February 9, 2008

The Percent of the Percent, or the Additional Percentage?

Justin Katz

It's good to see that the gatekeepers over at RI Future have allowed somebody actually to address the points that I'm making (as opposed to making distinct points and scoffing at whatever it was that some right-winger was saying elsewhere). That somebody turned out to be sometime Anchor Rising commenter Thomas Schmeling, and his argument is that my analysis of Rhode Island's, Massachusetts's, and Connecticut's increases in $200,000-earners measures the wrong thing. I encourage readers interested in the debate to read Schmeling's lucid post in its entirety before returning to my reply, below.

As well as Schmeling has illustrated the differences in approach between Crowley's/the Poverty Institute's/ITEP's statistics and mine, when it comes to arguing that one or the other is more useful or applicable to RI's current situation, it seems to me that he just swirls the water. He posits two identical states, both increasing the percentage of their populations earning over $200,00 per year at 10% annually, with one starting from a smaller proportion. He then states that the one's "lag is because, and only because, its starting point was lower." But the "only because" is the assumption under contention. I say again: when you're talking about a number of anything that doesn't self-multiply — households, in this case — it's easier to double 1% than to double 2%.

Ask yourself this (answers may differ): If I were to say that an economic boom is coming that would benefit all states equally, which of the following circumstances would you believe me to be describing?

  • The percentage of every state's population earning over $200,000 per year would increase at exactly the same rate.
  • An equal percentage of every state's population would advance into the $200,000 per year category.

Admittedly, the question is contrived; in reality you'd probably expect the boom to raise every state's average by the same percentage. In that case, according to the IRS data, Massachusetts's average AGI increased 40.31% from 1997 to 2005, while Rhode Island's increased only 34.94%.

But of the two options targeting the rich, I'd choose the latter, because (for the most part) rich people don't multiply; rather, others join their ranks. The economic boom doesn't cause the wealthy to bifurcate as might some chemical in a petri dish of amoebas; rather, it creates circumstances in which... umm... new amoebas can enter the petri dish.

Schmeling is correct that, "if RI's growth rate is larger then MA's, as it is in reality now, it must eventually catch up, even though in the early years MA appears to be pulling away." But that requires Rhode Island to add an ever-larger number of people to the group each year, to keep up its percentage. Moreover, the formulation implies that both will eventually reach 100%, which isn't a plausible percentage of the population for "The Rich" to reach.

Of course, it's very plausible that everybody who works will eventually earn at least the specific dollar amount of $200,000, because of inflation. To illustrate how this new consideration works into the discussion, I'll switch to U.S. Census data, because it breaks the population into narrower categories, although the relevant information is only available from 2002 to 2006.

According to InflationData.com, the inflation rate from 2002 through 2006 was 13.95%, which means that $200,000 in 2006 was equivalent to $175,515 in 2002. Assuming that households were spread evenly across the $150,000–$200,000 category, it's reasonable to suggest that, as a pure matter of inflation, the number of households over $200,000 in 2006 should have been the number of households in that category in 2002 plus one-half of the households in the lower category in that year. The following figure illustrates how this result compares with the actual change:

The red column above "inflation only" is the percentage of the households earning over $200,000 in 2006 if nobody did anything to advance their income beyond inflation and if everybody who entered the state during that period had incomes below that amount. Any citizens sufficiently surpassing inflation and any immigrants above the $200,000 mark would have increased the column, and as you can see, the actual results were lower than the purely inflationary results.

It's interesting to note — and indicative of this illustration's lack of practical utility — that Massachusetts actually fared worse by this measure. Schmeling might want to claim that note as evidence for his argument — that it is in keeping with RI's better growth rate in the highest-income category (the state came closer to matching inflation) — but I'd suggest that it ultimately supports just the opposite conclusion.

For one thing, using Schmeling's preferred measure — the rate of growth — even the pure inflation result favors Rhode Island. Rhode Island's wealthy group would have grown 70% to Massachusetts's 57%.

For another, consider the Phoenix Marketing data recently introduced into the comment discussion on Anchor Rising. In 2006, 5.64% of Massachusetts households were millionaires, in the sense that they had $1 million readily available in liquid assets. Rhode Island's percentage was 4.72. This difference brings to the fore the reality that Massachusetts's wealthy class outstrips Rhode Island's in ways beyond the reach of inflation. A state with a higher percentage of citizens over the $200,000 line has a smaller pool from which to draw improvement.

Which brings us back to dough.

