Wealth inequality is distorting how Americans think about the problem

monopolybOne of the right-wing talking points I see pop up with more frequency is the use of “liberal envy” of the wealthy elite Plutocrats who rule over us as the reason for issues like income and wealth inequality.

Liberals are just “envious” of the über-rich top one-percent and that is why they want to tax the rich more, so we are told.

This talking point only makes sense if one is a member of the privileged one percent. It’s a safe bet that most, if not all of you, are not.

Neil Irwin, who was a Washington Post columnist and the economics editor of its “Wonkblog” before moving over to The New York Times as a senior economic correspondent and writing for “The Upshot” column a year ago, recently wrote Why Americans Don’t Want to Soak the Rich:

With rising income inequality in the United States, you might expect more and more people to conclude that it’s time to soak the rich. Here’s a puzzle, though: Over the last several decades, close to the opposite has happened.

Since the 1970s, middle-class incomes have been stagnant in inflation-adjusted terms, while the wealthy have done very well; inequality of wealth and income has risen.

Over that same period, though, Americans’ views on whether the government should work to redistribute income — to tax the rich, for example, and funnel the proceeds to the poor and working class — have, depending on which survey answers you look at, either been little changed, or shifted toward greater skepticism about redistribution.

In other words, Americans’ desire to soak the rich has diminished even as the rich have more wealth available that could, theoretically, be soaked.

It’s not just public opinion polls, either. It shows up in the actual policies espoused by candidates for office and enacted by Congress. In 1980, the highest earning Americans faced a 70 percent tax on every dollar they earned beyond $215,400 for a married couple, for example, the equivalent of $544,000 today.

Over the last decade, by contrast, the top marginal rate has ranged between 35 percent (which President George W. Bush secured in 2003) and 39.6 percent (which President Obama advocated and which took effect in 2013).

This core question — How much should the government use its power to tax and spend to redistribute wealth in pursuit of a more equal society? — has been at the root of ideological clashes around the world and throughout history. Yet in American politics in recent years, it has manifested itself in a narrow, partisan debate over whether the top marginal income tax rate should be 35 percent or 39.6 percent.

How you make sense of this seeming paradox of rising inequality and flat or declining support for redistribution depends on your ideological assumptions.

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New research offers a bit more evidence on what may be occurring. It doesn’t disprove either the conventional liberal or conservative argument. But it does show some of the ways that Americans’ attitudes toward redistribution are more complex than either would suggest.

A National Bureau of Economic Research working paper by Jimmy Charité, Raymond Fisman and Ilyana Kuziemko tackled this with an online experiment in which a random sampling of Americans were asked what tax rate they thought appropriate for someone whose annual income had suddenly increased by $250,000 for reasons involving luck. The researchers asked the question twice. In one version, the income gain occurred in the current year; in the other, it happened five years ago. Surprisingly, the respondents favored a 1.7 percentage point higher tax rate if the person with the income gain had recently started earning the extra money than if the person had been earning it for five years. That may not sound like much, but it is more than half of the gap the same experiment showed between the tax rate favored by Obama voters and the rate favored by those who said they voted for Mitt Romney in 2012.

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Another working paper, from the Brookings Papers on Economic Activity by Vivekinan Ashok, Ms. Kuziemko and Ebonya Washington, looks at how thinking about redistribution has varied over time among groups. One of its more striking conclusions: The shift away from a belief in redistribution has been stronger among older Americans than any other age group.

Might this be explained by the elderly becoming more conservative in general, and therefore taking a more conservative view on this issue? Not really. The shift showed up even when the researchers controlled for views on hot-button social issues like abortion and gun control.

The researchers offer another way of making sense of the pattern: Older Americans benefit more directly than any other age group from the social safety net, specifically, Social Security and Medicare. The fact that American seniors already receive government-provided health care may make them view any talk of greater redistribution as taking away what they already have, the researchers suggest.

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The two studies indicate how complex — even messy — opinions on this question of political philosophy are. Our views on proper tax levels and redistribution may be shaped by seemingly extraneous factors, like whether we believe the rich are already used to being rich, and whether we are already getting government benefits.

In other words, the question isn’t, Why don’t Americans want to soak the rich more? It may be, Who exactly is being counted as rich and who is perceived to be benefiting from the soaking?

Interesting. Dean Baker at his “Beat the Press” blog at the Center for Economic and Policy Research responds to Neil Irwin in NYT Misses Story on Redistribution: Maybe People Don’t Want Government Policies that Rig the Deck for the Rich:

Neil Irwin had an interesting Upshot piece that noted polling data showing people do not favor much higher taxes on the rich. It questioned why it was that people were opposed to redistribution even though inequality has become a major national concern.

A major problem with this sort of analysis is that it treats distribution as though it is only a function of tax policy. This is clearly secondary. The upward redistribution of the last 35 years was overwhelmingly the result of government policies that structured the market to favor the wealthy.

