An Open Letter to those who believe that the theory of Diminishing Marginal Utility is valid justification for an increasing marginal tax rate. The antagonist had cited DMU as “fundamental principle of Economics,” and had posited that this theory is valid justification for our current system of elevating marginal tax brackets. I offer you this piece as a retort:

I do not profess to deny the principle of Diminshing Marginal Utility– certainly the first automobile you acquire is markedly more valuable (in terms of utility) than each subsequent automobile. But as we also know, value is not determined by utility alone, or it would be true that Iron is more valuable than Gold. Value is determined by desire to acquire an object (which may or may not correlate to said object’s utility), and the scarcity thereof, which is also a fundamental principle of economics, better known as Supply and Demand. Gold’s value is derived from men’s desire to obtain it, and its relative scarcity.

Regardless, I fail to make the connection between the diminishing marginal utility of my income, and your assertion that it rightly belongs to someone other than I, who worked to obtain it. I will maintain that it is a spurious argument, for sure, that the money I earn by the product of my labor is more deserved by someone who did not work to produce it. But this is not the crux of the issue, rather I aim to point out a serious flaw in your application of the theory of Diminishing Marginal Utility.

I would like to address a misconception: money is not accurately described as “what I can buy,” but rather it is a mode of storing the product of my labor, so as to eliminate the Double Coincidence of Wants. Money is value stored, it represents what I have given up. Each subsequent dollar is less representative of the time and effort required to obtain it. Consequentially, it is precisely because each dollar is less valuable than the previous, that I should desire to earn more of them as my effort to obtain them increases. An sside: Labor everywhere in this country has recognized this fact, and accordingly has passed laws mandating overtime pay at a rate of 1.5 times the normal rate of pay, but I digress.

If I make shoes– let’s assume for the moment that I do, and that they are all identically utile, require identical labor, and are sold for the same price. The theory of diminishing marginal utility requires that I receive less recompense for each subsequent pair of shoes, despite the fact that each individual customer values my product and is willing to pay me identically. You would argue that my compensation for providing such utility ought to decrease.

You toss out the DMU argument but you fail to recognize the increasing marginal opportunity cost of my time. Each subsequent pair of shoes that I provide to consumers requires that I give up an increasing amount of my leisure, of which there is a fixed amount. My leisure, like gold or oil, is a scarce commodity.

You would not dare proclaim that the 100th pair of shoes is less valuable to the 100th customer, than the first pair was to the first customer? Why then, do you devalue the time and effort of the producer

You suggest that as my leisure becomes increasingly scarce, that its value does not increase, but rather, it decreases. You argue that the time I have spent, and the things I have given up to provide the 100th customer with shoes are less important, less valuable to me than the things I gave up in order to create that first pair of shoes, when in fact only the opposite can be true.

Accordingly, I must conclude that the theory of DMU, if anything, speaks against a justification for increasing marginal taxes.

Kind Regards,

David Z