Income inequality: actual versus perceived

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The Atlantic has a great article this week on income inequality in America. Duke University Professor Dan Ariely writes about the discrepency between actual income inequality and the (much more optimistic – and incorrect) perception of wealth distribution. 

Imagine that we took all Americans and sorted them by wealth along a line with the poorest on the left and continuing as wealth increases until on the right we have the richest. Now, imagine that we divide them into five buckets with an equal number of citizens in each. The first bucket contains the poorest 20% of the population, the next contains the second wealthiest tier, and so on down to the wealthiest 20% (see Figure 1).

Figure1.png

With this in mind, from the total pie of wealth (100%) what percent do you think the bottom 40% (that is, the first two buckets together) of Americans possess? And what about the top 20%? If you guessed around 9% for the bottom and 59% for the top, you’re pretty much in line with the average response we got when we asked this question of thousands of Americans.

 

The reality is quite different. Based on Wolff (2010), the bottom 40% of the population combined has only 0.3% of wealth while the top 20% possesses 84% (see Figure 2). These differences between levels of wealth in society comprise what’s called the Gini coefficient, which is one way to quantify inequality.

 

 Figure2.png

It goes to show why it can sometimes be a challenge to discuss the issue. Turns out, many American’s belief systems on taxes and economic fairness are formulated from an inaccurate baseline.

Further, Ariely asked respondents to indicate their ideal level of wealth distribution. Check it out:

Figure3.png

(h/t to Patrick Emerson at the Oregon Economics Blog.)

As it turns out, Americans wish that wealth was distributed more fairly than they think it is — and yet they think that it’s distributed more fairly than it actually is. 

In other words, we’ve got a long way to go to get to where most of us want to be. We should start by saying no to politicians and tax policies that want to further cater to big corporations and the wealthy at the expense of the rest of us.

And there are some opportunities available to us now. In Oregon, we can vote this fall to repeal the corporate kicker tax break. At the national level, we should be calling on our electeds to let the Bush tax cuts expire for the wealthiest who don’t need any more tax breaks.

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