Who is high income, anyway? Social comparison, subjective group identification, and preferences over progressive taxation

Abstract

Why are high-income and low-income earners not significantly polarized in their support for progressive income taxation? This article posits that the affluent fail to recognize that they belong to the high-income income group and this misperception affects their preferences over progressive taxation. To explain this mechanism theoretically, I introduce a formal model of subjective income-group identification through self-comparison to an endogenous reference group. In making decisions about optimal tax rates, individuals then use these subjective evaluations of their own income group and earnings of other groups. Relying on ISSP data, I find strong evidence for the model’s empirical implications: most high-income earners support progressive taxation when they identify themselves with a lower group. Additionally, individuals who overestimate the earnings of the rich are more likely to support progressive taxation.