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Upper-income people still don’t realize they’re upper-income

Catherine Rampell highlights this stunning Gallup Poll result:

6 percent of Americans in households earning over $250,000 a year think their taxes are “too low.” Of that same group, 26 percent said their taxes were “about right,” and a whopping 67 percent said their taxes were “too high.”

OK, fine. Most people don’t like taxes. No surprise there. But get this next part:

And yet when this same group of high earners was asked whether “upper-income people” paid their fair share in taxes, 30 percent said “upper-income people” paid too little, 30 percent said it was a “fair share,” and 38 percent said it was too much.

30 percent of these upper-income people say that upper-income people pay too little, but only 6 percent say that they personally pay too little. 38% say that upper-income people pay too much, but 67% say they personally pay too much.

Rampell attributes this to people’s ignorance about population statistics–these 250K+ families just don’t realize that they’re “upper income.” Another possible explanation is that most upper-income people feel that other upper-income people should pay more–perhaps these surveys have an idea that they don’t cheat on their taxes but lots of others in their income bracket too.

I think Rampell’s explanation is correct, though. There’s lots of evidence that people don’t have a good feeling for population statistics–one of my favorite examples is a Washington Post survey from 1995 that found that “Most whites, blacks, Hispanics and Asian Americans said the black population, which is about 12 percent, was twice that size.” They similarly way overestimated the percentage of Hispanics and Asians in the country. Whites overestimated the proportion of minorities, and minorities overestimated the proportion of minorities too. Given that people haven’t even learned these simple percentages, it’s not shocking that they can’t come to grips with something more complicated such as an income distribution.

As a statistician, I’m upset when people are so clueless about numbers that affect them personally, but as a social scientist, I recognize that this is just the way things are. Most people aren’t quantitatively minded.

P.S. Some of Rampell’s commenters said that they made about $250,000 but didn’t feel that they were rich because they lived in expensive places like New York City. So, just to calibrate . . . the median household income in Manhattan in 2009 was $68000. It may very well be true that Rampell’s commenters aren’t rich–but they are definitely “upper income,” which is what the survey asked.

The headline to Rampell’s article used the word “rich” which I’ve changed to “upper-income” to be more consistent with the survey question. Also, the word “rich” seemed to freak out many of her commenters who started going off on rants without seeming to grasp her key point.

To put it another way, if you and your spouse make $125,000 each and you don’t feel rich, than that’s fine. Rampell isn’t saying you’re a bad person. She’s just saying going with the statistics and pointing out that you’re “upper income.” Her headline was a distraction.

P.P.S. This discussion also relates in some convoluted way to my point #6 here.

27 Comments

  1. Patrick says:

    This paradox is a common finding in other areas of survey research: For instance, a majority of people claim that the environment in general is very polluted, whereas only a tiny fraction claims the same about their immediate environment. The same applies to perceptions of the prevalence of crime, I think.

  2. zbicyclist says:

    Could this also be related to these:
    (1) wide stories about how some high income taxpayers and large corporations pay little or nothing?
    (2) the general difficulty of defining "income". This is particularly true for "high income" people who have a variety of common tax preferences: 401k, IRA, annuities not being taxed, retirement investment income being rolled over into further shares, items paid for by employers that might count as income, e.g. large life insurance policies and health insurance and pension contributions. [At the other end of the scale are transfer payments.] It's not that economists can't sit down and say "this is income, and this is not". It's that in the real world it's pretty muddled.

    Always dangerous to deal with a personal example, but I think of my "income" (for day-to-day planning purposes) as the amount I take home, but that's less than half my "income" from the point of view of my employer.

  3. Sebastian says:

    It also seems to be that people are very relative in their assessments of income. In the NYT comments you'll see things like "in Fairfield, CT, 250k is very much middle class". (or the same with Upper West Side).
    Which I guess is true, but also somewhat bizarre, considering that the fact that you can afford to live in these places makes you quite well of already…

  4. Andrew Gelman says:

    Patrick:

    Yes, this makes sense. It's not merely ignorance, there are some systematic biases.

    Zbicyclist:

    Sure, but this was a survey, so these are people who defined themselves as having household incomes over $250K. They're already richer than most households in the top 5%!

  5. Dan says:

    Not a paradox: rich people want their own income taxes to be lower, but want other rich people's taxes to be higher. Not principled, but easy enough to understand.

  6. Bill Jefferys says:

    Also relevant: Dan Ariely has looked into wealth distribution. Americans, left or right, Republican or Democrat, seem to think that our wealth distribution is similar to that of Sweden, and over 90% of all groups would prefer a distribution similar to Sweden's over the one we have. Of course, the distributions that they were given didn't have labels on them.

    http://www.npr.org/2011/04/16/135472478/study-ame

  7. Dan G says:

    Perhaps if you are on the lower end (really or perceived) on the income distribution of your ingroup, then you might not feel like you're upper-income.

