This is an interesting chart from the Congressional Budget Office (CBO) showing the share of income and federal tax liability by income quintile. In 2007, the average income of the bottom quintile was $18, 400; the middle, $64, 500; and the highest quintile was $264, 700. The top one fifth earn 55% of the county’s income and pay 70% of federal taxes. Witness the push back on Obama’s plan not to extend the Bush Tax cuts to the $250K club.
Some argue the marginal utility/satisfaction/importance of an extra $10K for a family making over $250K is much lower than a family earning $65k, for example. They argue and the most efficient — though maybe not fair — way to reduce the deficit is to tax the higher income groups. This concept of diminishing marginal utility of income is the theoretical basis of a progressive income tax, but we believe may not apply to risk taking entrepreneurs, for example, who often exhibit increasing marginal utility of income. Governments must be careful to consider such issues when formulating tax policy.