Is There a Utilitarian Case for Wealth Concentration?

In defense of billionaire philanthropy.

Utilitarians tend to skew left, and ostensibly for very good reasons. From the Stanford Encyclopedia of Philosophy entry on Jeremy Bentham:

While we might plausibly assume that, of two individuals with unequal fortunes, the richer of the two would be the happier, it does not follow that adding increments to that person’s wealth will continue to make him happier in the same proportion. It is in the nature of the case that the amount of increase in happiness will not be as great as the increase in wealth; the addition of equal increments of money will eventually bring successively less of an increase in happiness.

In other words, the returns to happiness from wealth decline as wealth increases. The law of diminishing marginal utility states that because individuals satisfy their most basic needs first, each additional unit of consumption brings less satisfaction than the last. For example, an additional $10,000 of income would bring a lot more happiness to someone who earns $30,000 a year than it would to someone who earns $1 million. Thus,

One of [the law’s] practical consequences for a utilitarian such as Bentham is that, where choices present themselves between giving an additional increment to a rich man or to a poor man, more happiness will result from giving it to the poorer of the two.

And, all else being equal, we have an equivalently good reason to think aggregate utility can be increased if governments redistribute wealth from richer people to poorer people.

Of course, all else is not equal. The obvious objection is that by redistributing wealth, governments disincentivize productivity and create deadweight losses that may exceed the increase in utility produced by redistribution. Because economic growth is cumulative, this is especially concerning over the long term. If the United States had adopted Huey Long’s “Share Our Wealth” program during the Great Depression and seized all incomes over $1 million per year and all fortunes over $50 million, the country would be far poorer than it is now and almost everybody would be worse off.

But say it was possible to avoid problems with incentives and deadweight losses. Say that you could convince the wealthy to redistribute their income and assets voluntarily along the same lines that the government would.¹ Is there still a case for wealth redistribution?

The answer is far from obvious.

For one, the principle of diminishing marginal utility is a lot weaker than most people believe. It’s widely assumed, based on a 2010 paper by economists Daniel Kahneman and Angus Deaton, that money can only buy happiness up to an income level of $75,000 per year. Beyond that, people’s lives don’t get much better.

As Vox’s Dylan Matthews explains, this is totally wrong:

[Kahneman and Deaton] did, indeed, find that emotional well-being taps out at $75,000. But “emotional well-being” is a very specific thing. […] [The] kind of questions [asked in the study] tell you what people’s mood was the day before. But they don’t tell you if those people like their lives overall.

When economists ask people about their general satisfaction with life, they typically fail to identify any income or wealth threshold beyond which money fails to buy happiness. In fact, as Matthew Killingsworth notes, “the difference in life satisfaction between the wealthy and those with incomes of $70-80,000/y (difference = 1.22) [is] nearly three times as large as the difference between $70-80,000/y and the average of the two lowest income groups (difference = 0.44).”

According to Killingsworth’s data, the amount of satisfaction gained by someone moving from an income of $240,000 to $480,000 per year is not substantially less than the amount gained by moving from $30,000 to $60,000. This still means that an equivalent amount of money added to one’s income produces more happiness for a poorer person than a richer person, but an equivalent percentage affects happiness by about the same amount no matter where one falls on the income distribution. This doesn’t refute diminishing marginal utility, but it does indicate that returns to happiness don’t diminish nearly as fast as widely assumed.

Source: Killingsworth (2024).

Another, more fundamental problem with redistribution is that governments in wealthy countries mainly redistribute money to their own citizens rather than the much needier global poor. Wealthy countries spend about 0.5% of GDP on international development assistance per year, compared to as much as 20% on transfer payments to their own citizens. A large share of these transfer payments also goes to relatively wealthy demographics, such as the elderly, who exert disproportionate influence over their respective governments. By contrast, needy citizens of poorer countries have virtually no say over where wealthy countries’ tax money is spent, and voting populations in the developed countries widely resent that even a small percentage of their budgets goes to foreign aid. In the United States, just 7% of adults say “economic aid to other nations” should be increased, while 51% say it should be cut. Fifty-eight percent say Social Security benefits should be expanded, while just 5% say they should be cut.

