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How perception affects our sense of wealth, and taxes

Marketplace Staff Oct 22, 2010

How perception affects our sense of wealth, and taxes

Marketplace Staff Oct 22, 2010


TESS VIGELAND: James Surowiecki argues that a big part of the problem with this whole debate is that there aren’t enough tax brackets.

In 1970, there were 25. Today, there are only six. And that means that wildly disparate incomes are lumped together, especially at the top.

Surowiecki is a staff writer at the New Yorker and wrote an article recently headlined “Soak the Very, Very Rich.” I asked him whether $250,000 qualifies.

JAMES SUROWIECKI: Well, it’s almost like a metaphysical question. I think the easy way to answer that is that it makes you incredibly well off, in the context of the United States at the moment. Yeah, it makes you rich, it puts you probably within the top 3 percent of earners in the country and I think by most standards most people would consider that well off.

VIGELAND: Then how is it metaphysical?

SUROWIECKI: Well, because obviously the definition of rich changes depending on where you are and by the standards of most of the world, just about every American is rich. So there is a kind of question as where do you draw the line, is someone who is in the top 10 percent rich, is someone in the top 15 percent rich, it’s hard to say. But I think that the $250,000 number has obviously become important because of the tax issue. I think it would be hard to argue that those people are not doing incredible well by the standards of just about everyone in the world.

VIGELAND: Then why do you think that there is so much debate about it? I mean top 2 percent, I mean it’s pretty easy — you are really well off.

SUROWIECKI: I think the real reason there is a debate is that although people who earn, let’s say $250,000, $300,000 have done very well relative to most Americans, they have not done anywhere near as well as people above them. If you look at the incredible rise in incomes at the top of the income spectrum, the vast majority of those gains have gone to the top 1 percent. And it actually is even more stark than that; they really have gone to the top 0.1 percent. So what you have actually seen is this curious phenomenon where while the gap between people who earn $250,000 and ordinary Americans has widened, the gap between the people earning $250,000 or $300,000 and the people above them has widened much more. They don’t feel well off, basically.

VIGELAND: And you have a great example in the article that you wrote, where you say that LeBron James and LeBron James’s dentist are paying the same tax rate.

SUROWIECKI: Right, so they are paying the same marginal rates. So every additional dollar that LeBron James makes, he pays the same marginal tax rate as his dentist does. Now the point though, I think, is not necessarily to say that the people earning $250,000 should not have their taxes hiked a little. It’s odd that we don’t have more tax brackets. In other words, it’s odd that someone who makes $5 million or $6 million a year is paying the same marginal rate as someone who makes $250,000 or $300,000 a year.

VIGELAND: I want to take you back to a word that you mentioned earlier, which is this notion of “perception” and that a lot of people even when they are making $250,000 a year don’t feel rich. Should that be a factor — does it really matter whether you feel rich when you pretty much categorically are?

SUROWIECKI: It shouldn’t make a difference in terms of public policy or anything along those lines. But I think it clearly affects the way people react. One of the consequences of this widening gap is that you have this kind of strange phenomenon where you have people who may very well have gone to college together, perhaps live in the same neighborhood, who really have radically different experiences of the world. I think the reality is that the way that human beings think about money and status is that people tend to compare themselves to their peer groups. They don’t tend to compare themselves to everyone else in the country or in the world. It is a total disconnect; people don’t understand how well off they are, but they don’t understand it because that’s not their experience of the world.

VIGELAND: Is that uniquely American, the aspirational idea that we are comparing ourselves to something that’s completely unrealistic?

SUROWIECKI: I think the reason people feel this way is that it doesn’t seem unrealistic, because people who are very much like them, again people who they went to college with, who do not have more education, who do not seem smarter, do not work any harder or the like, but who happen to work on Wall Street, let’s say, or happen to be a partner in a law firm or whatever it is. Those people are earning six, seven, 10, 15 times as much. So it doesn’t seem unrealistic exactly — it just seems like arbitrary. I took this path, you took that path. But I don’t think the phenomenon of comparing yourself to your peers is quintessentially American, I think it’s pretty universal. But I do think America, because of the American mythology of upward mobility, the American dream, and because we live in an incredibly and intensely consumerist society, that I think kind of magnifies people sense that they need to basically keep working to get ahead and that they never really have enough.

VIGELAND: James Surowiecki of The New Yorker magazine. His most recent book is “The Wisdom of Crowds.”

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