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I think this is a truism which doesn't always apply. Suppose that there are 1,000 basement-dwelling redditors (okay, it's a caricature). Each has their basic n

I think this is a truism which doesn't always apply. Suppose that there are 1,000 basement-dwelling redditors (okay, it's a caricature). Each has their basic needs taken care of, but not much money, and not much scope to improve their lot in life. What little money they have doesn't get invested, but spent frivolously. Suppose 1,000 such people could all put in $500 and give it to a randomly selected one of them. That person wins a life-changing amount of money. They suddenly have their prospects upgraded - they can travel, buy a house, live in some comfort, pursue a dream career. Couldn't it arguably be rational for all 1,000 to participate in that game? Doesn't it make sense that the utility curve is convex, not concave - that $500,000 is more than 1,000 times better than $500, when compared to $0? After all, suppose that $500 was a year's spare income. Even saving for most of a lifetime would only yield $20-30,000, nothing like enough for many of the opportunities that half a million would make possible. And a lump sum at age 65 could be much less useful than one at age 25. Losing the $500 might barely make a difference to one's quality of life. Now suppose that to participate in this lottery, they have to pay 10% of the money to Wall Street, or high frequency market makers, or whoever. Couldn't it still be a rational choice for each of the 1,000 to participate?

kbenson 6y ago
This is just the flip side of why people support progressive taxes. If you believe that a flat tax is unfair because the people at the lower end of the spectrum have much less free money that isn't taken up by base needs, then it follows that different amounts of money affect people in different circumstances differently. To the person with 10 million dollars, doubling their wealth is nice for them but likely won't result in a major change in lifestyle and what they could or couldn't do before. Maybe they go from a large house to a larger house. For the person that makes 30 thousand a year, doubling it makes a huge difference in how they live. The disposable income amount doesn't double, it's likely many many times higher, because it was such a relatively small portion before. The same thing applies to one-time payments. It would make sense in your example even if the payout was much less (like $10k) but still affected the group similarly (i.e. if they had less disposable income). That amount of money is a huge to people that have little disposable income.
- glazyrin 6y ago
  I completely agree, with the precision that there can be huge difference between two people with a similar amount of money, if one has most of their needs take care of (ie 'broke' but not 'poor') and the other will suffer severe consequences of they run out of money.
- kangaroozach 6y ago
  All good points, but I think most real flat tax proposals have zero tax on your “base need” income. Imagine no taxes on first $40k of income... Then a flat tax above that.
gruez 6y ago
>What little money they have doesn't get invested, but spent frivolously. The implication you're making here is that these people wouldn't mind losing $500/year, because it's otherwise being spent "frivolously". I don't think this is true because if you're spending it on something, you're getting joy out of it, otherwise you wouldn't be spending money on it in the first place. For reference, $500 can buy you a game console or several games, which can provide you with tens or hundreds of hours of entertainment. If it's really the case that the $500/year is being spent frivolously (ie. being spent on things that don't bring joy), then the correct course of action would be some sort of intervention that forces them to save, so they receive a large enough lump sum that can be used productively. We sort of see this happen with tax refunds, where people are basically forced to save throughout most of the year, the IRS gives it back at the end of the year, and they spurge the refund on a big purchase. >Doesn't it make sense that the utility curve is convex, not concave - that $500,000 is more than 1,000 times better than $500, when compared to $0? What makes you think that? I think it's generally accepted that money has a diminishing returns on happiness. I guess if you go to the extremes there's some ranges where it doesn't apply (eg. it's hard to do anything fun with a $5 bill), but there's also nothing preventing you from saving up the money. >After all, suppose that $500 was a year's spare income. Even saving for most of a lifetime would only yield $20-30,000, nothing like enough for many of the opportunities that half a million would make possible. You're off by a factor of 2. Factoring in a 6% inflation adjusted return, you end up with a return of $77,380 if you do this for 40 years.
- glazyrin 6y ago
  You seem to believe that saving is a virtue, that you get what you pay for, that interest rates have a natural level much higher than zero, and in 'diminishing returns'. I accept that you and many other people believe in those things, but I don't think they are universally believed in, not particularly supported by evidence.
  - imtringued 6y ago
    Saving isn't a virtue. You need a healthy balance between savings and spending. The economy is like a power grid. You cannot save labor. Any work that is currently done has to be consumed within a short time frame. Food rots. Technology gets obsolete.

kbenson 6y ago

This is just the flip side of why people support progressive taxes. If you believe that a flat tax is unfair because the people at the lower end of the spectrum have much less free money that isn't taken up by base needs, then it follows that different amounts of money affect people in different circumstances differently. To the person with 10 million dollars, doubling their wealth is nice for them but likely won't result in a major change in lifestyle and what they could or couldn't do before. Maybe they go from a large house to a larger house. For the person that makes 30 thousand a year, doubling it makes a huge difference in how they live. The disposable income amount doesn't double, it's likely many many times higher, because it was such a relatively small portion before. The same thing applies to one-time payments. It would make sense in your example even if the payout was much less (like $10k) but still affected the group similarly (i.e. if they had less disposable income). That amount of money is a huge to people that have little disposable income.

glazyrin 6y ago
I completely agree, with the precision that there can be huge difference between two people with a similar amount of money, if one has most of their needs take care of (ie 'broke' but not 'poor') and the other will suffer severe consequences of they run out of money.
kangaroozach 6y ago
All good points, but I think most real flat tax proposals have zero tax on your “base need” income. Imagine no taxes on first $40k of income... Then a flat tax above that.

gruez 6y ago

>What little money they have doesn't get invested, but spent frivolously. The implication you're making here is that these people wouldn't mind losing $500/year, because it's otherwise being spent "frivolously". I don't think this is true because if you're spending it on something, you're getting joy out of it, otherwise you wouldn't be spending money on it in the first place. For reference, $500 can buy you a game console or several games, which can provide you with tens or hundreds of hours of entertainment. If it's really the case that the $500/year is being spent frivolously (ie. being spent on things that don't bring joy), then the correct course of action would be some sort of intervention that forces them to save, so they receive a large enough lump sum that can be used productively. We sort of see this happen with tax refunds, where people are basically forced to save throughout most of the year, the IRS gives it back at the end of the year, and they spurge the refund on a big purchase. >Doesn't it make sense that the utility curve is convex, not concave - that $500,000 is more than 1,000 times better than $500, when compared to $0? What makes you think that? I think it's generally accepted that money has a diminishing returns on happiness. I guess if you go to the extremes there's some ranges where it doesn't apply (eg. it's hard to do anything fun with a $5 bill), but there's also nothing preventing you from saving up the money. >After all, suppose that $500 was a year's spare income. Even saving for most of a lifetime would only yield $20-30,000, nothing like enough for many of the opportunities that half a million would make possible. You're off by a factor of 2. Factoring in a 6% inflation adjusted return, you end up with a return of $77,380 if you do this for 40 years.

glazyrin 6y ago
You seem to believe that saving is a virtue, that you get what you pay for, that interest rates have a natural level much higher than zero, and in 'diminishing returns'. I accept that you and many other people believe in those things, but I don't think they are universally believed in, not particularly supported by evidence.
- imtringued 6y ago
  Saving isn't a virtue. You need a healthy balance between savings and spending. The economy is like a power grid. You cannot save labor. Any work that is currently done has to be consumed within a short time frame. Food rots. Technology gets obsolete.