Percent or Percentage Points?
By David Henderson
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?