When people invented currency, it was to create something that everyone agreed would have a standard value (eliminating the frustration of a barter system). A dollar is supposed to be worth the same to me as it’s worth to Noir or to Warren Buffet.
That’s how the system is supposed to work. Unfortunately, there are some things it fails to take into account. The most significant thing is: the worth of a dollar depends on the number of dollars you already have. Let’s consider a few examples.
Suppose you’re broke and homeless (through no fault of your own; let’s ignore the politics for the moment), and you haven’t eaten in a few days. A stranger walking by gives you ten bucks. That ten bucks is going to be extremely valuable to you. It will help you survive one more day and give you enough energy to try to improve your situation.
Now let’s suppose you work at a gas station, making ten bucks an hour by sitting behind the register and making sure that nobody steals the candy bars. You do this for 100 hours and get paid $1,000. That thousand bucks is also going to be very real to you, because it’s supposedly the equivalent of giving over 100 boring (and maybe dangerous) hours of your life in order to make a profit for someone else. So you’ll be understandably annoyed when the government wants to take a big chunk of it.
Here’s another example. Suppose you get a big client to sign a significant contract or purchase order with your business: big enough for them to hand you a six figure check. Maybe you’ve done this in your career. Does that money seem valuable to you? Better question, does that money, dollar for dollar, seem as valuable to you as in the last two examples?
It doesn’t.
I can attest to this: when you deposit that check, it seems like you’re depositing Monopoly money. Buy a car with that money, and it doesn’t really feel like your car. People who deal in transactions of this size eventually get used to it, but it’s still nothing like “reality” as most people understand it. It’s always like playing with fantasy money in a fantasy world.
People have understood this psychological effect for well over a century now, and as a result, governments began instituting progressive tax systems to account for it. As long as these systems know where the “point of diminishing returns” is for the value of money, they make perfect sense.
Let’s look at the modern U.S. as an example. Can anyone in this country spend more than $700,000 per year without intentionally wasting money? Almost certainly not. It takes a tremendous amount of time, effort, and planning to spend $700,000. If your portfolio rakes in an additional $5 million, how valuable to you is it, really?
This scenario shows us something else about the world’s wealthiest people that most of the rest of the world has no clue about. The truly wealthy don’t pursue money. To them, money is nothing beyond a way of keeping score when they want to compete with one another. They certainly don’t use it to shop. In fact, most of them aren’t very interested in acquiring more things to own. They prefer to find more things (and people) to control, instead. This viewpoint actually makes a great deal of sense, by the way. When you own things, someone else can destroy them, steal them, or use them against you. On the other hand, when you control things, you get all the benefits with far fewer headaches.
So when we talk about cutting taxes for households making $100,000 or $200,000, I’m fine with that. It’s when people start talking about cutting taxes for those making $1,000,000 a year that I start objecting. There’s no need for it: as I’ve just shown you, this money is rarely put back into the economy. The richest Americans will still be able to play the same games, just with lower scores.