Dan Ariely of Duke Business School is quite ingenious when it comes to devising experiments to determine how people think and what drives their decision making when it comes to economic matters. In his entertaining book Predictably Irrational, he challenged the traditional notion of economists that people are rational actors on the economic stage, making decisions in their own best interest. Instead he argues that people are irrational (i.e., not really thinking things through to get the best result for themselves) but irrational in a predictable way.
Now in a new paper co-authored with Michael Norton of Harvard Business School titled Building a Better America – One Wealth Quintile at a Time, they demonstrate that people in the US have a wildly inaccurate understanding of how wealth is distributed in the US. (I have already discussed studies (see here and here) showing the rapidly rising inequality in incomes in the US.)
In 2005, they asked a representative sample of 5,522 people from 47 states with median income, age, gender, and voting patterns that were matched to the population to identify which of three wealth distribution models they would prefer their societies to have. All the respondents were given this definition of wealth: “Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person’s net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.”
What they did was show people three pie charts representing different distributions of wealth by quintiles and ask them which society they would like to join, given that they would be assigned to a quintile in that society according to the ‘veil of ignorance’ model used by John Rawls to determine how to construct a just society. In this case, the ‘veil of ignorance’ took the form of telling the respondents, “In considering this question, imagine that if you joined this nation, you would be randomly assigned to a place in the distribution, so you could end up anywhere in this distribution, from the very richest to the very poorest.”
The three pie charts (as presented to the respondents) were unlabeled. The top right one was constructed using perfectly equal distributions. The top left one was constructed using the actual income distribution in Sweden. The bottom chart was obtained using the actual wealth distribution in the US (with the top quintile having 84% of the wealth, the second 11%, the third 4%, the fourth 0.2% and the bottom 0.1%).
The respondents overwhelmingly (92% vs. 8%) preferred the Swedish distribution to the US and by a considerable margin (77% vs. 23%) for the equal distribution over the US. There was also a slight preference for the Swedish distribution over the perfectly equal one. Who knew that Americans had such an egalitarian mindset?
For the second part of their study, the researchers asked respondents to estimate what they thought the actual wealth distribution in the US is and also what they thought it should be. The results are shown in this chart that again splits the distribution by quintiles. The actual distribution is given the top line and is the same as the pie chart above for the US. The second line is the response when asked what they think the current distribution is. The third line represents what they would like it to be. The results are interesting.
As the study authors say,
First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth. These desires for more equal distributions of wealth took the form of moving money from the top quintile to the bottom three quintiles, while leaving the second quintile unchanged, evidencing a greater concern for the less fortunate than the more fortunate.
In other words, not only do people think that wealth is more equitably distributed in the US than it actually is, their ideal of what the distribution should be would require a considerable redistribution of wealth from the richer to the poorer. Americans are socialists at heart, though they may not realize it.
What was also interesting is that there were not marked differences by age or gender or political party affiliation or income and wealth. As the authors say, “we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.”
What has happened in the US is that the ruling wealthy oligarchy that controls the government and the media keeps repeating the message that the current distribution of wealth is not only good but that there should be even more inequality by giving tax breaks and other benefits to the rich. Given the almost total disconnect between reality and what people think is the reality, it should not be surprising that it is almost impossible to have a reasonable discussion in the US about income and wealth and taxes.
That’s a remarkable post, Mano. Thank you.
Nothing good will happen in this country until a lot of people wake up and realize that it’s the oligarchy that’s screwing them, not “socialists”. Unfortunately the teabagging types are driven largely by racism- I deserve MY government benefits, but “those people” don’t “play by the rules” and shouldn’t get any. And racism is the oldest and most intractable problem in American politics. It’s difficult to be optimistic in the near term.
Great post, and appropriately timed.
Matt Taibbi had an excellent feature article recently on one of the mechanisms used by the uber-rich to perpetuate their happy condition -- the treatment of hedge-fund managers’ earnings as “carried interest” taxable at the long-term capital gains rate, which is only 15%. The Democrats, even though nominally in charge of both chambers, couldn’t even pass a bill subjecting part of this income to the rates that should apply to what is really ordinary income. This is obscene not just for its distributive consequences but also for its positive discrimination as a matter of law.
Although it is not easy to find consistency in the US tax code, there are numerous provisions which try to prevent taxpayers from shifting ordinary income, taxable at an appropriate marginal rate, into capital gains, taxable at much lower rates. One example of this is the doctrine of imputed interest, which requires (individual) lenders to include in income a prescribed, federal rate of interest if they make a loan at nominal or zero rates. In the case of a seller-financed mortgage, for example, this doctrine prevents the seller from charging the buyer a higher up-front price and very little interest as compensation. The more money the seller can classify as principal, the more he could treat as capital gains instead of interest. But the IRS heads him off at the pass and requires the reporting of taxable interest.
