How much do people actually know about the income and wealth of people who live around them? And how does what they think they know skew the way they think about government taxes and spending?Recent research we conducted suggests that the answer to those two questions are: Not much and a lot.
An emerging body of research suggests that citizens’ preferences for spending on public goods—from social programs to health care to infrastructure—are based in part about who they believe contributes and benefits. However, we discovered that many people are unaware of the true extent of inequality where they live. And in some cases, their beliefs are dramatically different than reality. In our research, we assessed people’s behavior toward the rich and poor under two conditions in a controlled experiment: when inequality remains invisible (or hidden), and when we reveal it. We then explored whether people might view the behavior of lower-income people differently when they were made aware of just how little income being “low income” entailed. In other words, I might be angry that poor people contribute very little in income tax to the overall federal budget. But I might feel differently when I realize that they have so little that any contribution represents a large percentage of their small income. In our experiments, people played a 10-round game in groups of five, in which every person was randomly assigned an “income.” In each round, every participant then chose how much of their income to contribute to a common pool. All contributions were then doubled and divided equally (or “redistributed”) among the five players. We assigned “incomes” to be reflective of the U.S. income distribution: The richest person received 55% of all income (or 55 “units” of income), the next 19%, the next 13%, the next 9%, and the poorest 4% (just four units).
In one condition of the experiment, we showed people the amount contributed by each person inI their group, but not the distribution of income. We then let each person reward or punish each other by sending units to someone or taking units away from them, respectively, based on what they gave. People directed their punishment toward the person who contributed less than three units, and their reward at the person who gave more than 20 units. What the participants didn’t know was that people who contributed less than three units were usually the lowest-income members of the group—those who had only four total units, and, therefore, contributed 71% of their income to the pool. And people who contributed more than 20 units were typically the highest-income members—those who had 55 units, and, therefore, contributed just 37% of their income. In another version of the experiment, when participants were informed of the full distribution of income, they changed their behavior dramatically: They punished the rich for not contributing their “fair share” and actually rewarded the poor for giving so much of the little they had. (Importantly, our results were similar when we made participants work to earn their incomes.) Of course, behavior in these stylized games can tell us only so much about how these dynamics might play out with policy decisions. So, in our final experiment, we used actual data from donations to parent-teacher associations in five New York school districts, where both the average income and the donation amounts vary across school district. We showed people either the contributions to the PTA from each district (hidden condition) or both the contributions and the average income of each district (revealed condition) and asked which district they believed should be responsible for an additional tax that helps all schools across districts. People levied additional taxes on mostly poorer school districts when incomes were unknown, but targeted wealthier districts when incomes were revealed.
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What can we learn from these results? It can be convenient to point a finger at perceived culprits: people seemingly not contributing enough, or taking advantage of social programs. But as people decide who should contribute more (in taxes) and who should receive more (in benefits), they often lack accurate information. That means that disagreements about the correct course of action can be based on flawed premises. Second, when it comes to individual financial decisions like supporting higher taxes or donating to charity, knowledge about the true state of affairs—the wider gap in income and wealth between the rich and poor than people believe—could change people’s willingness to support more funding for social programs or increased donations to charitable causes. A common reaction to our results is that such radical transparency of income and wealth would be at best infeasible and at worst lead to societal upheaval. Yet one country provides a glimpse into how it could work. Norway has an open database that allows citizens to see fellow citizens’ income and the taxes they paid. What is the effect? Not only is citizens’ compliance with paying their taxes high despite relatively high rates of taxation—but Norway has also not experienced revolution as a result. Dr. Hauser is a senior lecturer in economics at the University of Exeter Business School. Dr. Norton is a professor of business administration at Harvard Business School. You can reach them at email@example.com.
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