdens.").
135. This was $2 million in 1989, which is equivalent to about $3.5 million in 2010. Inflation Calculator, BUREAU OF LAB. STATS., http://data.bls.gov/cgi-bin/cpicalc.pl (last visited Oct. 31, 2010) (stating that $2 million in 1989 had the same buying power as $3, 516, 274.19 in 2010).
136. See, e.g., Ben Macintyre, Palace Where Father Partied, TIMES (London), Aug. 19, 1999, at 18.
137. Indeed, this might not be welfarism at all. See supra notes 27-34 and accompanying text.
138. See ADLER & POSNER, supra note 20, at 28-29 (suggesting that traditional theories of welfare focus on what conditions cause an individual person to feel better off).
139. E.g., Bankman & Weisbach, supra note 15, at 1421 (" Redistributing one dollar from the trust-fund baby to the working poor is likely to increase overall welfare. Paris Hilton very likely has a much lower marginal utility of money than someone slaving in the salt mines sixty hours a week to support his family. Redistribution from Paris Hilton to the worker makes sense.");
140. Daphna Lewinsohn-Zamir, Identifying Intense Preferences, 94 CORNELL L. REV. 1391, 1415 (2009) ("As with comparable generalizations, one should rely upon this assumption [of declining marginal utility] cautiously.... [L]egal rules should aim at the relatively extreme cases: those in which the marginal
141. Layard et al., supra note 30, at 1848. For a general discussion of happiness surveys and other empirical measurements of welfare
142. see Matthew D. Adler, Welfare Polls: A Synthesis, 81 N. Y. U. L. REV. 1875 (2006).
143. See, e.g., Kelman, supra note 29, at 404 (describing "ecological momentary assessment").
144. See, e.g., Griffith, supra note 4, at 1374, 1397 (noting some problems with happiness surveys, but concluding that happiness surveys show that "[a]dditional income increases the utility of the citizens of all nations but has the greatest effect where those citizens are poor, " and that "[t]he classic notion of declining marginal utility throughout the income distribution remains sound");
145. Layard et al., supra note 30 (reviewing "six major [happiness] surveys" and concluding that marginal utility as against income falls somewhat faster than it would if marginal utility were inversely proportional to income);
146. Andrew J. Oswald, On the Curvature of the Reporting Function from Objective Reality to Subjective Feelings, 100 ECON. LETTERS 369, 369 (2008) ("Large numbers of investigators... who have estimated subjective well-being regression equations on individual [happiness] data... have discovered that allowing for a concave form... in income fits reported well-being data better than a linear income term.").
147. See Griffith, supra note 4, at 1368 ("Answers to survey questions likely act as imperfect measures of actual happiness.").
148. See, e.g., Adler, supra note 67, at 1915;
149. Griffith, supra note 4, at 1369. The "peak-end" rule provides a similar example of the availability heuristic: in repeated studies, the amount of pain subjects reported in retrospect was best predicted not by the most painful moment experienced during the experiment, but by averaging the most painful moment and the last moment of the experiment. Thus the peak amount of retrospectively reported pain could be reduced simply by tacking on thirty less painful seconds at the end of the experiment. Adler
150. supra note 67, at 1918; Griffith
151. supra note 4, at 1369.
152. See, e.g., Griffith, supra note 4, at 1370 ("Subjects interviewed on a sunny day are more likely to report satisfaction with their lives as a whole than subjects interviewed when it is raining.").
153. Norbert Schwarz & Fritz Strack, Reports of Subjective Well-Being: Judgmental Processes and Their Methodological Implications, in WELL-BEING: THE FOUNDATIONS OF HEDONIC PSYCHOLOGY 61, 65 (Daniel Kahneman et al. eds., 1999);
154. see also Adler, supra note 67, at 1918
155. (citing Schwarz & Strack, supra, at 62-74).
