‘Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.’
-Sigmund Freud

The funny thing about our perceptions is that they can take on a life of their own, reinforcing themselves and blocking out facts that aren’t conducive to their maintenance. We sometimes call widely held misperceptions “urban myths” and they can be incredibly difficult to dispel.

Americans tightly, uniformly and consistently hold onto a specific genus of lies, about how wealth is distributed in this country and how progressive taxation works. I’ll take care of the second lie first, regarding how tax brackets work. There is no way that earning enough money to just put one into a new, higher tax bracket can result in harming their financial bottom line. That’s because only the income earned over and above the beginning of the bracket is taxed at the new higher rate, due to the fact that income is taxed in tiers. It seems simple because it is, yet in the last year prominent posters on this blog, who worked and paid federal taxes their entire adult lives, labored under the false idea that all income was taxed at the highest bracket rate. They believed this because they were told this, by people they trusted, the lie spread and took hold. They were also incurious enough to have never really looked into the specific architecture of the system they had been paying into.

The second misperception relates to how wealth is actually distributed, and a recent study has illuminated the depth and consistency of its grasp on the populus.

The graphs above depict the results of a online psychological survey of 5522 people conducted by Professors Daniel Ariely of Duke University and Michael Norton of Harvard Business School. The subjects were asked to identify their ideal breakdown of wealth distribution, along with their estimates of what it actually was. The first thing to take away is the very small level of deviation between various groups. It turns out that Republican and Democratic voters, people in different income brackets and of both genders give remarkably similar responses as to what their ideal and estimated wealth distribution looks like. The variations among all groups of respondents for every quintile never exceeds +/- 5%

The second thing to take away is how little anyone’s perceptions match reality. The responses of the estimated wealth controlled by the bottom two quintiles (the bottom 40% of Americans) ranged between 8 and 10 percent. The reality, as you can see, is 0.3%, a result so miniscule that it is not even visible on the graph above.

I thought of putting a poll at the beginning of this page asking the reader how much of the wealth they thought the bottom 40% controlled, but I’ve been harping on this lately and many of you now know. The other reason I’m not putting a poll in is that this should be a fairly serious topic for most people, society’s perceptions are widely and demonstrably wrong. The erroneous thinking many of us have about wealth distribution and tax brackets is driving public policy.

The recent movement to demonize the bottom 47% of income earners because they receive a total refund on income tax at the end of the tax year ignores, either deliberately or ignorantly, the fact that they have almost nothing to tax. It also ignores the fact that they pay into Social Security and Medicare, pay federal gasoline tax, and give the government an interest free loan every year. Here’s a breakdown of how much taxes the different income groups actually pay:

As you can see, once an earner gets above the 80% mark in this country, their support in terms of percent total income paid in taxes to their State and local government actually drops … steadily. Does that make sense to you? I’m sure someone will argue why it should, so I’ll end with this:

The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government. Not only should he recognize this obligation in the way he leads his daily life and in the way he earns and spends his money, but it should also be recognized by the way in which he pays for the protection the State gives him.

-Teddy Roosevelt

Sources:

United in Our Delusion By David Cay Johnston

Wealth, Income, and Power by G. William Domhoff September 2005 (updated July 2011)