Yes, obviously people can slip below the $200,000 line or withdraw themselves from the state altogether. The point is, however, that it's more relevant (in my view) to observe the additional percentage of the population that crosses the line than to calculate the rate at which the category is growing.


I expect Schmeling to point out, with respect to the Phoenix Marketing data, that Rhode Island improved its nationwide rank on the millionaires list more than Massachusetts did in 2007. I'd respond with a whoop-dee-doo that RI climbed from 20th place to 17th when both of its neighbors have consistently been top 5, and then I'd promise that this finding will be incorporated into the post with which I intend to move on from the esoteric distraction of how to measure categorical increases.

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The debate is missing one very, very huge point.

CT is an appendage of NYC. This one of the highest income cities in the world. More, Greenwich, CT is the hedge fund capital of the world, and the top 25 hedge fund managers in 2006 had a combined income higher than the combined income of the top 100 companies in the S&P 500.

Boston, while not NYC, is a world-class city with huge high-tech and bio-tech sectors. And, not coincidentally, both MA & CT have a very high ratio of elite colleges per capita, so they have highly educated work forces in place.

RI is simply not in that class. As such, to claim that RI is doing poorly because MA & CT are doing so much better is like saying someone 6'3" isn't tall because Shaq is so much taller.

And then there's the simple difference in size of population.

..."a state with a higher percentage of citizens over the $200,000 line has a smaller pool from which to draw improvement."

This completely ignores that the "smaller pools" in MA & CT are many times larger than the entire population of RI. So, as written, the statement quoted is meaningless. MA & CT have larger pools to draw from.

As for the differential in rates of growth (1.22 vs 1.91), we need to ask if this is significant viz a viz the differential in the relative sizes of the economies of each state. If the economy in MA is several times times the size of RI--which is a true statement--is a difference of 7/10 of 1% really significant? In short, no, it's not.

Also, the financial sector has been most effective in creating wealth in the current decade. Remember what I said about Greenwich, CT and hedge funds. And Boston also has a large financial sector. RI has nothing comparable. Given this, it's not at all surprising that MA/CT have done better in absolute and relative terms than RI.

My point is that a head-to-head comparison of RI to MA/CT in terms of wealth creation--as is being done here--is simply not legitimate. RI will lose, simply because its economy and its financial sector are dwarfed by what's happening in the other two states. The fact that RI is even competitive is a huge plus for RI.

The fact that RI moved from #20 to #17 is HUGE. Let me repeat: it's HUGE. Given the handicaps cited, that RI moved up 3 places is HUGE.

Also, one cannot choose the additional percentage crossing the line over the rate of growth simply because one does not support the desired conclusion. They are two different numbers, with two different implications.

The number of people crossing the line will be a function of the size of the respective economies; the rate of growth will be more impacted by where each state started from. MA/CT, with the larger economies, can be expected to push a larger percentatge of people across the line. RI, starting from a lower base, can be expected to grow faster.

So the relative sizes of the economies, and especially the relative sizes of the financial sectors is the "missing link" that Schmeling was looking for. RI simply cannot compete head-to-head.

It's not a mystery.

So, I'm sorry. What was your point?

Whatever it was, you've done a pretty good job of showing that RI is doing pretty well. In short, you've helped the Poverty Institute's case for it.

Posted by: John Huss at February 9, 2008 7:58 PM

Actually, Klaus (or John, if you prefer), although you're expanding the conversation in helpful ways, you're eliding the minute point of the debate.

Take, for example, your point about the types of businesses in CT and MA. I'm obviously not arguing that there aren't reasons that CT and MA are doing so much better. I'm arguing that RI is in trouble and ought to be looking into those reasons — constructing policies that will help to match them.

Regarding handicaps, your explanation of them is relevant to CT and MA, but not to the states that RI actually passed on the millionaires chart. With the exception of Arizona, RI wasn't jockeying with the "states" it passed; Florida, New York, and D.C. plummeted (at least six places). (Note, by the way, that your appendage of NYC was somehow not affected by whatever caused the drop of the state of which that city is actually a part.)

Thirdly, I wasn't relying on "the number of people crossing the line." I'm tracing the percentage of the population crossing the line.

Posted by: Justin Katz at February 9, 2008 8:19 PM

A few years back, RIEDC under McMahon (who, ironically, left RI to go run a private equity fund) tried to interest a number of hedgies in moving to the unused former Newport Naval Hospital campus, and turn it into hedge fund central. They complete bought into the Newport lifestyle argument, and the one about ease of Amtrak connections down to NYC, and Green's ease of use. They didn't care about the terrible public schools, because their kids wouldn't be going to them. What turned them off was, drum roll please, the tax system in RI, and the general political culture that represented (accurately, as it turned out) a heightened threat that one day they would become a target for closing budget deficits. This already happened in CT and CA; its not exactly news.