156. Schwarz & Strack, supra note 73, at 65.
157. Id.
158. Id.
159. Id.
160. E.g., Oswald, supra note 69, at 369-71;
161. Weisbach, supra note 23, at S308.
162. See Oswald, supra note 69, at 370.
163. Oswald, supra note 69, at 369-71;
164. Weisbach, supra note 23, at S308.
165. Weisbach, supra note 23, at S308-09.
166. See, e.g., Richard A. Easterlin, Diminishing Marginal Utility of Income? Caveat Emptor, 70 SOC. INDICATORS RES. 243, 244 (2005).
167. Id. ("[T]he diminishing returns generalization is based on data for a single point of time and on a simple bivariate comparison of happiness or life satisfaction with income....").
168. Id.
169. Id. at 246-51.
170. Id. at 253.
171. See Diane M. Ring, Why Happiness? A Commentary on Griffith's Progressive Taxation and Happiness, 45 B. C. L. REV. 1413, 1414 (2004) ("Happiness is a likely component of utility, but its selection requires us to consider what the term does and does not capture. How, and in what ways, is happiness a good proxy for measuring utility? How does it compare to the concept of well-being...?");
172. supra Part I. A.
173. See, e.g., Lorraine Ali, True or False: Having Kids Makes You Happy, NEWSWEEK, July 14, 2008, at 62, available at http://www.newsweek.com/id/143792.
174. See id. ("Parents still report feeling a greater sense of purpose and meaning in their lives than those who've never had kids.").
175. Adler & Posner, supra note 31, at S265.
176. A "laundered-preference approach" is an approach that gives weight not to people's actual preferences, but rather to the imagined preferences of an informed, rational individual who acts only out of self-interest.
177. See supra note 30 and accompanying text.
178. E.g., ADLER & POSNER, supra note 20, at 30-35;
179. Adler & POSNER, supra note 31, at S254.
180. See, e.g., William Vickrey, Measuring Marginal Utility by Reactions to Risk, 13 ECONOMETRICA 319, 324-33 (1945) (discussing analysis of utility in terms of individual choices involving risk).
181. See, e.g., Roger Hartley et al., Who Really Wants to Be a Millionaire? Estimates of Risk Aversion from Gameshow Data 3-7 (Univ. of Warwick, Warwick Econ. Res. Paper No. 719, 2005) (reviewing empirical research showing various levels of risk aversion).
182. (0.99 x $1000) + (0.01 x $0) = $990.
183. "Worth $1000" means, in this example, the subjective value of the house to the house's owner. That is, the owner in this example has insured the house for an amount of cash that he values as much as he values his house.
184. Whether the house burns down or not he has $1000, plus he has to pay $10 to buy the insurance.
185. The expected value is the number of dollars expected from the insurance purchase, obtained by weighting the amount of money received from each possible outcome by the probability of that outcome. The expected utility is how much the particular individual in question enjoys or derives satisfaction from that amount of money. See generally the discussion of utility supra text accompanying notes 29-36.
186. Whether the house burns down or not he has $1000, plus he has to pay $15 to buy the insurance.
187. See supra note 95.
188. Savings is sometimes cited as evidence for declining marginal utility, as it can be seen as a form of insurance against future lower income.
189. See, e.g., Stein, supra note 10, at 382-84. The United States has an extremely low personal saving rate, however.
190. See, e.g., Personal Saving Rate, BUREAU ECON. ANALYSIS, http://www.bea.gov/briefrm/saving.htm (last visited Oct. 12, 2010) (finding a personal savings rate of between one percent and about five percent of disposable personal income for 2008, 2009, and the first quarter of 2010).
191. Matthew Rabin, Risk Aversion and Expected-Utility Theory: A Calibration Theorem, 68 ECONOMETRICA 1281, 1282-88 (2000) (using the example of someone who is risk averse in the range of approximately $100);
192. see also Rabin, supra note 47, at 202-05 (same);
193. Matthew Rabin & Richard H. Thaler, Anomalies: Risk Aversion, 15 J. ECON. PERSP. 219, 220-24 (2001) (same).
194. Rabin & Thaler, supra note 102, at 226-27;
195. see also PETER P. WAKKER, PROSPECT THEORY FOR RISK AND AMBIGUITY, ch. 8 (forthcoming 2010). As Rabin and Thaler point out, myopic loss aversion explains insurance purchases much better than does expected utility theory. Instead of purchasing insurance with high deductibles and a lot of coverage, most insurance policies have low deductibles and low levels of coverage.
