Paul L. Caron

Thursday, August 18, 2011

'Last Place Aversion': Why Even the Poor Oppose Redistributist Tax Policy

The Economist, Don’t Look Down:  The Poor Like Taxing the Rich Less Than You Would Think:

[There are] longstanding differences between Americans’ attitudes to taxation and those in much of the rest of the rich world. America is far less inclined than many of its rich-world peers to use taxation and redistribution to reduce inequality. ...

The differences in attitude towards redistributive taxes are not just between countries but also within them, and economists have several explanations as to why. When it comes to differences between countries, social cohesion plays a major role. Broadly speaking, countries that are more ethnically or racially homogeneous are more comfortable with the state seeking to mitigate inequality by transferring some resources from richer to poorer people through the fiscal system [Group Loyalty and the taste for Redistribution]. This may explain why Swedes complain less about high taxes than the inhabitants of a country of immigrants such as America. But it also suggests that even societies with a tradition of high taxes (such as those in Scandinavia) might find that their citizens would become less willing to finance generous welfare programmes were immigrants to make up a greater share of their populations. Immigration can also subtly alter the overall attitude towards such matters in another way. A 2008 study by economists at Harvard [Culture, Context and the Taste for Redistribution] found evidence that immigrants’ attitudes towards taxation and redistribution were rooted in the places they had left.

Social divisions also play a role in determining who within a society prefers greater redistributive taxation. In America blacks—who are more likely to benefit from welfare programmes than richer whites—are much more favourably disposed towards redistribution through the fiscal system than white people are. ...

Paradoxically, as the share of the population that receives benefits in a given area rises, support for welfare in the area falls. A new NBER paper finds evidence for an even more intriguing and provocative hypothesis [Last Place Aversion: Evidence and Redistributive Implications]. Its authors note that those near but not at the bottom of the income distribution are often deeply ambivalent about greater redistribution.

Economists have usually explained poor people’s counter-intuitive disdain for something that might make them better off by invoking income mobility. Joe the Plumber might not be making enough to be affected by proposed hikes in tax rates on those making more than $250,000 a year, they argue, but he hopes some day to be one of them. This theory explains some cross-country differences, but it would also predict increased support for redistribution as income inequality widens. Yet the opposite has happened in America, Britain and other rich countries where inequality has risen over the past 30 years.

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. ... Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

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I don't think Americans are the only people gifted to see the notion of moving up the ladder someday, just some of the only ones whose society offers a realistic chance to do so. Outside North America, the experience of ordinary people ranges from glass ceilings in most of Western Europe to overt caste systems even in such firmly democratic countries as India or Japan.

Posted by: Stacy | Aug 18, 2011 10:59:17 AM

The untold story is that redistribution of income is, by and large, not designed to help the poor but to preserve social stability on behalf of the rich (or a portion of them). It's like Guido Calabresi used to tell his students on the first day of classes at Yale. Are you in favor of high taxes? Yes. Are you in favor of high spending? Yes. Do you want to see your seats at Yale redistributed to people with lower test scores? Silence. Aha, he would say, you just want to redistribute other people's advantages, not your own.

Posted by: mike livingston | Aug 18, 2011 12:10:59 PM

Its a weird thing that people diagnose as afflicted the poor who elevate beliefs over naked self-interest; do not some poor have morals, sense of fair-play, political views, economic views that are more important than confiscating others money to "raise their own income a bit"?

Let's aim this method at people I disagree with: Progressives want to pay more taxes. First place aversion arises from Progressives’ moral view that requires them to help everyone-- you can never reduce carbon emissions enough, donate to the poor enough, elevate support minorities enough, etc-- and holding themselves accountable for failing their moral obligations. And they fail all the time because Progressives like nice, expensive cars, clothes, food, yoga studios, Martha's Vineyard, etc, much too much to abide their moral world view. That moral deficiency causes them to

#1 appoint others who force promise to punish them with taxes and contribute to ending every harm; forgiven and made worthy, they ignore that their appointees often harm the poor and force others no afflicted by First Place Aversion top pay.

#2 steal and sully the poor's lack of culpability for all the wrongs that rich Progressive's can't fix by paying them off with other people's money.

Posted by: Yo Gabba Gabba | Aug 18, 2011 6:54:13 PM

@mike livingston - Your point about social stability for the rich reminds me of a point I don't think is made often enough when it comes to discussion of redistribution vs. free market capitalism.

Both systems will usually lead to the oft-decried "rich getting richer." The big difference is that in capitalism, the poor don't have to stay poor. Just because the rich are getting richer doesn't mean you've got the same "rich." Some of them are going to be formally poor who moved on up due to hard work. That will never, ever happen in a redistributionist economy.

Posted by: JakeTaylor | Aug 19, 2011 8:06:51 AM

An interesting counterpoint to Scandinavian socialism, which can best be described as the socialism of envy: most people want high taxes and government services (with few choices or alternatives) because they'd rather everyone be relatively poor than see their neighbors get ahead of them. Saw it in relatives there, it's crazy.

