May 18, 2024

Economix: Everyone Is ‘Middle Class,’ Right?

I’ve been complaining lately about how how surprisingly little Americans know about income distribution and their own place within it. Americans all seem to think they’re “middle class,” even those in the top 5 percent of all earners. As a result they frequently misunderstand what political mantras like “let’s tax the rich” really mean.

But it turns out such income ignorance is not confined to Americans.

A new working paper by Guillermo Cruces, Ricardo Pérez Truglia and Martín Tetaz finds that Argentinians also all believe themselves to be middle class, whatever their actual standing relative to their countrymen.

The study is based on a March 2009 survey of 1,100 households representative of greater Buenos Aires. Researchers gathered data on respondents’ actual household income, and compared those numbers to respondents’ perceptions of their own rankings within the income distribution for all of Argentina.

They found that everyone thought they were basically middle class.  Poor people consistently overestimated their rank, and rich people consistently underestimated their rank:

DESCRIPTIONSource: Guillermo Cruces, Ricardo Pérez Truglia and Martín Tetaz, “Biased perceptions of income distribution and preferences for redistribution: Evidence from a survey experiment.”

The authors suggest that this misperception may be related to the types of people respondents interact with, and therefore use as a reference point. If you’re mostly exposed to people earning about as much as you, you’re likely to think your earnings are average.

An incorrect assessment of one’s own standing in the income distribution can have significant public policy implications. In Argentina as in the United States, it can lead to skewed perceptions of income inequality, as well as misinformed opinions about what kind of tax and social safety policies are prudent, fair or necessary.

In the Argentina study, for example, respondents were eventually informed about whether their own rankings estimates were too high or too low. This news changed people’s policy attitudes. People who thought they were relatively richer than they actually were started to demand higher levels of income redistribution when told they were actually relatively poor. After all, learning that they were poorer than they had believed also meant they’d be more likely to benefit from redistributive policies than they originally believed.

“This relationship between biased perceptions and political attitudes provides an alternative explanation for the relatively low degree of redistribution observed in modern democracies,” the authors write. Additionally, they argue that misinformation about one’s socioeconomic standing can also help explain why low-income voters in the United States support tax cuts for the rich — the so-called “What the matter with Kansas?” effect.

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