196. Rabin & Thaler, supra note 102, at 228.
197. See supra notes 93-94 and accompanying text.
198. Friedman & Savage, supra note 22.
199. It is more accurate to say that lotteries almost always have a negative expected value. If the pot gets big enough, as sometimes happens in cumulative lotteries like Powerball, it is actually worthwhile to play-or would be, if not for taxes, which push the expected value of the lottery negative again.
200. See, e.g., Jordan Ellenberg, Is Powerball a Mug's Game?, SLATE (Aug. 31, 2001, 8:30 PM), http://www.slate.com/id/114577.
201. See generally EDWIN J. ELTON, MODERN PORTFOLIO THEORY AND INVESTMENT ANALYSIS 246-48 (7th ed. 2007) (describing utility functions in terms of risk aversion, risk neutrality, and risk preference).
202. See, e.g., Powerball Payouts, COLO. LOTTERY, http://www.coloradolottery. com/index.cfm/ID/19/Payouts/(last visited Oct. 14, 2010) (stating that the chance of winning or sharing the Powerball jackpot is one in 195, 249, 054).
203. Figuring out the expected value of Powerball is slightly more complex than simply dividing $20 million by 200 million. Both the odds and the amount of money at stake vary depending on how many people play and how long it has been since someone won the jackpot. There are also different sorts of Powerball tickets available, and a player wins some money for matching fewer than six balls.
204. See, e.g., How to Play, POWERBALL, http://www.powerball.com/powerball/pb- howtoplay.asp (last visited Oct. 17, 2010).
205. See, e.g., Lloyd R. Cohen, The Lure of the Lottery, 36 WAKE FOREST L. REV. 705 passim (2001) (arguing that playing lotteries is rational because lottery play is a consumption decision).
206. Rich Thomaselli, NY Lottery Breaks Second Ad Wave, ADVERTISING AGE, Feb. 25, 2002, at 6;
207. Matt Pacenza, If I Had a Gambling Problem, CITY LIMITS MAG. (Mar. 2002), http://www.citylimits.org/content/articles/viewarticle.cfm?article-id=2713
208. (quoting a New York State Lottery spokesperson as saying that sales of lottery tickets had increased "significantly" since the campaign began).
209. See, e.g., McCaffery, supra note 4, at 92 ("[A]nyone can daydream about being rich."). Indeed, while it is true that "you can't win if you don't play, " as an old Illinois Lottery slogan had it, it is not true that you can't dream if you don't play. (Given the extremely long odds against winning the lottery, "you can't win even if you do play" is also not so far from the truth.)
210. See, e.g., MILLIONS (Fox Searchlight Pictures 2004) (presenting a story in which the main character becomes wealthy after a bag of money is flung at him from a train);
211. SHALLOW GRAVE (Film4 Pictures 1994) (presenting a story in which the main character discovers a substantial amount of cash in a suitcase).
212. See, e.g., BEVERLY CLEARY, RAMONA FOREVER 4 (1984) (stating that Mr. Quimby "thought maybe [Howie Kemp's] long-lost uncle had died and left him a castle full of servants, jewels, and rare old wines");
213. William Meredith, The Illiterate, in THE ART OF THE SONNET 298, 298 (Stephen Burt & David Mickis eds., 2010) ("I am like a man/Who turns a letter over in his hand/And you might think this was because the hand/was unfamiliar but, truth is, the man.../has no other means/To find out what it says than to ask someone./His uncle could have left the farm to him....").
214. Roger Hartley & Lisa Farrell, Can Expected Utility Explain Gambling?, 92 AM. ECON. REV. 613, 614-15 (2002).
215. Id. at 615.
216. Id.
217. Friedman & Savage, supra note 22, at 280 ("Not only do risky occupations and risky investments not always yield a higher average return than relatively safe occupations or investments, they frequently yield a much lower average return. ").