Posted by: CatoRenasci | Aug 19, 2011 8:15:03 AM

the cure for poverty is not unearned money ... never has been ... in their gut people understand that getting a handout won't change their long term situation ...

Posted by: Jeff | Aug 19, 2011 8:19:04 AM

You wrote "ethnically or racially homogeneous"... might it not be more along the lines of "values homogeneous"?

Posted by: prsTM | Aug 19, 2011 8:35:17 AM

it seems the long way around the block to explain the fact that as "the share of the population that receives benefits in a given area rises, support for welfare in the area falls" by complicated psychological/economic hypotheses rather than the simple and obvious conclusion that as use of welfare increases, its abuse, negative consequences, and the negative behaviors of welfare recipients become apparent.

another simple and obvious explanation which has been propounded for dacades is that working people near welfare-eligibility levels deeply resent the fact that people who they can see doing nothing or doing retrograde things are receiving benefits equal to or greater in value than the fruits of their labors. in my life and travels through the US and its economy, the bitterest anger i saw expressed towards welfare recipients was by poor working people who in many cases refused to apply for benefits because they didn't want to be wards of the state.

Posted by: macphisto | Aug 19, 2011 9:06:43 AM

There still is a sense of fairplay and justice in the US.
I teach a class of middle schoolers (14 yr olds) and in a discussion of how to fix the budget issues the call of "Tax the rich" was voiced. I asked, ok-- to what level, what percentage of each dollar of income? The consensus 10% total. They had no conception of what actual tax rates are. Once we went through them, the kids were in shock they couldn't get their heads around the idea that if they were 'successful' financially the would be taxed at 10% just by the state, plus the federal govt at over 30%. They didn't see the 'fairness' in 40% of the results of their effort being taken from them.

Posted by: styrgwillidar | Aug 19, 2011 9:20:45 AM

The idea that this experiment proves anything as vast as suggested strikes me as beyond ridiculous. I would argue that the people near the bottom are more likely than those higher up to have the fewest illusions about why some people are on the dole and others are not. Having elevated or kept themselves out of poverty by dint of hard choices and better habits, they have every right to be the most morally offended by seeing their lesser Pauls enriched by takings from Peter. And unlike Peter, they rarely suffer much guilt about their relative superiority.

Posted by: Colin k | Aug 19, 2011 9:28:07 AM

You know what poor people call rich people? Boss.

As a longtime person of poordom, I've never heard a good reason why taking money out of my boss's wallet and giving it to the state is in my best interest. Does it help me keep my job? No it makes it more likely I'll be fired to cut costs. Does it help me get a new job? No it makes it less likely they'll have the money for a new hire. Does it help me get a raise? Hah, he's going to pay me more while he does with less? As if.

Posted by: dark eden | Aug 19, 2011 9:30:12 AM

I think macphisto and mike livingston really hit the nail on the head.

They say that most millionaires are Republican, but if you break that down further most people with over $10 million are Democrats.

Posted by: CG | Aug 19, 2011 10:24:46 AM

Redistribution in America was traditionally done via jobs, not taxes, for many reason relating to limited government and rewarding those that actually work. Globalization, tax policy, et cetera have reduced the number of and income from most jobs in America, but Americans regardless of income or class have a clear understanding that those that work should be rewarded, and income distributed by welfare is inferior to income earned at a job. A real problem to be solved is how to distribute more jobs and more income for those jobs (growth at somewhere other than the very high end) without the using the tax system.

Posted by: rustbelt | Aug 19, 2011 11:13:03 AM

I agree with Macphisto: People who are near the bottom but not at it are doing the things they need to do to climb the economic ladder - acting more responsibly, going to work, putting off instant gratification.

They see people at the bottom doing nothing whatsoever to help themselves but living a lifestyle nearly as good as theirs.

I'd be pissed too.

Posted by: John | Aug 19, 2011 11:45:33 AM

"Even the oppressed dream of becoming the oppressor."
- Ferengi Rule of Acquisition #124

Posted by: ted b | Aug 19, 2011 11:49:30 AM

Amazingly, the Starship troopers answer re: "would you like it if I gave you a 1st place prize even if you came in 3rd?" never seems to have occurred to the writers of that paper.

He didn't want it. Why did he not want it? He didn't _earn_ it.

or, in other words, just like Jeff and MacPhisto said. I'm just amazed that this ages-old piece of wisdom never entered the writer's heads.

Posted by: DG | Aug 19, 2011 12:10:11 PM

I would like to posit a different reason behind the feelings of this 'almost at the bottom' group of people.

I suggest that most people who are 'almost at the bottom' got there by clawing their way upwards, as opposed to coming from somewhere above that status. They have worked hard to overcome their situation and gain their slight upward movement, possibly even managed to move off a streed that is dangerous, or get their kids into a slightly better school. I am sure they don't want 'redistributed money' to move the thugs and other problems right back next door to them.

Posted by: David Henderson | Aug 19, 2011 3:36:02 PM