Income Perception, Information, and Progressive Taxation: Evidence from a Survey Experiment Acknowledgments: We thank

Are individuals accurately informed about their place in the income distribution? Despite the importance of accurate information about one’s placement in the income distribution for many models of redistribution, this assumption remains untested. We present survey data and an embedded experiment where we inform some individuals their true place in the income distribution. We find that individuals have considerable error regarding their self-placement in the income distribution. Revealing to individuals their true placement affects progressivity preferences for individuals who learn they are poor, and for individuals whose prior is that they are poor. These results have implications for information assumptions of redistribution models of comparative political economy, extant models of citizen information and redistribution preferences, and demonstrate the importance of studying views towards tax progressivity preferences, an understudied dimension of redistribution preferences. Introduction Are individuals accurately informed about their location in their national income distribution? What is the impact of individuals’ subjective income placement (where individuals believe they are in a country’s income distribution), as opposed to objective income placement (where individuals actually are located in the income distribution), on preferences over basic policy issues of progressive taxation? To what extent does learning about one’s actual placement in the income distribution affect such preferences? Despite the recent proliferation of research on preferences over redistribution, surprisingly few studies test the assumption that individuals’ views of their placement in the income distribution match their actual placement in that distribution. These assumptions are components of some canonical political economy models of preferences over tax rates and transfers. 1 Such assumptions are also normatively relevant as individuals may be misinformed about their true position in the income distribution; were they properly informed, their preferences over tax rates and redistribution may change. The emerging literature on redistribution preferences also suffers from another major lacuna, as few studies explain variation in preferences over tax rates and progressivity of tax systems, an obviously crucial component of redistribution policies. The absence of much data on specific tax preferences is striking given that such preferences are implicitly assumed in views towards overall redistribution. Citizen views of the amount of overall redistribution that they prefer can be partially conditioned by their preferred amount of progressive taxation. Further, issues of tax rates or the perceived fairness of the overall tax system are often salient political issues in advanced democracies (recent rhetoric regarding the economic gains to the top one 1 Romer (1975) ; Meltzer and Richard (1981) 1 percent of the income distribution in the United States and other advanced industrialized democracies and the proposals to increase top marginal tax rates are related examples of how tax schedules are becoming politically salient). 2 The relative paucity of political behavior studies on preferred tax rates contrasts with the voluminous amount of research that measures views towards redistribution generally. This research either examines general attitudes towards redistribution (such as whether the government should reduce differences between the rich and poor), or views about various decomposition of types of redistribution (such as assistance for the unemployed and support for other types of transfers in different policy categories). 3 While more sophisticated versions of these preference questions remind citizens of tax increases needed to pay for such redistribution, careful analysis of the determinants of the variation in preferred degree of progressivity is lacking. In this study we address these two deficiencies by presenting findings from new survey data from a nationally representative population in an advanced industrialized country (Spain) with an embedded information experiment. We use survey data to test the assumption that people know their location in the income distribution, by asking individuals to give their perceived placement in the income distribution. We then inform a randomly selected subset their true place in the income distribution, and assess the impact of such information on tax progressivity preferences. We first find that individuals are not necessarily well-informed about their placement in the income distribution, contra the assumptions of existing models. Citizens tend to believe that they belong to middle income groups, whether they are in reality richer or poorer 2 The recent influential work by Piketty also highlights the importance of tax policy preferences and inequality. Piketty (2014) 3 For examples of the growing literature on attitudes towards redistribution, and in particular studies that decompose redistribution into specific types of transfers or policies, see Gingrich and Ansell (2012); Iversen and Soskice (2001); Rehm (2009); Rehm (2011); Margalit (2013); Rueda (2005); Rehm, Hacker, and Schlesinger (2012). 2 than the median income. Our main experimental findings are that informing individuals of their true placement in the income distribution increases support for tax progressivity, but mainly for individuals who learn they are in the bottom quintile of the distribution, and for those who believe they are poor and learn that they are poorer than they thought. In contrast, we find little information effects for those with incomes greater than the median and for those who learn that are richer than what they thought. The results contribute to our understanding of key informational assumptions of basic redistribution models and demonstrate the impact of information on policy preferences. The paper proceeds as follows. Section one describes the relevant literatures we build upon. Section two presents a basic theoretical discussion and hypotheses. Section three presents the research design and discusses the survey instrument in detail. Section four presents the data from the control group and the experimental results. Section five concludes. Section 1. Background literature Our study builds on two developing literatures in comparative political economy and political behavior regarding redistribution preferences. The first is a growing body of work that tries to measure the degree of misinformation citizens have about issues relevant to redistribution, and how such misinformation affects preferences. Recent findings document how individuals are misinformed about various facts that are theorized to influence redistribution preferences, though most of these studies focus on US citizens and misinformation about specific policies.4 For example, Americans relative to Europeans are more likely to underestimate the 4 A large debate in the US behavior literature examines how informed Americans are on various aspects of public policy and whether this ignorance matters. A research tradition in the vein of Kulkinski et al. finds that misinformation is rampant and that such misinformation has implications for citizen welfare; a contrasting set of studies by Page and Shapiro finds general high levels of citizen knowledge (Kuklinski, Quirk, Jerit, Schwieder, & Rich, 2000; Page & Shapiro, 2010). For other studies exploring the degree of political knowledge in the United States see Neuman (1992); Carpini and Keeter (1996). Recent studies that debate the true level of political knowledge include Luskin and Bullock (2011); Boudreau et al. (2011); Prior and Lupia (2008). In this study we 3 income gap between the rich and poor in their respective countries, 5 are less aware of the extent of inequality at the top of the income distribution, and are less concerned about reducing differentials at the bottom of the distribution.6 Other studies find that most US citizens are overly optimistic in estimating their future economic standing, and a raft of evidence cites American over-estimation of the degree of income mobility. 7 Given the debate over how informed citizens are on relevant redistribution issues, some studies assess the relationship between relevant information and policy preferences. The results of the relationship between information and preferences in the US context is mixed. Using observational data regarding views on the US tax cuts of 2001 and 2003, Bartels finds that political information does not increase opposition to such policies, even from citizens who would not necessarily benefit from such policies.8 Experimental studies find some effects of information on tax and social policy preferences and awareness. For example, Duflo and Saez and Chetty and Saez9 show that information about retirement plans and the tax code can affect views and participation in such plans.10 On the issue of the US estate tax, Sides finds that information about the extent of the tax affects support for it.11 However, many of these experiments are limited to a US specific setting. In the study most relevant to our design, Cruces, focus only on information that is relevant to the domain of redistribution and taxation, and use a non-American sample. 5 Osberg and Smeeding (2006); Norton and Ariely (2011) 6 For an alternative view on estimates of error in inequality among US citizens, see McCall and Chin (2013). 7 See Neckerman and Torche (2007) and DiPrete (2007). 8 Bartels (2005) 9 Duflo and Saez (2003) and Chetty and Saez (2013) 10 Chetty and Saez provide an overview of US based evidence regarding Earned Income Tax Credit (EITC), retirement plans, and other specific policies demonstrating much ignorance over benefits of these policies (Chetty & Saez, 2013). Kuziemko, Norton, et al. also find using survey experiments that respondents update their views about income inequality when presented with information about the current distributi