218. Id. at 282 (introducing the "special" curve).
219. Id. at 295.
220. For an intuitive sense of why this is true, imagine a lottery promoter who wants to make as much money as possible. Because the marginal utility of income increases, the utility of $100 is more than twice as much as the utility of $50. So the promoter can earn more by offering one chance at $100 than he can by offering two chances at $50. See also id. at 296-97 (providing a more detailed mathematical analysis of why lotteries have many smaller prizes).
221. This use of "concave" and "convex" is consistent with the current general approach. Friedman and Savage, however, describe their curve as "two convex segments... corresponding to qualitatively different socioeconomic levels, and [a] concave segment [corresponding] to the transition between the two levels."
222. Id. at 298. Friedman and Savage wrote in the 1940s, when the dominant approach was to imagine examining the curve from above, whereas currently the approach is to imagine examining the curve from below. That is, they are describing the curve as having two convex "from above" segments (because upon observation from above, the two sections appear to curve away from the viewer), whereas I describe the curve as having two concave "from below" segments (because on observation from below, the two segments seem to curve toward the viewer).
223. See, e.g., OXFORD ENGLISH DICTIONARY 646 (2d ed. 1989) (defining concave as "having a curvature that presents a hollow to the point of observation, " and convex as "having a curvature that bulges toward the point of observation" (emphasis added));
224. Friedman & Savage, supra note 22, at 294 (using the terminology "convex from above" and "concave from above");
225. Adolf Kozlik, Note on the Terminology Convex and Concave, 31 AMER. ECON. REV. 103, 104 n. 5 (1941) ("[T]he expression 'convex or concave from above' is more commonly used than 'concave or convex from below' and therefore should be adopted.").
226. Harry Markowitz, for example, improved upon the Friedman-Savage curve, positing that the origin of a Friedman-Savage curve should be considered current wealth, and that another convex segment should be added to the left of the origin. Markowitz, supra note 36, at 151-54. There is also empirical evidence supporting Markowitz's version of the curve. See, e.g., Emily Haisley et al., Myopic Risk-Seeking: The Impact of Narrow Decision Bracketing on Lottery Play, 37 J. RISK & UNCERTAINTY 57, 59-60 (2008) (describing evidence for Markowitz's utility function, in particular the underweighting of small gains and small losses, or the "peanut effect"). Charles Karelis proposes a different utility curve in which the marginal utility of income increases not at a midrange of income, but rather at very low levels of income, and decreases once certain basic needs are met.
227. CHARLES KARELIS, THE PERSISTENCE OF POVERTY: WHY THE ECONOMICS OF THE WELL-OFF CAN'T HELP THE POOR 67-85 (2007). Karelis shows that his utility curve comports perhaps even more strongly with intuition than does a utility curve with strictly declining marginal utility.
228. Id. Karelis's proposed utility curve problematizes the usual argument for progressive taxation
229. id. at 153-63, though in different ways than does the Friedman-Savage curve.
230. See, e.g., Rabin, supra note 102, at 1282 n. 3 ("My wording... gives a psychological interpretation to the concavity of the utility function. Yet a referee has reminded me that a common perspective among economists studying choice under uncertainty has been that the concavity of the utility function need be given no psychological interpretation. ").
231. Friedman & Savage, supra note 22, at 298. Friedman and Savage acknowledge that there may be more than two "qualitatively distinguishable social classes, " each of which should be represented by a new bend in the curve.
232. Id. at 299. They also, however, state that "[a]t the moment, there seems to be no observed behavior that requires the introduction of additional... segments, so it seems undesirable and unnecessary to complicate the hypothesis further."
233. Id.
234. Id. at 304.
235. Id.
236. Compare, e.g., HENRY CALVERT SIMONS, PERSONAL INCOME TAXATION 97 (1938) ("In a world where capital accumulation proceeds as it does now, there is something sadly inadequate about the idea of saving as postponed consumption. ")
237. Anne L. Alstott, The Uneasy Liberal Case Against Income and Wealth Transfer Taxation: A Response to Professor McCaffery, 51 TAX L. REV. 363, 371 (1996) ("[P]rivate wealth remains a source of current social, economic and political power that goes beyond the potential use of wealth for consumption. In addition to the social and political influence that wealth creates, the possession of wealth confers significant economic security; one need not consume wealth to bask in its benefits."), and Avi-Yonah, supra note 23, at 1406-07 ("Wealth confers power beyond its consumption value. This power is economic, social, and political.")
