THE ISSUE: A recent study concluded Americans dramatically underestimate the level of economic inequality. An advantage to this misperception is that it gives policymakers time to reduce inequality before it causes more social unrest.
A recent study published by the National Bureau of Economic Research explored an oddity in the United States and other nations with dramatic economic inequality. Despite historical evidence that stark inequality of income and wealth leads to demands for income redistribution and often to violent class conflict, such consequences have not been pronounced in this country.
The underlying premise of the study — that inequality is high and growing higher in America — is an objective fact. America has the highest post-tax-and-transfer income inequality of any highly developed nation in the world. It outranks Israel, Britain and Canada, and its level of income inequality dwarfs that of Japan and most European nations.
Indeed, the list of countries with greater inequality than the U.S. is a disturbing snapshot of political instability, including countries such as Mexico, Colombia and Haiti, and a host of tottering regimes in Africa.
Why haven’t the citizens of the United States pursued tax reforms that help limit the gaps between the haves and have-nots? Why, after hundreds of studies demonstrating the nation’s growing inequality, do the nation’s wealthiest households often pay a lower percentage of their income in taxes than do those households at or below median income?
It’s a question that’s especially relevant in Alabama, which has a greater level of income inequality than all but five states. Why are Alabamians not clamoring for tax reform that would leave the vast majority untouched, but would slightly increase the burden on high-income households?
One answer, according to the NBER study, is that people do not recognize the level of inequality. For example, Americans underestimated the income of chief executive officers by 85 percent.
Maybe more significant people tend to believe they are higher on the income ladder, relative to other citizens, than they actually are.
“The rich tend to think that they are poorer than they are, and the poor tend to think that they are richer than they are,” the authors concluded. “Both believe they are closer to the national median than is, in fact, the case.”
So while it may be the case Alabamians are ideologically opposed to taxation and thus tend to oppose tax measures, it may also be the case that they wrongly assume their wealth or income would subject them to higher taxes in the event of progressive tax reform.
Economic inequality is not inherently bad. Socialism has been a consistent failure in part because, by aiming for perfect equality, it destroys entrepreneurial motivation. The desire to accrue wealth is a powerful motivator that has created huge benefits for the U.S. economy.
The level of inequality, however, has been growing at an increasingly furious pace. Rather than use tax policy to rein in inequality, Congress and state governments have too often used it as a tool to increase the chasm between those with capital and those without.
The NBER study concludes that people underestimate the level of inequality and overestimate their economic standing relative to the population. These misperceptions may help limit social unrest, but they are not sustainable. One benefit of the misperceptions is it provides lawmakers with a window in which to implement responsible policies aimed at curbing inequality.
Now is the time for leaders in our state and nation to put in place responsible tax reforms that impose higher burdens on the wealthy than on the poor, but not so high that they discourage innovation and investment.
Now is the time to provide educational opportunities that place the ladder on income mobility within reach of the poor.
(Published June 4, 2015)