Relative Income Perception and Taxation Preferences

Standard models of individual preferences for redistribution generally assume that individuals have full and accurate information about their relative position in the income distribution. In this paper we challenge this assumption and demonstrate the importance of accurate knowledge about one’s position in the income distribution. To do this we use an experiment embedded in a national survey of Spanish citizens. We show that a) citizens are generally not accurate about their position in the income distribution; b) the actual aggregate view of the distribution is much more compressed than reality; c) simple information – via random assignment of giving citizens accurate information about their actual location in the distribution – affects some preferences over taxing higher incomes, but not preferences over the progressivity of the tax system nor over redistribution policies more broadly. In particular, poorer individuals who find out that they are poorer than they thought are more hostile towards taxation of high incomes. The results have implications for much existing work on how individual misinformation affects preferences over policies that affect inequality.