  8. Phil says:

    I was speaking with a friend yesterday who makes over $300K per year. He made it very clear that he is willing to pay more taxes and he thinks taxes on his income should be higher. But he also referred to himself as "upper middle class." I made fun of him for it: the "middle" has to be pretty broad if you are going to include a household at the 98.5 percentile!

    I think Rampell's explanation that these people don't realize they are high-income is partly true. My friend makes more than $300K/year, but so do most of his peers. He's not high-income compared to the people he usually hangs out with, or compared to his neighbors.

    Similarly, I think low-income people don't realize they're low-income. If you make $25K/year, you probably live in a neighborhood with other people who make around the same, and most of your friends and acquaintances probably have roughly similar income.

    By my friend also made a good point, which is that yeah, OK, at $300K/year he's objectively high-income, but he's not in the same league as someone making $3M/year, and those people are a notch below the ones who make $30M/year, and then there are the people (not many) who make $300M/year. And yet, there seems to be an assumption built into discussions about taxes, that all of these people should pay the same marginal income tax rate…which makes my friend mad, because his income is mostly from salary, whereas those uber-rich get most of theirs from capital gains, on which they pay about half the tax rate.

    I think I've wandered off topic. My main point is that lots of rich people don't think they're rich, they think they're upper middle class.

  9. Lord says:

    Upper income people always look up the distribution so upper income is always twice what they make.

  10. derek says:

    Well, I'm middle-quintile, and I'm inclined to give these people a break. I always say I'm a bigger advocate of tax-cutting than any Republican, because I want to cut taxes on almost everyone and put the taxes where they belong, which is the super rich.

    $250K is nothing compared to the giant wealth owners (and remember, I'm not saying that because I'm anywhere near $250K), and in my scary "socialist" future, these people would probably get the tax cut they wanted. But the saps vote Republican, and are surprised their taxes go up.

  11. Eric says:

    Honestly, I think it is a valid point. Saying "rich" or "upper income" is a somewhat loaded term that suggests the person is associated with those people who make enough that taxes don't really effect their day to day life. To differentiate, the people who consider their finances in terms of millions could be said to be "wealthy" since their "income" is not really representative of how much money they are bringing in.

    The argument feels pretty semantic. While I understand that among the sample the category fits, it is pretty easy to see why someone who is not independently wealthy would not feel associated to those who don't feel the effects of taxes on a day to day basis.

    In terms of asking other questions it would most likely more accurate to consider income along side location and the expenses of their daily lives (food, shelter, etc.). In that way could consider the percentage of that income that goes to respective spending categories and get a better picture of what a tax rate really means. A person making 3k with 8 kids living in NYC is making a lot of money, yet would most definitely not feel "rich" or "upper income", while a single person making 150k living in Texas could feel pretty well off.

  12. Hank says:

    What is so stunning? It simply means that rich does not equal upper income. Therefore it is quite ignorant for our fearless leader to run around blabbering about taxing the rich, meaning those who make over 250k. That is not eve close to rich in quite a few areas of our country. What does make sense, among other things, is to apply weights to income based on where you live. But I think that concept is too complex for them.

  13. sven says:

    An alternative slant on Rampell's explanation is that many people, including many who are in upper incomes, don't actually know what share of their income is paid out in taxes.

    AGI is not the same as total income. The top marginal rate is not paid on every dollar. The numbers seem big but don't guestimate, do the division. This calculation isn't a normal part of doing one's taxes so most people haven't worked through it. Instead they might take a rough guess of the top of their head and bias inevitably emerges.

  14. Andrew Gelman says:

    Sven:

    Good point. And it's even more true if you're someone like Greg Mankiw whose marginal tax rate is 93%!

  15. Marc says:

    The way I see it there is only one way people who don't really do match look at themselves, and that's against their peers. "Rich" or "Poor" are relativistic terms to most people not absolute ones. If I'm on a train sitting in business class, I look to the people sitting around me and the first class car to assess my place. I also look at coach and out the window and my idea of "rich" is judged by my surroundings. Even if I make 300k a year, I feel I'm not rich because I have to worry about the money I'd blow in the first class car, but I can afford not to worry about the extra $50 for where I am. I also realize that I probably make a lot of money relative to most so I'll say I'm upper middle even though I know I'm in the top 3% of earners. I used the same train because you have the same disconnect that Newtonian Physics does with Quantum Physics; you're using macro numbers to divide people but on a smaller scale it doesn't work that way.

