In this fascinating interview, Bob Gregory talks of growing up in an unremarkable middle class suburb in Melbourne’s north. He recalls believing that his little street in 1940s Pascoe Vale was representative of the nation at large, a belief that is probably common to most children bar the well-travelled.

I thought the street represented all Australia and that the richer and poorer people in the street represented the range of Australian experiences as a whole. I had never seen a rich neighbourhood, a Toorak, for example, until I was twenty years old. I can even remember the day.

I had a similar experience. I thought the people living in the suburbs along the coast in the northern suburbs of Perth were rich until I went to UWA and met actual rich people.

Some people never quite grow out of that childhood naivete about the level of inequality. Andrew Leigh has written about the effect that opinion leaders’ overestimation of most Australians’ living standards has on the prospect of progressive tax reform:

For the most part, the taxation rates applying to most politicians, journalists, business executives and think-tank staffers (and indeed, to academic economists) are not those that apply to the average voter. In all these professions, six-figure salaries are common. Yet only 4.5 per cent of Australian adults have an income that exceeds $100,000 per year, and only 1.5 per cent have an income that exceeds $150,000 per year.

(Note: 2006 dollars).

A recent study sought to quantify exactly how out of whack Americans’ perceptions of the wealth distribution are from reality. They conducted a large poll and found that people believed that the wealthiest 20% of Americans owned 59% of the wealth, when in fact they own 84% of US household wealth.

Here’s the respondents’ estimated wealth distribution, their ‘ideal’ distribution, and the actual distribution:

In short, people think the poor are richer than they are and that the rich are poorer than they are.

I have little doubt that Australians would similarly underestimate the degree of inequality in our society, though our actual wealth and income distributions are less grotesque than America’s. Still, the widespread misperception of the shape of the income distribution has serious implications for the nature of our public policy debates.

Take tax, for example. The usual suspects are able to carry on as if cutting the top marginal tax rate, or increasing the threshold at which it applies, would constitute meaningful “tax reform”. They get away with this mainly because most people don’t understand how marginal tax rates work (confusing them with average rates) and don’t understand where the top rate kicks in.

You need to earn 3.5x average weekly earnings before you hit the top marginal tax rate. Less than 2% of taxpayers are in the top bracket. It’s worth remembering that fact with the looming tax debate.

Elsewhere: Alex White.

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