238. with, e.g., Bankman & Weisbach, supra note 15, at 1448-51 (arguing that wealth offers benefits only because it can be used to buy things, and that power and prestige "likely come more from labor than from savings").
239. See also WALL STREET (Twentieth Century Fox Film Corporation 1987) ("Wake up pal, if you're not inside you're outside. And I'm not talking a $200, 000 a year working Wall Street stiff flying first class and being 'comfortable.' I'm talking rich, pal, rich enough to fly in your own jet, rich enough not to waste time, 50, 100 million, a player, Bud-or nothing.").
240. See generally Louis Kaplow, Utility from Accumulation (Nat'l Bureau of Econ. Research, Working Paper No. 15595, 2009) (providing a formal model of the effect of individuals' "deriv[ing] utility from accumulation, that is, from the possession (in contrast with the expenditure) of wealth, " and providing citations to various literature that investigates the extent to which individuals derive utility from wealth, as opposed to consumption).
241. Frederic L. Pryor, The Friedman-Savage Utility Function in Cross-Cultural Perspective, 84 J. POL. ECON. 821, 823 (1976) ("[T]here should be a positive correlation between socioeconomic inequality and the presence of gambling.").
242. The study controlled for a number of factors, including whether the society had experienced contact with "the West, " whether the culture was risk loving, and the degree to which the society was individual, as opposed to group, oriented.
243. Id.
244. Bruno Jullien & Bernard Salanié, Estimating Preferences Under Risk: The Case of Racetrack Bettors, 108 J. POL. ECON. 503, 525 (2000). The data included 34, 443 races and 367, 408 horses.
245. Id. at 506. Of course, as with any model, this model depends on certain simplifications, and thus, as the authors note, "this particular exercise cannot pretend to realism."
246. Id. at 525. Nonetheless, the results are suggestive, because their results are particularly strong when the amount at risk is large, and the amounts at risk would generally tend to be larger than the amount bet on a horse race.
247. Id.
248. Gregory G. Brunk, A Test of the Friedman-Savage Gambling Model, 96 Q. J. ECON. 341, 345 & 346 tbl.2 (1981).
249. See id. at 344-45 (noting that among lotteries, football pools, bingo, raffles, and poker, "only the purchase of lottery tickets could result in a large increase in wealth that the Friedman-Savage model suggests is a motivation for gambling").
250. Joseph G. Eisenhauer, How Prevalent Are Friedman-Savage Utility Functions?, BRIEFING NOTES ECON., Sept.-Oct. 2005, at 1, 3.
251. The initial amounts ranged from f100 to f10, 000. The sign "f" represents the Dutch guilder; this version of the question was asked in 1993, before the Netherlands adopted the Euro as its currency. In January 1993, the guilders-to-dollars exchange rate was approximately 0.55 dollars to one guilder. Historical Exchange Rates, OANDA, http://www.oanda.com/convert/fxhistory (last visited Oct. 31, 2010).
252. Id.
253. See supra Part II. B.
254. I do not analyze here the efficiency or distortive effects of redistribution in a world with Friedman-Savage curves; rather, I discuss only distributional concerns. Thus, I do not present a full optimal tax analysis of a world where individuals have Friedman-Savage curves.
255. Cf., e.g., KAPLOW, supra note 5, at 29-30 (noting that there are two dimensions to any welfarist analysis of a tax policy, and describing a two-step analysis that involves, first, a "distribution-neutral income tax adjustment" and, second, a "purely redistributive income tax adjustment").
256. Another approach would be to maximize average utility (that is, sum individuals' utility and then divide by the number of individuals). Whichever approach one chooses, the analysis in this section remains the same.
257. Additionally, if everyone has the same utility curve and that curve is concave, a nonegalitarian (or utilitarian) welfare function recommends that everyone have the same amount of wealth. KAPLOW, supra note 5, at 47.
