The Value of an Extra Dollar

What is the value of one extra dollar in your pocket? For most of us, finding a dollar on the street or having someone give us one might be a happy experience, but it doesn’t make any difference in our financial situation. And the more money we have, the less impact that dollar has. For someone with nothing, however, that single dollar is much more valuable. It gives that person the ability to buy food or drink and stave off hunger for sometime longer.

What is the overall trend of value for that dollar as wealth increases? This is a key question facing our elected officials as they face automatic spending cuts and tax increases at the end of the year unless a deal is reached. As discussions center around bigger types of changes (for example, tax policy overhauls), what politicians are actually debating is the trend of that value line. Let’s examine some of the perspectives for how value of a dollar looks based on your wealth.

1. Makers must be valued over takers.
In this view of society, some members are makers, people who create jobs and wealth; everyone else is a taker, or someone who receives more than they contribute. If the balance of takers exceeds that of makers, then the society is in grave trouble. The trend line for this view suggests that as you gain more money (making you a maker by default), the value of a single dollar actually increases. When you have more money, you are able to create more jobs. Thus tax policy should be structured so that all people pay the same amount, and that tax rates on investments (things that are creating jobs by putting that money to work) be even lower.

2. Society depends on income equity.
In this apathetic view, monetary and tax policy should not discriminate against any person. The trend line is assumed to be flat, indicating equal value for all; or the data is thought to be too random to guide policy, indicating that people rich and poor are equally likely to do smart or stupid things with money. This perspective should favor a flat tax on all income. Proponents of this perspective might also argue that the government cannot make adequate judgments about what is the “right way” to handle money; instead, they may propose that the free market make these determinations.

3. Society depends on income equality.
This position describes a majority of our tax system. Incomes are bracketed and taxed at increasingly higher rates. This is done because its proponents believe the value of a single dollar decreases logarithmically as a person amasses wealth. Eventually, there is no value added once a person achieves a certain level of wealth and thus taking that additional dollar from them does no harm to the person, but does give benefit to society. No politician seems to believe that an additional dollar adds no value for the richest people, however; if one did believe this, the most logical position is to argue for a tax rate of nearly 100% for the top income bracket.

4. Not all dollars are created equally.
This position describes the rest of our tax system. Advocates for this perspective believe that some dollars are more wisely spent than others and thus should be treated accordingly. This is why we pay no sales tax on food; because food is a necessity, the government has labeled it as money well spent. This position is somewhat similar to the income equity position, but rather than taking a nihilistic or apathetic view toward taxes, proponents of this perspective argue that the government can help guide people’s values through tax policy. This view also explains our complex system of tax deductions. The government has valued some spending over others, so donations to charity and home ownership costs (along with a lengthy list of other things) are deducted from taxable income. The trend line here only makes sense when we control for a variety of other factors. If looking only at money well spent, then the value of a dollar probably follows a downward trend; as you have more, that one dollar adds less value. But given the value of deductions for people with more money, it’s also clear that this perspective believes richer people must be rewarded for making wise money choices, even if that extra money adds less value for them than it would for a poorer person.

Not all people’s views follow one perspective completely. Perspectives 1 and 3 can both agree on perspective 4. Only perspective 2 stands alone, and this perspective isn’t widely touted because it is easy to argue it fosters greater income disparity. Ultimate revamped tax policy may end up still blending perspectives 3 and 4, just with a shift in how dollars are valued above a certain amount of income. Republican presidential candidate Mitt Romney proposed that deductions be capped above a certain amount (for example, no person can take more than $25,000 in deductions); this perspective has been adopted by members of both parties as a reasonable change. It actually pushes the tax code more toward perspective 3.

I hope this thought exercise can help illustrate the complex debate about taxes and help any readers uncertain of their stance begin to consider what perspective they support. Ask yourself, how do I see the value of additional money as wealth increases? This question, along with the perspectives above, should help guide responses in the debate about tax policy.

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