David R. Henderson  

Percent or Percentage Points?

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After reading news stories today about the House Democrats' plan for levying higher taxes on higher-income people, I found myself confused. It took some digging to end the confusion.

No, I'm not talking about almost all reporters' insistence on confusing high-income people with rich people. Although virtually all of them reported that income tax rates on the rich would rise, that's not true. What would rise is income tax rates on high-income people. Although there is a strong positive correlation between wealth and income, it is by no means 1.0. Think of the young person making a high income who is not yet wealthy, the moderately successful professional athlete who had one good year before suffering a career-ending injury, or the older person with a low income but a net worth of $2 million in the form of a fully paid for house in Pebble Beach.

The confusion I had was whether the surtax on people with incomes of $1 million or more would really be only 5.4 percent, as was reported, or would actually be 5.4 percentage points. Well, it's the latter. And, in case you noticed that a link to a Washington Post article gave me the facts, don't get too excited. The Post misreported it too. It's just that they gave enough information about where the top tax rate would end up that I could connect the dots. So starting from a top marginal tax rate of 35 percent, this would be, not a 5.4 percent increase, but a whopping 15.4 percent increase in marginal tax rates.

Reporting was not always so bad. When the Lyndon Johnson 10% surtax on income tax rates was being discussed in the late 1960s, I think reporters, by and large, got it right. (I'm not sure because I was about 16 at the time.) They didn't talk about a 7% tax increase; the top income tax rate at the time was 70% and so the top tax rate temporarily went to 77%. No. They talked about a 10% increase.

Two economist bloggers who often post about how badly the media mess up in economic reporting are Brad DeLong and Dean Baker. Will they nail this one?

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CATEGORIES: Fiscal Policy

COMMENTS (12 to date)
Wowow writes:

How can you even be surprised at hack reporting on this stuff, Bryan?

It's incredible, what he Dems plan is.

I haven't been following the news on this very closely, but the US already has amongst the highest taxes in the world for high earners - if one includes state income taxes, payroll taxes, etc.

And they want to pile this on top? Wow. This tax raise may actually put the max marginal rate for states such as MA, NY, and CA right even with the Scandinavian countries.

Robert writes:

Great post. You've informed at least one person.

Wowow writes:

Sorry David, not Bryan.

BlackSheep writes:

If it is described as a surtax, does that not make it explicit already that the number presented is not a proportion of the current taxes, but another increment to be piled into the tax heap?
I guess I don't know what surtax means...

David R. Henderson writes:

You could be right. It's a matter of usage. But whatever surtax means or doesn't mean, my point is about percent vs. percentage points. The latter is a serious misuse of language. Oh, and Wowow, I'm not surprised; I'm simply pointing it out.

BlackSheep writes:

David, sure, I just mean that if it's a new tax then it might not make sense of asking about whether the increase is in the percent or percentage points, because it's not being considered relatively to the existing tax rates. (it's yet another tax to throw to the bundle.)
Dunno, English is not even my mother language. You're surely correct to ask reporters to make a decent effort into being more precise when reporting what should be simple arithmetic.

Milton Recht writes:

"Furthermore, we find that the correlations between earnings and wealth and between income and wealth, which are 0.463 and 0.600, respectively,are significantly smaller than the correlation between earnings and income, which is 0.715."

From "Updated Facts on the U.S. Distributions of Earnings, Income, and Wealth" by Santiago Budría Rodríguez, Javier Díaz-Giménez, Vincenzo Quadrini, José-Víctor Ríos-Rull. Federal Reserve Bank of Minneapolis Quarterly Review Summer 2002, Vol. 26, No. 3, pp. 2–35.

David R. Henderson writes:

Thanks, Milton Recht.

Dan Weber writes:

When I heard "five point four percent," I knew, instantly, that they meant 5.4 percentage points. There was no confusion at all to me.

Heck, even The Economist says 5.4%.

David R. Henderson writes:

Dan Weber,
You wrote:
When I heard "five point four percent," I knew, instantly, that they meant 5.4 percentage points. There was no confusion at all to me.
I believe you. I dare say that most people would not be confused by it either. That's the problem.

liberty writes:

I agree with Black Sheep -- I have been modeling the surtax for Heritage, and hence reading all about it, and I do not think it has been poorly represented. Most people think of a surtax as a new tax, and it is indeed a new 5.4% tax for those earning more than 1 million AGI (joint). Hence, 5.4% of 1 million goes from their pocket into the government's pocket. Bye bye $54,000.

Nobody is thinking that it is a 5.4% increase of what I currently pay; they realize as a new tax this means 5.4 percent of earnings, or a 5.4 percentage point increase. This clear because the reporters say "a surtax on incomes of ..." not "a surtax on taxes paid."

In general I think the media does a terrible job, but in this case I do not think it is deceptive or all that confusing.

Patrick R. Sullivan writes:

Actually, David Henderson is correct. The 10% surtax was added to your calculated tax on your tax return back in (iirc) 1969. If you would have paid $1,000 under the tax tables, with the surtax it was upped to $1,100. I remember having to make the calculation.

For consistency, today's newspapers should be referring to a 15.4% 'surtax' (or, an increase in the top marginal tax rate to 40.4%).

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