For example, trade policy has been quite explicitly designed to put manufacturing workers in direct competition with low-paid workers in the developing world. The predicted and actual effect of this policy is to reduce their wages and also the wages of non-college educated workers more generally. By contrast, doctors and other highly-paid professionals (who comprise much of the one percent) have been largely protected from international competition. The argument for exposing these professionals to competition is the same as the argument for trade more generally: it will lead to lower prices and more economic growth. But because of the political power of these groups, free trade in the services of doctors and other professionals is not even discussed in polite circles.

The Federal Reserve Board has also quite explicitly adopted policies that keep unemployment higher than in the years prior to 1980. Higher rates of unemployment not only deny workers jobs, but they also reduce their bargaining power, thereby preventing them from getting wage increases. The government’s labor policies have also been much more hostile to workers over the last three decades, making it far more difficult to form unions. And, the government handed out trillions of dollars in below-market interest rate loans to rescue Wall Street banks and prevent the market from working its magic.

Given a whole set of policies that have redistributed a massive amount of income upward, it is understandable that many people would not trust the government to be taxing the rich to help the poor and middle class.

That’s a fair assessment: those with wealth and power write the rules, and they write the rules to benefit themselves at the expense of everyone else. In other words, “the game is rigged,” as Sen. Elizabeth Warren frequently points out.
Warren in Minnesota: ‘The game is rigged’: “The game is rigged, and the Republicans rigged it,” Warren said.

Given the number of billionaires who are buying up presidential candidates like they used to buy up race horses, it’s little wonder average Americans have lost faith that any candidate is going to represent their interests over the demands of the billionaire who financed their campaign, and expects a quid pro quo return.

6 responses to “Wealth inequality is distorting how Americans think about the problem

  1. Joseph Stiglitz, Nobel Laureate in economics, detailed the very deleterious economic and political effects of economic inequality on the functioning of our mixed economy in his recent book, “The Price of Inequality”. Inequality in wealth distorts an economy and makes it less efficient, less competitive, less innovative, restricts opportunity, and makes goods and services more expensive than they would be in an economy in which wealth and economic power is more evenly distributed. Whatever one may think or feel about the unequal distribution of wealth does not change these economic realities.

    And of course, gross inequality in wealth is unfair and inequitable. For one example, most of us have to pay sales taxes when we buy or sell goods or services. Why don’t those who buy and sell financial instruments have to pay a sales tax on their transactions? The value of financial transactions by financial high rollers exceeds 1 quadrillion dollars per year in the U.S. A sales tax on these transactions of only three tenths of one per cent would yield over 300 billion dollars per year. Think of what that amount could do for education, for infrastructure, or the national debt. To be sure, taxes that are too high can also stifle. Optimal taxation can be calculated. The U.S. taxation system is suboptimal. Sweden with a 70% tax rate outcomptes the U.S. in world trade and has a growing economy that provides many social benefits that the U.S. doesn’t.

    Suppose you were an alien who had to find another world to live on, and you came to Earth and had to choose a country in which to live, knowing only how wealth and opportunity was distributed in each country. Would you choose a country with an even distribution or one in which wealth and opportunity was concentrated in a few hands, betting that you could become one of the few?

  2. Too many poor people don’t want to tax the rich because when they hit the lottery to much of the money will be taxed. Bismarck came up with the social welfare state to protect the established wealth of the rich helping the poor was a by product. Republicans and rich people do not behave themselves out of decency they behave themselves out of fear. The great depression made them fear. Mrs. Clinton and third way democrats don’t. Right wing republicans primary rinos out who is going to primary kirsten synama out? (maybe the supreme court!)

    • I don’t know if Bismark came up with the social welfare state originally. The Romans had a pretty refined system of “bread and circuses” wherein the wealthy paid for all Romans (in the City of Rome) to receive a weekly stipend of flour, grain and wine. Whenever that stipend was threatened, riots broke out in the City. And, of course, there were regular games put on in the Hypodrome and Coliseum by wealthy patrons for the amusement of the poor common people. Does any of that sound familiar?

  3. Those are some good articles that give pause for thought. Bob Lord convinced me that we do need a progressive income tax simply because it is ridiculous to concentrate wealth to such a degree at the top. It has nothing to do with envy of the rich. I just paid $133,000 in taxes to the state and federal governments, and that was after my tax attorney/CPA had found every legal exemption possible and factoring more than $160,000 in charitable contributions. I know the pain of taxes, but I am willing to pay them for the privilege of living here and being able to earn a decent living. (NOTE: Remaining anonymous here allows me to share such personal information in making a point without concern such information will come back to haunt me)

    It is heartening to know that so many American also do not feel envy towards the wealthy. I have always assumed the opposite was true…I am happy to hear I am mistaken.

    Anyway, “AZbm”, thanks for sharing the information!