IS THERE SUCH A THING AS
THE DESERVING RICH?
OR HOW DO WE TAX THE RICH…
DANIEL SGROI (research with ANANDI MANI and
SHARUN MUKAND)
Memory can be biased…
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“I have done this, says my memory. I cannot have done that,
says my pride, remaining inexorable. Finally – memory yields.”
[Friedrich Nietzsche, Beyond Good and Evil; from B&T
QJE2002]
“I had during many years followed the Golden Rule, namely,
that whenever a published fact, a new observation or thought
came across me, which was opposed to my general results, to
make a memorandum of it without fail and at once; for I had
found by experience that such (contrary and thus unwelcome)
facts and thoughts were far more apt to escape from memory
than favorable ones.” [Charles Darwin in The Life of Charles
Darwin, by Francis Darwin; from B&T QJE2002].
…as can perceptions of what really
matters.
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"For almost two centuries, Spain has hosted an enormously popular
Christmas lottery. Based on payout, it is the biggest lottery in the
world and nearly all Spaniards play. In the mid 1970s, a man
sought a ticket with the last two digits ending in 48. He found a
ticket, bought it, and then won the lottery.” In a subsequent interview,
he argued that luck had nothing to do with his choice of lottery …
and he was so intent on finding that particular number, “because” he
replied, “I dreamed of the number seven for seven straight nights.
And 7 times 7 is 48.”
-- Quoted in Stanley Reisner (1977)
Suggestive Evidence of a Self-Serving Bias (SSB) in Beliefs about
reasons for Own Success.
The idea in a nutshell
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People bias their recall to bolster their self-image.
They would rather think of themselves as hardworking than
lazy: blame “bad luck” when they fail, attribute success to
high effort/ability.
People are more sympathetic towards those who are like
themselves.
Those who see themselves as deserving are more likely to
want to see lower taxes on those they also think of as
deserving…
So the concept of the “deserving rich” may be a function of
your own experiences and perceptions and may therefore
be malleable…
We show this is true in a controlled lab environment.
Motivation
The theory of self-serving bias (SSB)
Theory in a Nutshell
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Put (very) simply, Economists have shown that
sometimes it pays to be wrong about yourself.
The classic example is a lawyer who refuses to
accept he can be beaten in a case:
If he wins that is taken as evidence that he is great
If he looses, it must have been because the jury or
judge were biased so he can discount that as
“flawed data”
So he never looses…
Good or bad?
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This is BAD if it means he takes on cases because he
is overconfident
This is GOOD if it boosts his confidence which is in
turn linked to his ability, so inflated self-confidence
can actually boost productivity.
This is called a “self-serving bias”
Applied to others (viewing others as better boosts
my confidence in my self) it is a kind of “projection
bias” (an idea going back at least to Freud)
Motivation II
How beliefs about the importance of luck vs.
ability in life can influence attitudes towards
taxation…
Source of Income may affect Attitudes to
Redistribution
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We all have social preferences (what we think is fair)
This is likely to be based on our own experiences (what we
know, what we have seen).
If we have succeeded it is nice to think that is because we are
good at what we do – and so to discount luck.
And vice versa…
If we discount luck in our own life experiences we will most
likely discount them in others and so think of the rich as
“deserving” and so support lower taxes.
Beliefs about Luck vs. Effort and Attitudes
to Redistribution
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Attitudes towards redistribution differ both within and across
countries….(World Values Survey, 2001)
America
Europe
Poor people “trapped” in 29%
poverty
60%
Poor are lazy and lack
willpower
54%
30%
In the long run, hard
work brings better life
59%
34-43%
….and
are correlated with differences in attitudes towards
taxation and spending
Social Expenditure and Beliefs
(Alesina and Glaeser, 2001)
Experimental Design
Our Questions
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Do people care about absolute wealth when choosing
taxes , or about the source of income?
If they care about the source of income is this related
to how they got their own wealth?
Are people willing and able to manipulate their own
views and experiences to boost their own self-image?
Why the Lab?
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We are hoping to produce a causal link between attitudes and
choices – what people see or do changes their attitudes.
It is hard to get at this in the real world as there are too many
things going on that complicate the relationship between
experiences and attitudes.
In the lab we can make small changes and see how people
respond.
Those changes can be very focused on answering the questions
that matter – so it is all about having a simple controlled
environment rather than the chaos of the real world.
What We Did
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Recruit subjects and ask them to complete a simple questionnaire.
Get them to carry out an ability task (adding up numbers…).
Get them to take part in a simple random lottery.
Randomise what turns out to matter (luck or ability) – and reward
them based on how they did in the relevant task.
Give them different information – crucially they have enough to see
what really happened but with room to bias their self-image if they
wish
They get to choose tax rates on those who made money through the
ability task and those who made their money through the luck task.
Then they are paid based on how they did and the tax rate that is
chosen (taken randomly from the taxes suggested by subjects).
Logistical Details
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Recruitment and registration fully anonymous.
We need a good number of subjects to cover our
hypotheses (we will be comparing across subgroups)
To that end, we obtained 452 subjects in total – that
is a large number for a lab experiment.
Fully computerized on-screen terminals (complete
privacy).
Fully incentivized: £5 show-up fee with the potential to
win up to £20 for 45 minutes work.
Screen shots – skip.
Screen shots
Results
Tax Rates (setter excluded) – example
averages from raw data
Overall
Full Information
No. of Addition Lottery No. of Addition
obs.
Tax
Tax
obs.
Tax
Lucky Rich
Deserving
Rich
RICH
Unlucky
poor
Low effort
poor
POOR
Partial Information
Lottery No. of Addition Lottery
Tax
obs.
Tax
Tax
108 26.3 43.4 39 29.42 40.89 29 24.8 39.8
68 19.3 40.3 47 15.28 44.28 61 23.9 42.2
176 23.6 41.5 86 23.01 42.43 90 22.7 40.5
116 43.3 69
65 50.8 72.16 51 44.9 73.9
160 47.9 72.9 78 42.01 66.23 82 45.2 71.7
276 46 70.7 143 46.81 68.93 133 45.1 72.5
Results Summary
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Based on statistical analysis of the data we can say
that:
People tax luck more heavily than effort/ability. They are
more lenient towards wealth generated via ability.
 BUT own source of income matters – the lucky rich are much
more lenient towards those others who get rich through luck,
and the high effort rich are much more sympathetic towards
those who get rich through effort.
 AND self-image is important – the rich who know they are
lucky are much more lenient than those who are not so sure
– suggesting self-delusion is in place.
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Conclusions
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As you go through life your ideas about who deserves
their wealth and who does not will change based on
your own experiences, typically in ways that make you
feel better about your self-image...
...so if we want to change tax rates, or alter opinions
we need to address how people see themselves – the
environment they are in and the information they
possess.
It is not just about reality, it is also about perception:
who is deserving is all in the eye of the beholder.
Many thanks!