So, as in many other areas, the hedgies called it right on this one too (remember, it was the banks that have blown up the credit system, not the hedgies).

But go ahead and jack up the taxes on the affluent in RI to punitive levels, and support Liberace Alves' punitive head tax on RI's small businesses.

It will only hasten the collapse.

Posted by: John at February 9, 2008 10:21 PM

"The fact that RI moved from #20 to #17 is HUGE"

John-Klaus (or anyone who shares his view), setting aside for the moment that the deficit is a spending, not a revenue problem (fourth highest taxed state), specifically, how much money does this increase in the number of either millionares or earners over $200,000 bring to the state budget? Anything close to $500,000,000 per year?

Posted by: Monique at February 9, 2008 10:57 PM

While figuring out the percentage of millionaires in Rhode Island compared to the whole makes for a nice theoretical discussion, the fact is, there aren't nearly enough of them! Furthermore, treating them like they are people that you don't want here makes no sense if you want them to invest what funds they already have, to grow businesses here which employ people like us, and to donate to charities which help the poor. I'm not a millionaire by a long shot, but I know that most people don't become millionaires by making poor financial decisions, one of which would be to invest in place which has a "closed for business" sign prominently displayed at the state line.

While there may be a certain small percentage of "rich" (a very subjective term) "living in Rhode Island," I think it would be more interesting to figure out how many of those "rich" people who live or own property or businesses in Rhode Island, actually consider Rhode Island as their "primary" residence for the purpose of paying state income taxes -- and more importantly, how many of them would shift away assets from our state, in the event that we made ourselves even more uncompetitive than we already are (or conversely, how many would move assets into our state, if we were to become more competitive)?

To answer the gentleman who said:

Boston, while not NYC, is a world-class city with huge high-tech and bio-tech sectors. And, not coincidentally, both MA & CT have a very high ratio of elite colleges per capita, so they have highly educated work forces in place.

Instead of answering his question with the question "Why not Rhode Island?" -- I would say "Why Rhode Island?" I think we could have more world-class businesses here. However, if you operated a world-class business, what is the incentive to locate / relocate here? Narragansett Bay is nice, but that doesn't pay the bills. Bueller, Bueller, Bueller? We could have world-class universities, too (we're alleged to have one at Brown already). Furthermore, it's not like we're so far from the universities in Boston and NYC that people there "can't" come live and invest here; rather they are choosing more often than not, not to come here (although, there are always the "old money" types who are not bound by those economic considerations -- though they are very few and far between). The days of the horse and buggy are gone. People, when given a choice, usually choose what is best for them first, then worry about everyone else second. It's not greed; it's human nature.

The difference between "the wealthy" and the rest of us, is that they -- by virtue of their wealth -- have more choices available to them regarding how their wealth is invested. Despite what some on the left might believe, the rich don't put all their gold in a big money bin like Scrooge McDuck and swim around in it all day. They invest it -- even if they intend to give some of it away -- so that they can grow it! Wealth begets wealth -- and it doesn't happen by magic!

The way to help our state, first of all, is to realize that we are in a competition, both with other states, as well as with the rest of the world. Secondly, we have to then make a decision to compete in the race, and just not sit on our hands at the start line and complain that there's no way that we can run in the race because we're too small, or too dumb, or whatever. In the long run, the way to have a prosperous state isn't to penalize the successful and subsidize the slothful, it's to have a business climate that generates economic growth, which leads to higher and better employment for everybody.

PS Just as an aside, I know a very wealthy man who is a household name to most Rhode Islanders, who at present owns 4 homes. 2 of those homes are in Rhode Island. One is located elsewhere in New England. 1 is in Florida. He pays property taxes on all of them. However, where do you suppose his accountant considers his primary residence for the purpose of state income taxes? It sure as heck ain't Rhode Island!

Posted by: Will at February 10, 2008 1:58 AM


Let me start by saying that I have nothing but admiration for your willingness to dig through the data and think about it. Thanks for doing it and presenting it. Too much of our public policy debate is based on anecdotal evidence or what people think "has to be" the case. Also, it make me think, which was fun. I went back and forth between your charts and Pat's for a bit before I realized the two different questions that you were asking. It was kind of like that "Lady and the Vase" drawing.