258. Friedman and Savage themselves argued that their curve would be relevant even if not shared by everyone. Friedman & Savage, supra note 22, at 299 ("[I]t is not necessary that every consumer unit have a utility curve [like the Friedman-Savage curve]. Some may be inveterate gamblers; others, inveterately cautious. It is enough that many consumer units have such a utility curve.").
259. Of course, it is not actually possible to measure an individual's utility with such accuracy, but this Article generally works within the assumptions made by various welfarist scholars. See discussion supra text accompanying notes 28-33.
260. See generally KAPLOW, supra note 5, at 151-78 (discussing transfer payments and noting that taxes and transfer programs should be considered as a whole, since "[i]t simply does not matter if the income tax makes poor individuals pay some tax as long as the generosity of transfer payments makes up the difference").
261. There is a small zero bracket for income tax, but social insurance taxes (also known as "payroll taxes") are imposed from the first dollar of earnings. Social security tax is 6.2 percent of wages, I. R. C. § 3101 (2006), and Medicare tax is 1.45 percent of wages, id. Compare id. § 1 (imposing tax on taxable income), and id. § 63 (reducing taxable income by either a fixed-amount deduction or, if greater, itemized deductions), and id. § 151 (reducing taxable income by the amount of a personal exemption), with id. § 3101 (imposing social insurance tax on employees' wages), and id. § 3121 (defining "wages" for social insurance tax purposes as including all remuneration, with some exceptions).
262. 42 U. S. C. §§ 601-619 (2006) (providing block grants to states for temporary assistance to needy families).
263. I. R. C. § 32 (providing a refundable credit, known as the "earned income tax credit").
264. 42 U. S. C. §§ 1396-1396v (authorizing health care payments for lowincome individuals).
265. 7 U. S. C. §§ 2011-2036 (2006) (authorizing the Supplemental Nutrition Assistance Program).
266. 42 U. S. C. § 1437f (authorizing the Housing Choice Voucher Program).
267. This included transfers under the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765, as well as loans from the Federal Reserve.
268. Louise Story, Cuomo Details Million-Dollar Bonuses at A. I. G., N. Y. TIMES, Mar. 17, 2009, http://www.nytimes.com/2009/03/18/business/18cuomo.html.
269. Id.
270. For example, in a U. S. House committee meeting, Representative Paul Hodes said that AIG stood for "arrogance, incompetence and greed, " and House Majority Leader Steny Hoyer said that people felt "anger and disgust" about the bonuses. Randall Smith & Liam Pleven, Some Will Pay Back AIG Bonuses, WALL ST. J., Mar. 19, 2009, at A1. The outrage was a bit odd given that $165 million is less than one-tenth of one percent of $170 billion.
271. See, e.g., Editorial, Grabby at AIG, BOS. GLOBE, Mar. 17, 2009, http://www.boston.com/bostonglobe/editorial-opinion/editorials/articles/2009/03/ 17/grabby-at-aig.
272. See, e.g., Louise Story & Landon Thomas Jr., Tales from Lehman's Crypt, N. Y. TIMES, Sept. 13, 2009, at BU1
273. available at 2009 WLNR 17964914 (describing the effects of the Lehman bankruptcy on some of the members of the financial industry who worked there).
274. I thank Ethan Yale, Hunton & Williams Professor of Law at the University of Virginia School of Law, for this point.
275. See supra note 52 and accompanying text; cf. Thomas Nagel, Personal Rights and Public Space, 24 PHIL. & PUB. AFF. 83, 92 (1995) ("This is a curious type of argument, for it has the form that P is true because it would be better if it were true. That is not in general a cogent form of argument: One cannot use it to prove that there is an afterlife, for example. However, it may have a place in ethical theory, where its conclusion is not factual but moral.").
276. Bernard B. Davis, The Moralistic Fallacy, 272 NATURE 390, 390 (1978) (coining the term "moralistic fallacy" and defining it as "an illogical effort to derive an 'is' from an 'ought'").