Normal rules like this don’t apply if you’re a billionaire hedge-fund manager contributing heavily to both parties. They have literally bought themselves preferential treatment in the US tax code. And with Rupert Murdoch’s personal propaganda machine telling everyone that higher taxes are the hallmark of socialists, who are the equivalent of communists, even the most obvious tax hike can’t make it through Congress before the mid-term election. Disconnect indeed.
Let me just clarify that by “most obvious” tax hike in the last paragraph, above, I meant “most sorely needed.”
Shalom Mano,
I too read the report with interest.
I think one of the challenges here is the use of the word “redistribute.” It has taken on a pejorative meaning as a code word for “taxes.”
American do not favor redistribution because they fear (incorrectly) that such redistribution will mean the loss of what they understand to be theirs.
I would suggest that we need to discover a path to where we can talk about equitable distribution, a system where the economic playing field is flattened and reward is measure by personal merit and not access to capital.
We shouldn’t seek to redistribute after the fact of economic activity, but rather to ensure that wealth is distributed correctly before the fact.
This would make a great Socrates Café question. You should put it in the jar tomorrow night.
B’shalom,
Jeff
I remember reading somewhere that a socialist mindset is hardwired into us as part of our evolution. The example given was in a family, the haves (the parents) take care of the have nots (the children) as part of a moral obligation that is part of our parental instinct, and as children grow, they are given the tools to succeed on their own, but always with the parental safety net in place, should they fail. Somehow, though, that relationship is lost when extrapolated to the world outside the family.
Why not? There’s nothing sacred about the distribution produced by our or any other income system. (Well, especially not by ours, with its highly pronounced “winnner take all” aspect.)
Yes, many have been brainwashed by a torrent of propaganda financed by billionaires who would like us to believe the laughable proposition that they earned all of their booty as a result of their superior merits. But not only should we not give up on educating people about the lottery aspects of capitalism- there is no hope of achieving a more just society without doing so.
Shalom Steve,
What we have done for the past 100 years has not worked to create the equitable society that this study indicates we as Americans want.
It’s time to think of alternatives. Think of it this way. If we all had to pay our income taxes quarterly, without the mechanism of payroll withholding, we would have a lot more people in arrears. Once the money is in our pocket, we don’t want to give it up, regardless of how little we might perceive it to be.
Instead we might think of ways to create equity before the cash is actually in someone’s pocket. I’m uncertain as to what that mechanism might be, but I think it is one of many approaches that ought to be explored.
B’shalom,
Jeff
We got a LOT closer than we are today (i.e. income inequality is higher than it has been since the 1920s), and then the plutocrats all the progress that had been made. Part of the way they accomplished that was to make “redistribution” a dirty word.
IMHO it is simply not possible to run a capitalist but reasonably just society without a great deal of income redistribution. Certainly I have never heard a coherent proposal for doing so. And while I have a certain amount of of sympathy for socialism, the possibility of running a reasonably productive socialist economy has yet to be demonstrated in practice. If you know of a third alternative I’d love to hear about it.
This is America. Most of the respondents probably did not quintiles or percentile measurements either.
Americans most like the 1950s. when taxes were high on the rich, lower on the poor, the momentum of our protectionist history was going strong, and the feds were subsidizing highways, powerplants, schools, sewers, water utilities, construction, etc, labor unions were stronger, etc. or at least, what they remember from tv about the 1950s.
progressive taxes on the rich were much higher in the 1950s. taxes on the lower classes were much lower in the 1950s. I guess we can raise taxes back to 1950s levels without being socialist.
labor union membership was higher in the 1950s. National exports and imports were much lower in the 1950s: we were still enjoying the momentum of over a century of protectionism, + plus the rest of the industrial world blowing itself up in two world wars. american capitalism works great with protectionism.
I’m not sure that the fact that Americans think an ideal distribution would be more “equitable” really means anything more than that simple fact. I’m not convinced it has implications about what policies they would want in taxation or otherwise.
The problem I have with any of the forms of redistribution mentioned is that it does involve taxation--that is, the government taking money away from some people and giving it to other people or spending it (on various things). Firstly, as I pointed out in reply to the post regarding life expectancy, along with everything else that has been going on, we have seen a steady increase in the size and scope of government, and most massively in the last few years. I would argue that much of the recent shift in wealth has occurred under the guise of government beneficence. In plain English, I don’t trust the government to redistribute the money. And secondly, even if they did, this might well be accomplished through even further expansion of government. Increased governmental power means decreased personal liberties in my book. Not quite a zero-sum game, but almost.
Never mind socialism, how about a return to real capitalism? How about if we started with government not giving preferential treatment to the superrich. Not just talking about taxes here, but I think the individual who was personally most benefited by the bailouts was Warren Buffett. He’d look like a chump if so many of his corporations hadn’t received government help. Instead, we do. But that’s big government. Sure, it’s there to be bought--but being bought it has enormous and unwarranted power.