Thanks also for your civility in the face of disagreement, which is all too rare on-line.

However, I will stick with my guns on the substance, for the following reasons:

1) you say [Schmeling] then states that the one's "lag is because, and only because, its starting point was lower." But the "only because" is the assumption under contention."

It sounds like you're saying I assumed that which was to be proven. On the contrary, I think that I demonstrated, clearly if not elegantly, that RI had a higher 1997-2005 growth rate, and that its failure to make the same absolute gain in the % of $200K+ earners, as well as its apparent loss relative to MA, are reasonably attributed entirely to its lower starting point.

2) It may be that "its easier to double 1% than to double 2%" in some context, but I don't see how it helps here. If you and I both have $100K, and you invest $1K while I invest $2k, it will take exactly the same rate of return, or "effort", for each of us to double our money in a given amount of time. For you to double your 1% faster, you will need more "effort". RI did manage to get a higher rate of return than RI did MA, which is why it came closer than MA to doubling it's percentage. (98.2% vs. 88.6%). If what you’re really saying is that it should be easier for RI to get a higher growth rate because of its low starting point, I'd like evidence for that. It seems to go against your more general point that growth rates in high incomes are determined by tax rates, and that RI is behind MA precisely because of its tax policies.

3) You say "...; in reality you'd probably expect the boom to raise every state's average by the same percentage."

This, I believe, was your point in your original argument. My RIFuture post was designed argue that this expectation, though intuitively appealing, is not correct.

Posted by: Thomas Schmeling at February 10, 2008 12:55 PM

1. My central point was that it makes more sense, in context of the larger discussion, to judge states' success (as measured by their percentage of wealthy citizens) to look at absolute increases of that percentage (as abstruse as that sounds): more of a "we've got 1% of citizens rich, let's get another 1% rich" than a "we grew our percentage of rich people 25%! From 1% of population to 1.25% of population!" If that's the discussion, then part of your argument did, it still seems to me, take the form of "we should judge our success by the percentage increase because the smaller absolute increase was caused by the percentage increase." It doesn't answer the question.

2. Your example is a fine example of why I think your selected measure is wrongheaded. The states (a) are not starting from an equal financial base, (b) are not "investing" their rich citizens, and (c) their "effort" is not thus measured. Rather, they have differing percentages of citizens who have crossed the $200K line, and RI lags in pushing citizens across it, as measured by percentage of the total population.

What I haven't seen you do is explain why that approach is not more applicable to the larger question than the rate of growth.

3) Actually, that was just an aside.

At any rate, my feeling is that this minute debate (though interesting and useful on a philosophical level) has largely become moot, given my later post.

Posted by: Justin Katz at February 10, 2008 1:09 PM


Let me try this. From 1997 to 2005, the number of $200K+ filers in RI increased 96.5%. In RI, the increase was 114.7%.

I'll note that the Rhode Island Observer, published today, reports that "in the current decade, by contrast, Rhode Island is performing at or above the national average and Massachusetts is in the dumps."

Posted by: Thomas Schmeling at February 11, 2008 5:10 PM

Well, if the Observer analysis is correct, then Rhode Island's in huge trouble, because according to tax returns filed in 2006 (the latest available), Rhode Island lost 337 returns (comparable to households) to MA, and for the past three years (which is all of the IRS data I have), the trend has been from positive to negative, and their salaries are increasingly high compared with those coming in.

But anyway, your "number of" point only restates what you've been saying, and I still disagree with it.

Posted by: Justin Katz at February 11, 2008 5:28 PM

Justin kindly ignored my typo. Of course, my statement should have read:

From 1997 to 2005, the number of $200K+ filers in MA increased 96.5%. In RI, the increase was 114.7%.

This is not merely a restatement of the "percentage increase in the percentage of high earners" It is actually the percentage increase in the number of high earners . The one is not a simple function of the other, but the latter does confirm that both the percentage, and the number of high-earners increased at a faster rate in RI than in MA from 1997 to 2005.

Both measures are also independent of the initial (1997) percentage of high earners.

However, I doubt that I'll succeed in getting youto accept any figure that does not suggest that RI has been doing worse than MA, so I give up.

Posted by: Thomas Schmeling at February 11, 2008 6:51 PM

Thanks for backing up my argument re: the percentage/actual number of murders in Venezuela vs. Colombia. The terrorist gov't of Colombia is way ahead of Venezuela in actual murders. Please inform Andrew and Joe Bernstein.

Posted by: OldTimeLefty at April 20, 2008 5:01 AM
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