When I was in high school, I took part in a state government simulation called Buckeye Boys State. High school students come from across the country and take part in a mock state government–passing bills, running cities, operating the state bureaucracy.
I ran for the House of Representatives (after a spectacular failure in the state Senate race) and served in this mock legislative body’s minority party.
While I was serving, one of the majority party members put forth a proposition to institute a “flat tax” for Ohio: a tax rate that was exactly the same for everyone. High schoolers throughout the room nodded. After all, why shouldn’t the tax rate be the same for everybody? You still have to pay a higher amount if you make more money: why should the percentage go up, too?
Being a high school debater, I was always taught to try to debate both sides of an issue. After all, if this issue was so cut and dry, why do we have a graduated tax structure (a tax system where people with more income pay a higher percentage on that income) in the first place?
What I came across was an interesting concept: the marginal value of money. The idea is this: as your income increases, the value of extra income decreases. If a family at the poverty level loses 10% of their income, that will have a much more negative impact on their well-being than a family making five times the federal poverty level.
This plays out in a number of the lenses we use to analyze public policy. From a classical economic standpoint, the idea of the marginal utility of income goes back to 19th century economists. From a poverty or inequality analysis perspective, dollars accrued to low income households are more effective at reducing poverty than dollars accrued to upper-income households.
From a capabilities perspective, basic needs for education and health tend to have marginal utility, too. For instance, the difference between getting no regular health screening and any regular health screening generally improves health more than the difference between getting any regular health screening and the most expensive health screenings. And the difference between no college and going to a low-cost state school is much more vast for future outcomes than the difference between going to a low-cost state school and an ivy league college.
This even plays out in research around subjective well-being. Happiness economist Matthew Killingsworth finds that increases in income correlate with increases in self-reported happiness–but that the increases diminish as income grows. So money does make you more happy, but typically you need a lot more money to get just a little more happiness as you move up the income scale.
So how does this matter to an analyst? My graduate school benefit-cost analysis professor Dan Acland presented a paper at the Society for Benefit-Cost Analysis’s annual conference this month on how to factor this insight into benefit-cost analysis.
His general proposal is to separate impacts of a policy into impacts for lower-income and upper-income people and then adjust dollar values into “income-adjusted values.” In Acland’s model, these can be understood as the value of an impact adjusted for if the beneficiaries were at median income.
In practice, this will make policies that accrue monetary benefits for low income individuals yield higher net present value than they would before adjustment.
Acland’s proposal is radical, but it seems like a useful way to apply a rigorous equity lens to policies that are likely to have disparate impacts to households across the income spectrum. And we could certainly use better tools to understand the equity impacts of public policy in the United States today.