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I am a student of econometrics and I'm studying the philosophy of economics. This week I have exams, and I was reviewing last year's exam to practice. I ran into this question:

One of the arguments for a 'flat tax' system instead of the current Dutch progressive system is that such a tax contributes to the welfare of The Netherlands, because there is a direct relation between someone's contributions and his net reward. This argument reflects the following principle:

a. Principle of equal opportunity

b. The difference principle

c. Capitalist justice

d. Utilitarianism

I was convinced that the answer should be capitalist justice, with the reasoning that its definition is: 'Everybody should be rewarded equally to their productivity, effort or contribution'.

However the correct answer according to the book is D, without any explanation given. I don't see how this can be, because utilitarianism's definition is 'that aggregated utility should be maximized'. The argument indeed states something about welfare, but I don't see why this should be the right answer.

Can someone explain this to me before my test? Thanks a lot in advance.

  • Just for sanity's sake: is the question then 'why might a flat tax be considered utilitarian'? – Joseph Weissman May 21 '12 at 20:34
  • Yes, but with respect to the given argument. – Lotte Laat May 21 '12 at 20:34
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I'm not terribly good with economic theory, but it seems a little unjust that no one was able to step up on this one last year. Still, it deserves an answer.

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If we took only the reason that "a [flat] tax contributes to the welfare of the Netherlands", then it's fairly obvious that this is not a capitalist concern, and certainly doesn't pick out enough of a difference between individuals by the definition you've provided, that "Everybody should be rewarded [by] their [...] contribution." That tricky word you included "equally", in reference to capitalism, means to say that each person should receive some benefit equal to their contribution, not equal to everyone else.

It gets problematic once you include that clause which states the Netherlands will be benefitted "because there is a direct relation between someone's contributions and his net reward" (emphasis added). My concern here is that when I look up "flat tax", it does seem to imply equal treatment in the strictly capitalist sense, specifically because it rewards greater productivity in just the way that your question claims is the reason it benefits the Netherlands on the whole. There's no sense that this involves anything other than a very capitalist sort of view.

...

So honestly? I think you're absolutely right. Your guide's answer 'D' may have simply been a typo, and you should check with the author or editor. The question's also a bit wonky without the text it's taken from to define what kind of tax it means by saying "flat tax." I'm inferring the meaning from the definition that your question gives. However, if it's taken to mean a strict flat marginal rate, then it ceases to have the same capitalist qualities - but then it would satisfy choice A, not D. So I can't really say.

On the other hand, can any version of the "Flat tax" possibly be utilitarian? That's an entirely different question, and one I'm not really capable of answering. I'm inclined to say that it could be construed as utilitarian, but only on the premise that capitalism benefits all at the expense of the individual. Yet that still presupposes capitalist justice (by your definition) as the motivating reason.

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I needed the complete citation from the book. I think it was a typo, because I think the question was: why Flat tax isn't so good to society or capitalism's justice.

  • If the government creates a rule that says everyone must pay an equal share of their income, revenue will be restricted to the rate that the lowest earning workers can afford to pay.

  • $100 means more to a person making $5,000 a year than it does to a person making $500,000 a year. This means that allowing poor people to keep a larger share of their income will result in a happier society than making everyone pay the same rate.

  • Almost everyone’s income results largely from factors beyond their control. For example, the poorest Americans are richer in absolute terms than the richest Indians. This isn’t because Americans are that much more hardworking than Indians, but because Americans have access to a superb set of institutions and a grand scale of specialization and trade within our borders. Other factors, such as our genes, parents’ income, our order of birth, year of birth, have enormous impact on our future earnings.

  • Because people don’t morally necessarily deserve their income, it means that society can fairly ask the wealthy to pay more. Doing so allows us to produce more public goods and services that benefit everyone, while creating a more happy and just society than if we asked everyone to pay the same. But, we still need to be concerned about incentives. We don’t want to make rates so progressive or so high that they make it unattractive for people to be productive.

Effort exerted does not necessarily correspond to value provided to society, and value provided to society does not correspond necessarily to personal wealth. We simply cannot assume that the rich among us have provided greater value to society, or that they have made greater sacrifices for it. We can see, however, the ethical case for using superfluous capital to address society’s ills. Then aggregated utility can be maximized

  • While everything you write is perfectly clear, I'm not sure how this answers the question, in particular. – iphigenie Mar 22 '13 at 17:35
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    @iphigenie Ok, I corrected my answer. The answer in the book of the question is so absurd that I think it is a typo. – Annotations Mar 22 '13 at 17:45
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Utilitarism is a theory that says that each decision should maximize the best, analyzing all the opportunities, stakeholders and prioritizing the total benefits, it could be mathematical , capitalism see the maximization of capital.

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