And finally, I note a conspicuous absence of reference to the old idea that “a rising tide raises all boats.” None of the discussion has touched on productivity, although ryan costa’s comments came close I think. “Merit” in a capitalist economy means economic productivity. While there is probably a lottery effect for access to capital, I’d just like to see a more level playing field where actual contribution (whether or not flavored with accidental wealth) had a closer relationship to rewards reaped. Then things might get better for everybody.
what were the days of “real capitalism”. what days do you want to return to? what was “real capitalism”? where was it?
great post thanks
It is interesting the views from the US not matching the current reality of their financial distribution -- perhaps this is an indication of the future direction that the US will steer towards with a bit of pushing from the population? I suspect it is the very generous social welfare system in the Scandanavian countries that redistributes the finances from the wealthy to the rest of the population, which will mean more for health, social welfare services and less for other endeavours?
Until we can actually gain control of the tax act and convert it to a simple one-page document that says something like the following, we’ll be chasing our tails for eternity. The rich have us by the short and curlies and have no intention of letting go anytime soon.
1)Less than 15,000 is exempt from tax
2)15,000 and up is taxed at xx%, no exceptions
3)If you spend money deveoping your business, you will still pay tax on it, consider it a cost of doing business. And with no exceptions, it will be a level field.
4) Employers and employees will contribute SS and UI and Health Care at a rate of xx%
5) Not(necissarly) a tax act item but if you want to be in the Health Care Insurance business, you better be prepared to insure anyone who knocks on your door from cradle to grave at a “national” rate. Your payment will come from the Fed for services rendered.
6) All stock trades will be taxed at x%($0.01?), no exceptions.
There will be no opportunities for tax fraud, dodging etc. Also everyone who is making over $15,000 per year will pay taxes.
Great great post.
We have been reading(from Australia) recently about the debt levels and GPD output of the USA. Its now becoming a significant and popularized fact here. That provides some insight when you quoted that 84% figure, do you think though, would peoples opinion of there “ideal” wealth distribution model would change in different economic cycles. Eg from bad depression to economic boom?
Respondents do however feel very obligated to believe what ever the media(newscorp) is spinning at the time also so this has to taken into account?
Matt.
Matt,
I wish I knew the answer to your question but I think the kind of study done here was new so it is unlikely that we would have data for other economic times.
The results of this study don’t surprise me at all. Most people want a more even distribution of wealth simply because they think it means THEY will get more … and get it without doing anything.
For most people (not all I understand) the opportunity to raise their own income is available if they create more value to society either via getting more education to obtain a higher paying job, or by starting their own business.
I still believe that America is the land of opportunity.
Your findings are really not that much surprising. You are right when you said, “Americans are socialists at heart, though they may not realize it.” However, I think there should be some limit to how rich a rich person can get! Otherwise the “socialists” ideas will always be there.
I feel that most Americans are too obsessed with the idea of capitalism without realizing that pure capitalize would be a horrible thing! Everything needs moderation so there should never be a truly capitalistic society.
Thank you for a very interesting article. Having been born and raised in Norway, I would like to point out that Sweden and Norway are social democratic nations, as opposed to plain socialist. Most Scandinavians would resent being referred to as socialists and not social democrats. Most Americans would not make that distinction, but to us it makes a difference. Having lived most of my adult life in the US, I am a strong supporter of a free market economy, but one has to be blind not to see that the wealth distribution is out of whack. Capitalism is good, but as another poster pointed out, pure capitalism may be to much of a good thing -- there has to be a balance. If you would like to see a good example of balance, look at how the Norwegians handled the banking crisis in the late eighties by refusing to bail out speculators and greedy bankers. It was a government takeover, but only a temporary one.
I have been to over 30 different countries, and the US is the country with the widest income disparity.
I have seem incredible wealth right beside poverty. this leads to social unrest.
I personally felt that America is the land of opportunity. Also I agree what you have said that “Americans are socialists at heart, though they may not realize it.” But I cant more comment on your question since I didn’t do that much of study on this topic.
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There are protest going on all over the US. It started in New York City, in the financial district called Wall Street. The protester are protesting corportate greed in America, and blame Wall Street and the big banks for America’s current financial situaton. These protest have spread from Wall Street to all across America. Is this a socialist movement? Well, at this point it is hard to say. I support the protests, as long as they don’t become violent, and I am certainly not a socialist. As former president Bill Clinton said: For a protest to have meaning, you cannot only be against something,but you must also be for something. If not, someone else will come in and fill the void.
Look at what happened to the Wall Street protest! We heard so much about them at the beginning but now all of a sudden I haven’t heard anything from the protest!