    This also explains the "vote Republican" phenomenon, such as it exists in Wisconsin where people are voting for a party that, honestly, isn't representing their best interests. They do this because they think they are better off then they are, and the aspire to be in one of the other cars and think they will get there. Their way of life and their peers are all in the same social and monetary circumstances and even if their household income is 80k, they don't realize that to get to 300k is going to take a lot of work and a lot of luck. If they drive though, say Detroit, on their way to work, they already think they are in the upper middle class even though they are not. There is actually more distance between 300k in household income from where they are as there is between what they see.

    And here is where the tax debate is also off the mark. If you tell someone at this income level that you'll "reduce taxes" for them they fall for it. But if you frame the debate by the numbers and tell them that a tax break at their level could only be a maximum of 1200 ($25 a week) and ask them if they'd spend this on all their health care, you'd get a different answer, especially if you tell them that for me, the tax break will be 4500 and then point out my weekly salary. I've done this with people and the Bush tax breaks and the reaction is fun! Try it. Use actual numbers. I did on my own numbers. People are aghast! The recent social security tax break is especially funny when they find out that, not only do I get the maximum break, I don't pay anything above the limit…which most people don't even know about because they'll never hit it.

  16. clayton says:

    In response to the commenter to Rampell's article saying that she didn't feel upper-income because she lived in expensive New York City. Brad DeLong has remarked that getting to live in an outstanding place like NYC or San Francisco or London or Paris or Geneva, etc., is part of the compensation, part of the benefit that you receive that further makes you upper-income.

  17. Ken says:

    Income is not wealth; earning income is a very risky business. How many people in the Gallup sample are temporarily doing well and know that their good fortune is temporary? Interpreting the meaning of income without knowing the net worth of the individual does not make much sense. My own example: I once earned more than $250k for a couple of years. At my place of employment, I received a onetime payout, much of which went to taxes only to find I did not have enough “income” to live on any more. Today I earn nothing at all. And yet, according to the poll I was “rich” or “wealthy”. I was well aware of my risky position as a high earner, knew I would be in that group for a short time, knew that I would soon be classified in the poorest of poor income categories, and would definitely have said I paid too much tax – I needed that tax money to survive the lean years, not have the government take it away. In other words, for me at least the inconsistency in the poll could not reflect my reality. Perhaps we need a more nuanced method of researching income perception; the results of a poll like this are obscure.

  18. Andrew Gelman says:

    Ken:

    Sure, but the survey didn't ask "rich" or "wealthy." The phrase was "upper income," which I do think is appropriate for people in the top 2% (or even the top 20%!) of income.

  19. dunkelblau says:

    Perhaps the confusion comes from what is used as the frame of reference. The term "upper income" implies being above average– but the average of what? For example one may consider the median US income level to be "upper income" by world standards, but I doubt that you would find many median US earners who believe that they are being undertaxed. For some reason Americans like to compare themselves only against other Americans, so the median US earner sees himself as middle class. This parochial view also afflicts other income levels as well, I'm sure, as it is commonly known that most Americans live in neighborhoods and social circles that are segregated by income level. So go ahead and tax the rich, but damned if I'll identify myself as one of them.

  20. Alan says:

    Most "high income`earners" get the difference between a balance shet and an income statement. The discussion of what constitutes "wealthy" is really a balance sheet issue. If you earn a good income, invest it wisely, and are lucky enough to only have one family without medical or psychological problems, eventually you could become "wealthy". But in each year until you achieve "wealthy" stat us, you are just a "high income earner". So, the question about taxation is whether to tax the "wealthy" the "high income earner" or both. And how much? we have probably gotten to the point at which taxing only the high income earners and the otherwise wealthy will not get us out of our economic problems. So, ultimately, we will have to tax just about everyone. So, what would be a fair way to share the burden? There are a few key areas: a) income tax rates need to go back to the Clinton era brackets. Everyone needs to pay a little more. High income earners will carry the greatest share of the load here. b) forget about repealing the inheritance tax. With some tax planning, wealthy can leave something to their heirs and also help to fund the government and reduce the deficit. c) remove the payroll tax limit. People who earn above $106,000 should continue to pay the same rate on their payroll taxes. d) institute a federal sales tax. This is where the middle class will begin to carry it's share of the additional burden. They won't have as much money to "consume" but a lot of consumption is discretionary anyway. e) inflation–the middle class will carry the burden of inflation a lot more than the poor and the rich. For the poor, it won't matter so much. Their lives will, unfortunately, not change. For the wealthy, they will find ways to increase their wealth. The middle class will find it more and more difficult to find discretionary dollars. They will still have food, shelter, education and health care. This is the only real way we will get through this mess, which I blame on our politicians. Any politician who is minimally professional at their job certainly should have anticipated what the "Bush Tax Cuts" would do. Anyone who looked at the federal budget trends would have seen it coming. It was mostly the right wing politicians who pander to the rich and powerful who led the effort, but the "progressives" did not do nearly enough to educate us all in the effects of the tax cuts. And, lets not forget that Bush and Cheney would not even be straight about the cost of the invasions of Iraq and Afghanistan. They would not even put the cost into the budget. It was always a separate appropriation and they dared the politicians who were against it to stand up and oppose them. On the whole, then, our nation, if it is to survive, will need to spread the burden for what we have now across more than half of the households. If we can't do that, we are pretty much doomed to an ever declining standard of living and a smaller and smaller place in whatever goes on in the rest of the world.

