May 21, 2006

The Myth of the Reality: Fun with Statistics

Justin Katz

Opinion pieces that seek to demythologize economic reformers' rhetoric are magnificent fodder for analysis (often facilitating sympathy, in the analyst, for those who don't care enough to investigate). Institute on Taxation and Economic Policy state-tax policy director Matt Gardner offers one such opportunity with his "Correcting myths -- R.I.'s economic climate compares well." I've no knowledge of the leanings of either Mr. Gardner or his institute, but as seems often to be the case with such things, upon opening up the cabinet, one finds its contents all but spilling outward. Cracking it open:

Myth: The number of high-income earners in Rhode Island has fallen in recent years, even as such numbers have risen in neighboring Connecticut, Massachusetts, and New Hampshire.

Reality: Between 1997 and 2003 (the years for which detailed Internal Revenue Service data are available), the number of taxpayers reporting incomes over $200,000 rose 60 percent in Rhode Island -- a greater rate of increase than in Connecticut (37 percent), Massachusetts (51 percent), and New Hampshire (55 percent).

I'll put aside the question of whether anybody's actually made an explicit claim about raw numbers of rich people dropping, as well as the observation that the "recent years" of 2004 and 2005 are not included in Gardner's assessment. Having picked apart the IRS data to which Gardner refers, I'd suggest that percentage increases don't tell the whole story. Here's a chart of the "new" (i.e., additional) high-income earners in the states that he mentions:

One obvious objection to my graphic would be that the raw numbers aren't really comparable, given the different sizes of the states. To be sure, it is a bit unreasonable to compare Rhode Island's 9,252 high-earners with Connecticut's 64,692, but that's pretty much the point: it takes less of an increase to make it appear as if Rhode Island's stock of rich folk is on the same trend path as those of other New England states. Putting the trend in context of the broader societies, however, the reality is that — again, using Gardner's own IRS source — Rhode Island is behind the listed states in the rate at which it is expanding its wealthy class. Relative to total tax returns, the percentage claiming adjusted gross income over $200,000 went from:

  • 1.24% in 1997 to 1.86% in 2003 in Rhode Island
  • 1.43% in 1997 to 2.05% in 2003 in New Hampshire
  • 2.09% in 1997 to 3.06% in 2003 in Massachusetts
  • 2.95% in 1997 to 3.91% in 2003 in Connecticut

So, when Gardner states that "the average annual income of the top 1 percent of Rhode Island taxpayers rose by $235,000," he's talking about a relatively stagnant pool, not the froth of a rising tide. In Massachusetts and Connecticut, by comparison, just about a full 1% entered the high-income group.

But here's where the aforementioned spilling begins; expanding the quotation:

Myth: Wealthy Rhode Islanders are getting poorer. The Journal asserts that the wealthiest saw their incomes drop by 17 percent between 1995 and 2002, while high incomes rose in the neighboring states.

Reality: This misuse of statistics would be almost funny except that the statistics being abused come from my organization, the Institute on Taxation and Economic Policy. The data come from two ITEP reports, which look at two very different groups of Rhode Island taxpayers. An "apples-to-apples" comparison over the same period shows that the average annual income of the top 1 percent of Rhode Island taxpayers rose by $235,000 -- for a healthy 46-percent gain in average family income.

It would have been helpful of Mr. Gardner to expend a dozen words or so explaining what made apples apples and oranges oranges in the Providence Journal editorial in dispute, because turning back to the IRS spreadsheets that he found so helpful up to this point, one finds that the total adjusted gross income of $200,000-earners as a group did indeed grow from $3,033,302,000 in 1997 to $4,281,410,000 in 2003. However, those amounts were divided among 5,764 and 9,252 taxpayers, respectively, for an average AGI of $526,249 in 1997, but only $462,755 in 2003. Somehow, this apples-to-apples comparison finds a decrease of 12%.

No doubt, such analysis could go on. It would be interesting, for example, to attempt to reconcile Gardner's sunny view of the low end of Rhode Island's tax spectrum with his seemingly conflicting proclamation that "the gap between rich and poor in Rhode Island was the 12th fastest-growing in the nation." It would be even more interesting to find some sort of data that would shed light on the types of occupations through which the different states' rich earn their wealth. My suspicion is that Rhode Island's upper crust disproportionately boasts those who consume, rather than generate, wealth by draining the public reserves.

Unfortunately, as a man who must actually earn a living in Rhode Island — without the resources to patronize "the plethora of new high-end eateries and cafs" that Gardner sees as evidence of our state's affluence — I haven't the time for further numbers games.

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Justin,
Like you, I was left wondering where this guy was coming from. Curiosity got the better of me, and I went to the ITEP web site. After poking around for all of 12 seconds, I came upon a link on their site to: "Poverty Institue at Rhode Island College."
That said it all.

Posted by: Jim at May 22, 2006 6:25 AM

>>Matt Gardner is director of state-tax policy at the Institute on Taxation and Economic Policy, a Washington think tank focusing on state-tax fairness.

When I saw the word "fairness" I knew that this organization was just a left-wing flack (see, e.g., "rich, don't define who it is, soak with 'progressive' tax rates and then describe the whole thing as merely making them pay their 'fair' share.")

Whenever ones sees "fairness" or "justice" ("social justice" etc.) it's almost invariably a tip-off that a liberal / socialist is speaking.

Posted by: Tom W at May 22, 2006 8:45 AM

Tom W.,
You're absolutely right about use of the word "fairness"! Anytime I hear that word, my next question is "Fairness for Who?"

Out of curiousity, I'd be interested to see the what tax returns were joint combined income rather than single.

Posted by: Anthony at May 22, 2006 10:29 AM

Justin,

This is EXCELLENT work that left me wishing for more. If only you didn't have to "make a living" or "support your family"

Posted by: johnb at May 22, 2006 11:54 AM

>Out of curiousity, I'd be interested to see the what tax returns were joint combined income rather than single.

Yep. And also, how many have jobs in MA but sleep in RI, and therefore file income tax returns as RI residents?

Posted by: Tom W at May 22, 2006 12:39 PM