What concept is our tax system based on?
You may be surprised to know that our tax system is based on a utilitarian principle called Declining Marginal Utility of Income. What does that mean? Good question. The basic idea states that one would derive less utility from each dollar as he/she has more dollars. This concept provides justification for a concept called progressivity. A “Progressive” tax is one in which a taxpayer pays a greater proportion in tax as the tax-base increases. Sounds familiar?
Interestingly, even people sympathetic to utalitarianism may wonder whether utility can readily be translated into money. Others doubt whether there really is a decreasing utility to every dollar added. One thing today is certain, the more dollars one has the greater his ability to hide the rest of his dollars.
That’s why Estate and Tax Planning is so critical.