Not Very Much

I think anyone who either (a) is not rich, or (b) has not been both poor and relatively well-off at different times in their adult lives, does not understand the concept of declining marginal utility of wealth. It’s one of the bedrock principles underlying progressive taxation, one that sends the heads of right-wing anti-tax zealots spinning and exploding with indignant rage when one tries to explain it to them.

Basically, what it means is that while a dollar is a dollar in the abstract, meaning it has the same value and the same amount of purchasing power as any other dollar, it is worth more to a person who has less money/income than it is to one who has substantially more.

Let’s say that [X] is a laborer making $30,000 a year in salary, with a couple of thousand dollars in the bank (checking/savings), and [Y] makes $20 million per year in capital gains and has tens of millions more in accounts, investments, etc.

Now, take any amount of money; say, $1,000. That $1,000 is a fortune to [X]; there are very few things, if any, on which [X] could or would spend that much at once. [X] has to be very careful with that $1,000, in deciding on what, when, where and how to spend it; if he spends it on one thing, he has to go without something else. If he loses it, has it stolen, or has a sudden and unexpected $1,000 expense (like, e.g., an auto repair or accident), it could be devastating.

On the other hand, [Y]‘s $1,000 is worth very little to [Y], even though it’s the same amount of money in the abstract. There’s a lot more that [Y] can buy with it; a lot more places he can spend $1,000 on one thing, without it affecting his ability to afford anything else. A sudden unexpected loss of $1,000, regardless of what causes it, also doesn’t affect him very much.

The principle applies just as well to percentages of income. 15% of $30,000 is $4,500, a huge sum for [X] who may never have had that much money in his accounts at the same time at any point in his life. Either that or it would take him years to save that much. On the other hand, 15% of $20 million is $3 million, a huge amount of money in the abstract, but for [Y] who has tens of millions in assets on top of his annual income, relatively speaking it’s nothing.

[This is where right-wingers heads explode; who am I to say that other people's money is "nothing"? Who am I to judge what someone else's money is worth to him? Yada yada yada...]

[Y] could write a check for $3 million without batting an eye; [X] couldn’t write a check for $4,500 if he wanted to.

I wish more people understood this. I also wish they understood how progressive taxation works (starting with the principle that income, not a person, is taxed), but that’s a separate discussion…..