America’s Aug. 2 debt ceiling deal introduced $2.4 trillion in spending cuts. However, it called for no tax hikes, despite the fact that many consider additional taxes necessary. The Economist argues that the average American’s reluctance to avoid taxing the rich is entirely psychological, a product of what the publication calls “last-place aversion.”
Warren Buffett supports taxing the rich, but America doesn’t
In a recent New York Times op-ed regarding taxing the rich, Berkshire Hathaway CEO Warren Buffett said it’s high time the rich took on tax hikes to facilitate a redistribution of wealth. On the surface, it would seem that most Americans would agree with Buffett’s sentiments. However, the economic think-tank OECD indicates that the U.S. is far less likely to use tax hikes to reduce economic inequality than many of its peers.
While the average American’s compensation loses just less than 30 percent to taxation, countries like Germany and France hit almost 50 percent. Scandinavian countries like Sweden and Denmark exceed 50 percent. Yet the U.S. is less generous to its poor and those receiving unemployment, compared with European countries.
Blame it on ethnic and racial homogeneity
Economists have found that the populace of countries with greater ethnic and racial homogeneity – and hence fewer immigrants – are much more comfortable with allowing the state to control redistribution of wealth from the rich to the poor. Sweden is a classic example, and the individual income tax rate there is among the highest in the world.
Divisions of social class also play a role in which nations favor greater tax revenue to fund social programs. In 2001, 20 years of data from America’s General Social Survey was compiled, and the division of opinion regarding welfare programs between whites and blacks was tremendous. While 16 percent of whites favored increased welfare spending, 47 percent of blacks were in favor. This follows the general theory that those who easily identify with a group that benefits from redistribution tend to support more of the same.
Being near (but not on) the bottom
American support for welfare and wealth distribution tends to fall in those areas of the country where benefits are distributed in the greatest quantity, according to a recent National Bureau of Economic Research study. More specifically, individuals near but not at the bottom of the income distribution curve question redistribution the most.
The reason for this, according to various economists, is that while the lower-middle class is not affected directly by tax hikes on those making more than $250,000 per year, there is a fear that taxing the rich will eventually close the economic gap between near-bottom and bottom dwellers. “Last-place aversion,” as the NBER study authors refer to it, is a powerful motivator. Income distribution no longer seems so attractive when there isn’t someone underneath you who gives you a reason to be thankful. According to the theory, with the poor in their place, it’s clear that things could always be worse.