  21. Marc says:

    dunkelblau: you judge by your peers and your surroundings. How many people have any idea of their relative position as, say, opposed to the general position of an Indian? Or a Somali? Do you honestly think the average Italian has a better perspective? Or the average French person? So I'm not seeing your point. I regularly travel to Eastern Europe and, frankly, the cities do not look too much different than they do in the US in terms of relative living conditions now. If I were to ask someone there the same question as here, I'd get the same answers. In fact we've talked about it a lot. And if you think WE complain about taxes…you obviously haven't talked to these people ;)

    "Wealth" is a term not understood by 95% of the population, really, because it has something to do with money, but not really. Most people think wealth == money/income. So I think any mention of it just skews the results. So income is the correct way to frame the question. Wealthy, to me personally, means what we call having FU money…I don't need a job because my wealth throws off enough cash. So income may flux at times, but generally it stays the relative same for the vast majority. Although lately, as I said, the space between 80k a year and 30k a year is a lot less than the space between 80K and 300k. And unfortunately, recent policy has made that the most likely place to end up for a lot of people. But people's perceptions at their level are framed by their environment, not abstract discussions like quintiles.

  22. Ken says:

    Andrew,
    (FYI: Sullivan at the Daily Dish also linked to your comment, although I came to it through other means.)
    While I would not disagree with you about “people don’t have a good feeling for population statistics”, I guess I did not make myself clear enough, sorry. My point was not about rich versus wealthy but that no need to posit “ignorance about population statistics” or perceptions of cheating exist in this case. I guess I find my explanation more parsimonious; that we should just take the respondents answers to be sensible ones reflecting their own true experience. A percentage of the Gallup sample may have merely been temporarily in the upper income bracket and felt unfairness that they had to give up income to taxes when they knew they would soon be short of funds while others who have more permanent sources of income pay too little. I do not see a contradiction in these ideas. Furthermore, the tax code allows recovery of lost income in a corporation through the refund of past taxes paid in. Individuals, unless they go on welfare, have no way to recover the lost income to taxes when they too fall on hard times. When it comes to money, I find people, especially people in high income brackets, are very well informed.

  23. Dave says:

    My college roommate brought this basic point home to me when he described his family as just normal folks, with each parent at somewhere around a vice-president level at a fairly large corporation, each pulling down a 6-figure income. He was completely blind to how rich he was.

    And it's understandable why. The people he knew well growing up were mostly pretty rich, like him. He didn't think about the income of the gal at Subway making him a sandwich, so he didn't perceive how much richer he was.

  24. Nameless says:

    Median HH income in all of Manhattan may be only $68,000, but median HH income in Manhattan less Harlem & Lower East Side is certainly above $100,000, with several census tracts above $150,000.

    And, at the same time, Manhattan households are small: average non-hispanic white Manhattan household is 1.90 people, compared to the nationwide average of 2.60.

    So what this means is that, for example, a family of three with total income of $250,000 ($83k per capita) living in Manhattan may well not feel particularly rich, because median per capita income among their close neighbors will be somewhere in $60k to $80k range.

  25. Andrew Gelman says:

    Nameless:

    The survey asked about "upper income," not "rich." I think it's reasonable to expect that if your household income is in the 98th percentile that you count as upper income.

  26. Nameless says:

    People don't see their incomes as percentiles across the entire country. They look at their environment as a reference group. The level of segregation between rich & poor is so high that a household in the 98th percentile nationwide can easily be in the 50th percentile within their zip code. They may have a vague idea that somewhere out there there are people who make $20,000/year, but, among their peers, they are not necessarily upper income.

  27. @Nameless

    I've seen households of three before, and I've seen households where two people earn the median HH income before, but I don't think I've ever seen a household with three earners before! Manhattan must be doing some progressive (or regressive) social structures!