277. Cf. DAVID HUME, A TREATISE OF HUMAN NATURE 469 (L. A. Selby-Bigge et al. eds., 2d ed. 1978) (identifying the "is-ought" problem, whereby the normative is derived from the descriptive);
278. Hume's Moral Philosophy, STANFORD ENCYCLOPEDIA OF PHIL., http://plato.stanford.edu/entries/hume-moral (last updated Aug. 27, 2010) (explaining the is-ought problem).
279. E.g., Dan M. Kahan et al., Whose Eyes Are You Going To Believe? Scott v. Harris and the Perils of Cognitive Illiberalism, 122 HARV. L. REV. 837, 842-43 (2009) ("Social psychology teaches us that our perceptions of fact are pervasively shaped by our commitments to shared but contested views of individual virtue and social justice. It also tells us that although our ability to perceive this type of value-motivated cognition in others is quite acute, our power to perceive it in ourselves tends to be quite poor."). An emotional commitment to redistribution or to declining marginal utility might also explain the vigorous response some people have to the suggestion that marginal utility does not strictly decline. One legal academic, for example, has referred without elaboration to the Friedman-Savage curve as "the most implausible investment rationale for the lottery." Cohen, supra note 110, at 715 n. 16.
280. See supra text accompanying note 1.
281. See supra notes 134-36 and accompanying text.
282. See, e.g., KAPLOW, supra note 5, at 47
283. (citing ABBA P. LERNER, THE ECONOMICS OF CONTROL 29 (Macmillan 1960), for the proposition that equal distribution should be extended "to the case in which individuals' utility functions may differ and the government cannot observe utility functions");
284. LERNER, supra (noting that "[e]very individual could declare that he has exceptionally high capacities for satisfaction and so should be given more income than anybody else if total satisfaction is to be maximized; and there is no way of testing the validity of such a claim, " and showing that "[i]f it is impossible, on any division of income, to discover which of any two individuals has a higher marginal utility of income, the probable value of total satisfactions is maximized by dividing income evenly").
285. See, e.g., Lewinsohn-Zamir, supra note 66 (proposing multiple ways to accurately identify various heterogeneous preferences).
286. E.g., Louis Kaplow, Optimal Policy with Heterogeneous Preferences, 8 BERKELEY ELECTRONIC J. ECON. ANALYSIS & POL'Y 1, 2 (2008).
287. E.g., David A. Weisbach, What Does Happiness Research Tell Us About Taxation?, 37 J. LEGAL STUD. S293, S295 (2008) ("A standard response is to use Occam's razor to argue for a higher standard of proof on models that add complexity to the utility function....").
288. Theodore P. Seto & Sande L. Buhai, Tax and Disability: Ability to Pay and the Taxation of Difference, 154 U. PA. L. REV. 1053, 1101-02 (2006). As described in Seto & Buhai, supra, the Canadian commission nonetheless recommended effectively progressive taxation, because it took as the tax base "income available for discretionary use."
289. Id.
290. See supra note 27.
291. See, e.g., Blum & Kalven, supra note 8, at 471 (raising the question of "whether the minimum sacrifice notion has any persuasiveness independently of the frank case for greater economic equality or whether it is merely a circumlocution for a more obvious position.... Would any one who favors progressive taxation on minimum sacrifice grounds not continue to do so on equalitarian grounds if he came to believe that the utility of money was constant?");
292. id. at 485 ("The ostensibly scientific form of sacrifice theory, which purports to deal with the way people actually react to money, frequently conceals a normative judgment either about the way that people ought to value money or about the social value of typical expenditures at different levels of income.");
293. Dibadj, supra note 18, at 1390 ("Of course economic models... are useful tools, but at their core [they] rest on value judgments, not metatruths.... By making economic assumptions explicit, we can debate them rather than succumb to the polarization between 'economic' and 'non-economic' approaches.... Inevitably, weasel numbers, just like weasel words, encompass value judgments.").
294. The conversations may be identical, but the models will not be. as Louis Kaplow has shown, models differ depending on whether utility curves, on the one hand, or social welfare functions, on the other, are assumed to be concave. Kaplow, supra note 34, at 38.