Tax Hikes, Status Competitiveness, and Social Stratification

Taxes on top earners are the lowest they’ve been in nearly three generations, yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable. In my youth, if someone complained much about their taxes, it was taken as a sign that they either had no class or were under some financial stress.

Some of this caviling no doubt reflects the degree to which the plutocrats are firmly in control of the political process. They can openly lobby for blatantly self-serving policies, and adopt a non-negotiable posture. But something else is afoot too, and these bitter protests seem to be another side effect of social stratification.

As we’ve pointed out, highly unequal societies are unhealthy for their members, even members of the highest strata. Not only do they score worse on all sorts of indicators of social well-being, from crime rates to teenage births to average lifespan, but they exert a toll even on the rich. Not only do the rich have less fun, but a number of studies have found that income inequality lowers the life expectancy even of the rich. As Micheal Prowse explained in the Financial Times:

Those who would deny a link between health and inequality must first grapple with the following paradox. There is a strong relationship between income and health within countries. In any nation you will find that people on high incomes tend to live longer and have fewer chronic illnesses than people on low incomes.

Yet, if you look for differences between countries, the relationship between income and health largely disintegrates. Rich Americans, for instance, are healthier on average than poor Americans, as measured by life expectancy. But, although the US is a much richer country than, say, Greece, Americans on average have a lower life expectancy than Greeks. More income, it seems, gives you a health advantage with respect to your fellow citizens, but not with respect to people living in other countries….

Once a floor standard of living is attained, people tend to be healthier when three conditions hold: they are valued and respected by others; they feel ‘in control’ in their work and home lives; and they enjoy a dense network of social contacts. Economically unequal societies tend to do poorly in all three respects: they tend to be characterised by big status differences, by big differences in people’s sense of control and by low levels of civic participation….

Unequal societies, in other words, will remain unhealthy societies – and also unhappy societies – no matter how wealthy they become. Their advocates – those who see no reason whatever to curb ever-widening income differentials – have a lot of explaining to do.

It’s easy to see how the “big status differences” alone has an impact. The wider income differentials are, the less people mix across income lines, and the more opportunties there are for stratification within income groups. Thus a decline in income can easily put one in the position of suddenly not being able to participate fully or at all in one’s former social cohort (what do you give up, the country club membership? the kids’ private schools? the charities on which you give enough to be on special committees?). And lose enough of these activities that have a steep cost of entry but are part of your social life, and you lose a lot of your supposed friends. Making new friends over the age of 35 is not easy.

So a perceived threat to one’s income is much more serious business to the well-off than it might seem to those on the other side of the looking glass. Loss of social position is a fraught business indeed.

Robert Frank points out the fallacy in this reaction: if all the rich pay more taxes, the relative differential should remain the same. Of course, this is a bit simplistic, since some people will be better positioned to minimize their exposure to an increase than others. But his general premise holds. And he has proof of a sort, in that he actually made headway with a buddy who was incensed over the prospect of seeing his taxes go up by making a relative status argument. From the New York Times:

A financially prosperous friend of mine is a case in point. He watches a lot of angry talking heads on cable news, and he recently buttonholed me to ask whether I had any idea that our taxes were about to rise?…. His face grew redder as he listed each outrage.

I said I knew all about the scheduled expiration of the Bush tax cuts but hadn’t heard much about the other proposals. When he expressed shock that I hadn’t, I tried to explain why I didn’t think it made sense to fret….

But the most salient issue in taxpayers’ minds is how the changes would affect their own standard of living. Truly wealthy families wouldn’t have to alter their spending at all…

Many families with income of $250,000 and more do spend everything they earn, and, of course, would have to cut back. As psychologists have long known, individuals typically find belt-tightening painful. But recent psychological research suggests that if all in that group spent less in unison, their perceptions of their standard of living would remain essentially unchanged….

With less after-tax income, top earners also wouldn’t be able to spend as much on cars or their children’s weddings and coming-of-age parties. But why did they feel compelled to spend so much in the first place? In most cases, they simply wanted a car that felt spirited, or a celebration that seemed special. But concepts like “spirited” and “special” are inescapably relative: when others in your circle spend a lot, you must spend accordingly or else live with the disappointment that results from unmet expectations.

If the top tax rate were to rise, as scheduled, from 35 percent to 39.5 percent — its level during the Clinton era — many top earners would spend a little less on cars and parties, so the standards that define their expectations would adjust. But once the dust settled, their cars would feel no less spirited, and their celebrations no less special, than before…

I explained all of this to my friend — telling him that because the tax increases he listed would apply not only to him and me, but also to others like us, they wouldn’t much affect our ability to acquire the things we want. That seemed to calm him down a bit.

Even in the Eisenhower era, when the top marginal tax rate was 90%, I have no doubt the rich were still able to find ways to hold themselves apart from everyone else, even if it isn’t as far as they can now.


Originally published at naked capitalism and reproduced here with permission.

47 Responses to "Tax Hikes, Status Competitiveness, and Social Stratification"

  1. Guest   January 28, 2011 at 10:12 pm

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