Ignorance Fills the Income Gulf

Carol Graham and H. Peyton Young
H. Peyton Young Professor in Economics - Johns Hopkins University

June 23, 2003

At a recent Washington social gathering in honor of graduating seniors heading to elite colleges, the subject turned to the new tax cut. “Isn’t it too tilted toward the wealthy?” one parent asked. Another retorted, “Why give tax breaks to the poor? All they will do with it is buy more Cokes or another pair of Nikes. We need to stimulate investment to create new jobs and wealth.”

This is, of course, exactly the rationale the Bush administration used to justify the tax cut. Yet the remark is deeply troubling, in ways that go beyond the usual policy debates. As economic policy, it is simply wrong-headed. The economy is well below capacity and needs demand, not investment stimulus. An extra $30 billion a year in the hands of millions of lower and middle class families would buy a lot of Cokes and Nikes. Meanwhile $30 billion in the hands of a few investors may eventually lead to more jobs and investment, but that could be a long way off.

But are the people at the party right about what plain folks want? Perhaps they want better health insurance – or just some health insurance. They might need to spend the tax break on college for their kids. Indeed, in-state tuition at many state universities is going up by 10 to 20 percent in just one year. Yet these facts are simply not part of the current political debate. In part this is because those who frame the debate find these facts almost impossible to imagine. It’s not that they are mean-spirited; on the contrary, they are well-meaning people who give generously to charitable causes. It’s just that they find it hard to believe an extra $500 or $1,000 for the typical American family could make a real difference.

Ultimately what drives these attitudes is ignorance about how others actually live, a gulf between the haves and the have-nots in American society that seems to widen every year. It is not only ignorance on the part of the haves, however, that keeps this system in place. A surprising number of have-nots expect that they, or at least their children, will eventually be attending parties just like this one. An October 2000 Time-CNN news poll showed that 19 percent of Americans thought that they were in the high income group that would benefit from proposed tax cuts – defined as roughly the top 1 percent of the distribution.

The strong belief that the United States is the land of opportunity helps explain why support for income redistribution is low in America compared to Europe. A study by Roland Benabou and Efe Ok of Princeton University, for example, finds that the majority of Americans believe they will be above average (mean) income in the future, a Lake Wobegon fantasy if there ever was one.

To what extent is the United States the land of opportunity? How does the myth – which has clear effects on political attitudes – square with reality? Evidence suggests that mobility in the United States is not higher than in other countries in the Organization for Economic Cooperation and Development and indeed may be lower. A Stockholm University study finds more mobility in Sweden than the United States and that only South Africa and Britain have as little mobility as the United States. Indeed a recent Brookings Institution book records more mobility in a 10-year period in Peru than in the United States.

There are many factors determining mobility. Children from well-to-do households tend to fare better than children from poor households for a variety of reasons, including transmitted cognitive abilities and higher expectations, as well as better access to health and educational opportunities. The factors that are most influenced by policy, especially health and education, are becoming increasingly expensive, even out of reach for many families with the exception of the poorest ones that qualify for special programs. An Urban Institute book says that access to good schools is increasingly important for upward mobility – but is strongly linked to family income.

Policies that give tax breaks to the wealthy at the expense of support for basic social services such as affordable health insurance and public education risk undermining the foundation of the American dream. While the public may still believe that we live in the land of opportunity, the reality is one of increasing stratification of incomes and of opportunities.

We need a broader public debate about opportunity in our society and how it relates to current policy. It seems that the rich are as uninformed about the facts as the poor. Ignorance is not without cost, however. Antonia Fraser’s biography of Marie Antoinette suggests that she was not the nasty person of popular imagination, but was quite generous and warm-hearted (if rather naive). What ultimately did her in was simple ignorance about how others live.