Liscio Report: Recent Work on Income Disparity

Philippa and Doug are co-editors of The Liscio Report, an independent research newsletter focusing on the U.S. labor market, debt issues, and international flows. Their work includes month-by-month tracking of tax revenues at the state level, and detailed analysis of federal data releases.

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Setting the stage

UC Berkeley Economics Professor Emmanuel Saez recently updated his income-share spreadsheets through 2010, using data from the IRS’s Statistics of Income Division. This series includes capital gains, which results in more dramatic swings than one sees in series that exclude them.

Including capital gains real incomes fell 17.4% between 2007 and 2009, the largest decline since the Great Depression. Within that the incomes of the top 1% were down 36.3%, largely the result of the 74% decline in realized capital gains between 2007 and 2009, while those of the lower 99% were down 11.6%.

Painful for all, indeed, but skewed to the upper income groups, a trend that had more than retraced itself by the end of 2010, the most recent year of IRS data. Between 2009 and 2010 the incomes of the lower 99% rose only 0.2% while the incomes of the top percentile rose 11.6%, meaning that close to all the over-the-year improvement in income, when adjusted for population, was captured by that top percentile, 93% of it to be exact. (See links below for more data.)

That puts some numbers on why the recovery is experienced so differently by ordinary wage earners and by elite income groups, which in turn has surely heightened public awareness of our growing income disparity.

But there’s another big question out there. Whether you’re rooting for the upper or lower percentiles, if you spend a lot of time looking at income distribution tables, you can’t help but wonder why there is so little popular support for redistribution toward the middle classes, especially as the share of income going to the wealthiest citizens has risen toward levels last seen in the Roaring Twenties:

 

 

Piecing together what people think

In “The American Public Looks at the Rich,” sociologists David Weakliem and Robert Biggert round up a number of opinion polls on the subject taken over the last five decades and suggest some answers.

We’re re-quoting their opening quote because it’s a bit hard to remember that concerns about “tyranny of the majority” related to taxation have a long history. Back in late 19th Century England, as property restrictions on voting weakened, John Stuart Mill fretted, “…is it not a considerable danger lest [the majority] should throw…upon the larger incomes, an unfair share, or even the whole, of the burden of taxation; and having done so, add to the amount without scruple, expending the proceeds of modes supposed to conduce to the profit and advantage of the labouring class?”

Although American workers have fought for wages, unions, and benefits, why a push for inequitable tax burdens (some would say even equitable tax burdens) on the rich feared by Mill and his colleagues has never gained traction remains an open question. After reviewing polling evidence, Weakliem and Biggert note that, “There is little support for direct redirection from the rich,” and, “Even the general principle of progressive taxation does not draw clear majority support.”

The paper is thoughtful, even-handed, and a refreshing break from dreary speculation that the lower-income groups are dominated by a disproportionate share of misguided lottery enthusiasts. The authors suggest a far more complex picture.

For one thing, the authors note that Americans are not opposed to higher taxes on the rich– 59% of respondents to a 2011 poll favored higher rates for families making at least $250K—but they don’t have much faith in the government’s ability to accomplish this. In one poll that inquired about the government’s ability to provide health care, college education, day care, and a few other services, “reducing the difference between the rich and poor” was the only item for which a larger percentage had had “no confidence at all,” rather than “a great deal of confidence.”

One pollster notes that since the 1980s “people have told pollsters that the rich, not themselves, will benefit from budget agreements. It does not seem to matter what the contents of the agreement are or whether they are negotiated by Republicans or Democrats.” Widespread belief that the rich get out of paying taxes leads respondents to believe that additional revenues intended to come from the wealthy would fall instead on the middle and lower incomes.

For another, poll respondents did not have an accurate idea of how big the current income gap is, and were in the dark concerning America’s international ranking in terms of economic equality. The authors found that although respondents were quite accurate in estimating compensation in a number of professions, they “dramatically underestimated” top executive incomes. For example, estimates of what CEOs and owners of large factories make were less than half the official estimates of actual salaries, as pieced together from a number of sources. Additionally, the margin between what respondents think executives make and what seems fair to them is considerably smaller than the margin between what respondents think executives make and what they actually make. (The authors note that respondents might have made more accurate estimates had they been asked about entertainers and athletes, rather than business-people, and that doctors’ and lawyers’ salaries are often over-estimated.)

