Wednesday, September 07, 2011

Basic math for journalists

When I first heard about the proposal to reduce the business tax rate “by 10 percent” when this was intended to report a business tax change from 35 percent to 25 percent, I started writing letters to the offending journalists at some of the largest news organizations. Apparently I was not understood, because my correction was ignored by all.

You’re not thinking clearly if you think that this change is a “10% reduction” in business taxes.

For example, assume that $100 is taxable, and the rate is changing from 35% to 25%...


35% tax on $100 = $35.00

25% tax on $100 = $25.00

$10 tax saved = 29% of the $35 original tax

Thus, the total tax in dollars is fully 29% less than it was originally; therefore business in this example will not be saving just 10% but will actually be saving nearly 3-times as much, a very significant difference!

This is the math that should also be applied to such things as sales tax increases. These are often presented as a “half-percent increase” going from 8.0% to 8.5% but going from 8¢ per dollar to 8.5¢ per dollar paid in taxes is actually more than a 6% increase in taxes paid, NOT 0.5% as implied.


I have nothing against paying taxes, since I believe in paying for the goods and services needed for a functional society, but I do think we should understand the math, and should understand the magnitude of changes that are to be made. Would the average person agree to a ~30% tax cut for business as readily as they would agree to a 10% cut? Shouldn't we all clearly understand exactly what is being proposed?

2 Comments:

Blogger Desi Babu said...

Well written Kathleen!

I have always wondered how well Walter Cronkite did in Math. I am pretty sure that the rest of the crowd would have followed his example, if he had his fractions right.

But then, it may have something to do with the fact that nowadays, if you don't do well in math, journalism as a career option, is wide open.

Peace!

1:38 AM  
Blogger Kathleen said...

Thank you, Desi Babu!

[I've just modified the second image, to (hopefully) make the math clearer, and more accurate as well, because "difference" would not ever have been a negative number, even in the event of a decline. Coffee helps.]

9:00 AM  

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