Since government redistribution is so poor at transferring money to the people who need it most, it’s possible that redistributive policies may actually do more ill than good for the global poor. This is likely to be true if wealthy people in the developed countries give more money to effective interventions on behalf of people in extreme poverty than their governments and the recipients of government transfer payments would do with the same amount of money.

Famed economist Larry Summers made a more convoluted version of this point during the 2020 Democratic presidential primary, when candidates like Bernie Sanders and Elizabeth Warren were proposing steep taxes on wealth (without an exclusion for private charitable foundations) that would have incentivized the rich to spend down their money now or else see it rapidly eaten away by the government. (Sanders’s proposed top tax rate of 8% per year on wealth over $10 billion would have amounted to between 89% and 133% of the average annual return to the largest portfolios, in addition to an 80% top marginal income and payroll tax rate.)

Summers was widely mocked online, but his concern about the effects of a wealth tax on billionaire philanthropy are well placed. Economists Emmanuel Saez and Gabriel Zucman, who designed Warren’s tax proposal, estimate that if it had been in place since 1982, the wealth of top global health and development donors like Bill Gates, Warren Buffett, and Dustin Moskovitz would have been decimated. Sanders and Warren, many of whose surrogates subscribe to the view that billionaire philanthropy is undemocratic and ought to be done away with, have proposed using higher tax revenue to fund transfers to relatively well-off Americans — like wiping out student debt — rather than global health and development assistance.

Source: Tax Justice Now.

These sorts of confiscatory tax and transfer schemes would disproportionately hurt giving to the global poor for two reasons.² First, wealthy people donate a significantly greater percentage of their income to charity, on average, compared to people who are poorer. Households earning more than $2 million per year give an average of 14% of their income, while middle class households typically give between 2% and 5% of their income.

Source: Philanthropy Roundtable.

Second, wealthy donors are also more likely to prioritize more effective charitable causes and achieve better economies of scale for effective giving because they often establish their own foundations with staff specifically dedicated to reviewing grant requests. Only 5% of total U.S. charitable giving goes to international causes, including global health and development. The Bill & Melinda Gates Foundation, which accounts for less than 2% of total U.S. giving, funds more than a quarter of international causes. Since 2000, it’s been a key contributor to efforts that have saved at least 122 million children from premature deaths. Another foundation, Good Ventures, run by Facebook co-founder Dustin Moskovitz and his wife Cari Tuna, has helped save at least tens of thousands of lives per year and treated millions of cases of debilitating disease. As Toby Ord has shown, the most effective health interventions like those prioritized by these large foundations can avert suffering and save lives about 60 times more effectively than the median health intervention and 15,000 times more effectively than the least effective intervention.

(You can say billionaire philanthropy is undemocratic, but if democracy makes much poorer philanthropic decisions than the billionaires — at an opportunity cost of thousands or millions of lives — then I consider that a feature, not a bug.)

The total wealth of all billionaires in the United States is $6.2 trillion. Bill Gates, Melinda French Gates, Moskovitz, and Tuna control at least 2% of that sum and plan on donating their entire wealth to their foundations by the time they die. If the U.S. government spends just 0.7% of its budget on development aid, and the average American gives just 5% of their income to charity and 5% of that to effective causes, then without even accounting for giving from other billionaires, redistribution from the wealthiest Americans would mean cutting their giving to the world’s neediest people by more than half.

Since poorer people in the less developed countries tend to benefit more than relatively well-off Americans when given the same amount of resources, it’s unlikely that the gains from increased transfer payments domestically would balance out the losses from lower giving abroad. Although this would likely not be the case if advocates of redistribution prioritized cost-effective global health and development programs over their domestic priorities, or dropped their grudge against billionaire philanthropy and provided tax exclusions for private foundations, either of those proposals is a virtual non-starter for the progressive left. For any realistic policy proposal aimed at large-scale wealth redistribution in the United States today, the utilitarian costs almost certainly exceed the benefits.

---

1. In the United States, there is an obscure federal program called the Bureau of the Fiscal Service that allows individuals to donate money to the government, but it can only be used to pay down the national debt. It’s raised $66.6 million since 1996.

2. This isn’t a loaded term; Thomas Piketty, the French economist and author of the best-selling Capital in the Twenty-First Century, describes his own proposed tax regime — which is less aggressive than Sanders and Warren’s — as being “confiscatory.”