Income and wealth inequality have been in the news lately. Part of what drives the Occupy Wall Street protests, for example, is the perception that the very, very rich--the top 1% of the population in the U.S. and elsewhere--are "writing the rules of an unfair global economy that is foreclosing on our future."

How should we judge whether this observation about fairness is reasonable? Let's start with data. The U.S. Census Bureau provides a breakdown of how all income in the U.S. for a given year divides up between five sets of households, from those in the lowest-earning 20% to those in the highest-earning 20%. The picture looks like this. 

Here's how to read this chart. The legend on the top shows how the colors are assigned to the parts of each bar, with the bottom 20% in light blue, the 4th 20% in purple, and so forth. The top 20% of households pull in about half of all the income earned each year, and the bottom 20% take in something closer to 3% than 4%. This pattern has held relatively steady over the past 15 years.

Is this fair? Some liberals might say that when the average top-quintile household brings in almost fifteen times what the average bottom-quintile household does, that's unfair. Some conservatives might say that the breakdown is only to be expected, and in any case life in general is unfair. Opinions differ. But let's look further.

One of the ways that our society deals with inequities is through the tax code. Here's another bit of data, from Citizens for Tax Justice.

This chart shows the total tax burden and the federal income tax burden, again broken down across five sets of households. (The numbers for income on the paper I've linked to above don't quite match up with the Census numbers, but it's hard to know why there are discrepancies. In any case, the numbers don't seem too far off, given other sources I've looked at.) The general pattern here is the same as in the first chart I showed: the top households pay a lot more taxes than the bottom households. In fact, they pay disproportionately more; otherwise the colored areas would be identical. This is a natural effect of our having a progressive taxation system. The rich pay more because they can afford to pay more (and there are some arguments that they benefit more, but I won't go into that here). Again, we can ask whether this is fair, and we can enter the debate between people who support progressive taxation and people who support a flat tax.

I've said that fairness is in the eye of the beholder, and in the first paragraph of this post I use the term "perception" to describe the unfairness of the 1%ers having much more political and economic influence than the rest of us. Is that all I can do? Present some data and say, "Well, here it is. You be the judge"?

Fortunately, there's more. Earlier this year, Michael I. Norton and Dan Ariely published their analysis of a survey carried out in 2005. They asked over 5,000 Americans across the country, a group representative of the general population (with respect to sex, income level, and voting patterns), two interesting questions. I'll paraphrase:

If you were to divide up the U.S. population into five groups, from the poorest 20% to the richest 20%, how would the wealth of the country ideally be distributed between the groups?

How would you estimate that wealth is distributed in reality?

They were asking about wealth, rather than income, but I think it's reasonable to assume that people's attitudes are similar with respect to both. (They were also asking about individuals rather than households, but that should be okay, too.) Results were striking. I've reproduced Norton and Ariely's summary below, along with the actual distribution of wealth in the U.S.

In the first bar, at the top of the chart, we see the ideal case, how people generally think wealth would ideally be distributed. The bottom 20% should own about 12% of the country's wealth, the 4th 20% about 15%, and so on. At the right, the top 20% (blue) should own about 30% of the wealth. Let's interpret this as reflecting people's intuitions about fairness. Ideally, the world would be a fair place, and if the average person at the top is 2.5 times as wealthy as the average person at the bottom, that's okay.

Of course, the world isn't ideal. What do people think it looks like? That's the second bar. People estimate that the top 20% own close to 60% of the wealth, with the bottom 20% coming in for less than 5%.

And the third bar, on the bottom? That's the reality. The top 20% own about 85% of the wealth. We see only three groups in this bar, rather than five. The bottom 20% and the 4th 20% are still present, but at 0.1% and 0.2%, they're too small to show up. I've seen other estimates of the wealth of the bottom 20% actually being negative--that on average they literally own less than nothing, given their debts. Further, that blue block of about 85% isn't broken up evenly among the people in the top 20%. The top 1% own about half of the wealth in the U.S.

It turns out that we can say something in general about fairness. If we take the ideal case as standing for what would be fair, then Americans do believe that we currently have an unfair distribution of wealth. (That's not the only interpretation; some people might believe that the reality--which they've just been told of--still falls within the bounds of being fair. But I think this is unlikely. The average person at the top is not 2.5 times wealthier than the average person at the bottom, but instead 840 times wealthier. That's a big difference. If you and I were haggling over some purchase, and you said, "I think $2.50 is a fair offer," would you think my demand for $850 was also fair?) Now, recognizing a situation as unfair is not the same as doing something about it. But doing something is justifiable, even moral.

Let's come back the Occupy Wall Street movement and current political discussions about the economy. Mitt Romney, the current frontrunner for the Republican Presidential nomination, tells the National Journal, "I think it’s dangerous, this class warfare." Romney didn't include in his metaphor the flat tax proponents, union busters, Social Security/Medicare privatizers, and those who would eliminate welfare as being on his side in the war. But it's not really warfare to point out the reality of economic inequities in the U.S. and demand that something be done. In fact, it seems perfectly reasonable to say that the world is an unfair place and we should do something about it. 

Michael I. Norton and Dan Ariely, Building a Better America—One Wealth Quintile at a Time, Perspectives on Psychological Science 6(1) 9–12, 2011.