In a 2006 poll, the respondents optimistically gave the US a mean ranking of 15th out of 32 industrialized nations in terms of economic equality as measured by income ratios. Our actual ranking was 28th, with only Mexico, Turkey, Hong Kong and Singapore more unequal.

And for yet another, across a number of polls, respondents showed strong agreement that the possibility of earning high salaries was important to the economy as a whole, and to bringing people into professions demanding a lot of preparation. One poll found 63% agreeing that the spending of millionaires gives “employment to a lot of people,” with 23% not agreeing, and 68% agreeing that investments help “create jobs and provide prosperity,” with 19% disagreeing. A majority agree that no one would go through law or medical school unless they could earn substantially higher incomes than ordinary workers. So concerns about the negative economic effects of curtailing income inequality look to be part of the explanation for the lack of support for redistribution.

On the other hand, the authors found little support for the idea that Americans over-estimate their own standing on the income ladder, and none at all for David Brooks’s claims that 19% of Americans believe they are in the top percentile. In one older poll, 20% ranked their families as above or far above average, and 29% as below or far below average; in a newer poll 8% ranked themselves as poor, 19% as lower income, 11% as upper income, and 2% as rich. The halves don’t add up, and are skewed to the lower side. The authors note the people tend to be generous in evaluating their abilities, so perhaps there is some over-estimation, but polling evidence suggests otherwise.

The common assumption that people over-estimate upward mobility is complicated by disparate estimations of what it means to be wealthy. One study found that those making $10K a year would require only $50K, while it would take $250K for those making around $75K, so definitions of “rich” probably include moving beyond a hand-to-mouth existence. But the authors suggest that respondents are generally quite reasonable in their expectations about becoming wealthy. Noting that 8% of households make more than $150K a year, and that one analysis of tax returns found a 50% turnover within the top 5% over ten years, the number of people who will be rich at some point is several times larger than the number who are rich at any given time. According to various polls, about 10% of respondents think it is very likely they will be rich, and about 24% that it’s somewhat likely, so they aren’t so far off.

In 2009, one set of pollsters concluded that, “Americans doggedly believe in the rags-to-riches story,” but there’s a problem with the question on which this conclusion is based: “Do you believe it is still possible to start out poor in this country, work hard, and become rich?” The authors point out that it’s certainly possible, so the correct answer in fact is yes; people answering yes may well be acknowledging that possibility, not saying it’s highly likely, just as the up to 40% who responded no were more likely commenting on the rareness of the event than the literal impossibility.

Some have suggested that the American public tends to idolize the rich, but this was not supported in polls. First, the majority of respondents indicated they don’t find the rich that interesting, although they like to read about celebrities. A majority of respondents to an AARP poll thought being wealthy was the result of hard work rather than luck, but other polls found that percentages of people who agreed and disagreed that people worked hard for their wealth, and agreed and disagreed that the wealthy had exploited people to get where they were, were about even. Weakleim and Biggert suggest that the number of people who dismiss luck’s importance in becoming wealthy might be unrealistically high because some people may understand “luck” to “mean completely haphazard events, rather than systematic factors such as being born in a wealthy family.”

Although a majority of respondents in one poll believe millionaires give generously to charities, 49% do not believe they feel a responsibility to society because of their wealth, 78% believe them more likely to be snobs, 66% less likely to be honest, and 54% think them more likely to be racists. So, although 61% think the very rich are more likely to be physically attractive, that hasn’t translated to general merit, so admiration for the rich does not rank high as a reason that Mill’s prediction has not come to pass.

And finally the authors take on happiness. Although polls have found that large majorities believe they would be happier if they made more money, and 60% would like to be rich, only about 40% believe they would be happier if they were rich. Fifty-two percent believe the rich are no happier than they are, with only 11% thinking the rich are happier, and 35%, less happy. The authors don’t really see a contradiction here. They note that people might prefer to be rich because it would provide better benefits for their children, or that they would like to be relatively better off than they are, but not necessarily rich. In any case, the authors suggest that people are “resisting the logical consequence of the principle that money makes life better.”

Who knew?

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Notes:

Income distribution data available at Emmanuel Saez’s website: http://elsa.berkeley.edu/~saez/

If you would like to see a copy of, “America Looks at the Rich,” please get in touch with Philippa Dunne, 877-324-1893

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