Americans underestimate the wealth gap, but want far less disparity

Friday, October 8, 2010 at 11:42 PM by

The rich are getting richer, the poor are getting poorer, and the vast majority of Americans would prefer a much more level wealth distribution, along the lines of Sweden’s – according to an academic study that has been getting a little media attention this week.

A theme of our last two blog posts has been the new Census data revealing an unprecedented income gap between the rich and the poor. The distribution of wealth is even more lopsided than income, and – according to a new study – that gap is at odds with the much more balanced distribution of resources that most Americans favor.

Yet, even after the alarming statistics about the growing divide were released, conservative politicians have continued to argue for repeal of the estate tax and the extension of federal income tax cuts that contribute to the divide.  They continue to support the termination of progressive changes in refundable tax credits that can soften the gap a little bit, and conservative groups are calling for a regressive shift of state and local taxes by increasing sales taxes. (See yesterday’s post.)
If you listen to public radio (even during pledge drives), you might have heard an interesting NPR story Thursday morning regarding the wide gap between the rich and the poor and some polling data relating to people’s perceptions about the size of the gap, and their preferences about what the wealth distribution ought to look like. If you weren’t listening during this week’s pledge drive, let me fill you in.

According to economists, the top one percent of Americans have about 50 percent of the wealth, and the top 20 percent own 84 percent. Add in the next quintile (fifth), and the aggregate total for the top 40 percent of Americans is about 96 percent of wealth. That leaves the remaining three-fifths of us with only about 4 percent or all the wealth in the U.S.

A soon-to-be-published academic paper by business school professors Michael Norton (Harvard) and Dan Ariely (Duke) asked 5,522 Americans about wealth distribution and how they thought it should look if things could be changed. They found the following:

  1. 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 %.
  2. When asked to construct their optimal wealth distribution, most people thought the top fifth should have about 32% of the wealth; and the widely supported wealth distribution looked similar to but flatter than Sweden’s.
  3. There was a “surprising level of consensus” among different groups, with 92% of Republican voters backing the Swedish model versus 93.5% of Democratic voters, with the richest and poorest also voting along similar lines.

Those findings stand in sharp contrast to the current political debate, where one can be accused of engaging in “class warfare” for daring to suggest that Americans making more than $250,000 per year shouldn’t get the vast majority of the benefit of extending the 2001 Bush tax cuts (as shown in a CBPP analysis ). And as we noted in a blog post yesterday, a proposal was unveiled this week to shift a larger share of state and local taxes onto poorer Wisconsinites by increasing the sales tax.

One of the justifications conservative groups make for raising the sales tax is that the public has the (mistaken) impression that it’s a fairer tax. Okay, if we want to base public policy on polling, let’s take a look at how Americans think we should reallocate wealth in this country.

Jon Peacock, project director
Wisconsin Budget Project

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