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Puzzler: Economic numbers that people often get wrong

Write down your answers to the three questions below. Then click on the link for our explanation.

1. What percentage of the U.S. federal budget is spent on non-military aid to developing countries? Answer

QUESTION: What percentage of the U.S. federal budget is spent on non-military aid to developing countries?

ANSWER: This figure typically ranges between .5% and 1%. Most people over-estimate this number, and some politicians find a ready audience for the argument that it is much too high.

Of course, the U.S. economy and budget are huge, so this is still a lot of dollars.

One way to compare the generosity of different countries is to calculate government foreign aid spending as a percentage of each country’s GDP. On a list of 28 wealthy (OECD) countries in 2016, Sweden and Norway ranked one and two on this statistic, with development aid greater than 1% of each country’s national income. The U.S. ranked 20th out of 28, with a donation rate of .17% of our country’s very large GDP.

2. What percentage of American adults over the age of 25 hold a college degree? Answer

QUESTION: What percentage of Americans over the age of 25 hold a college degree?

ANSWER: About 35% in 2018. College-educated respondents often over-estimate this figure, because so many of the people they know have at least a bachelor’s degree. As recently as 2003, this same figure was 27%, much lower than many people would have guessed. College attendance – although not always college completion – has been rising in recent years because of the relative decline in wages earned by high school degree holders.

3. Assume that Joe and John are two neighbors with similar family situations. Joe earns $50,000 per year, and John earns $100,000 per year. Joe pays $5,000 per year in taxes. In your personal opinion about the nature of a fair tax system, what amount do you feel John should pay in taxes?

  1. Less than $5,000
  2. $5,000
  3. more than $5,000, but less than $10,000
  4. $10,000
  5. more than $10,000
Answer

QUESTION: What amount do you feel John should pay in taxes?

ANSWER: OK, we know this is an opinion question, so it is impossible to get it wrong.

It is interesting to note, however, that in repeated polls of college students conducted at SEBS, the overwhelming majority of them answer “d”. They believe that John should pay $10,000. This works out to be the exact same percentage of John’s income as $5,000 is of Joe’s income. This very popular answer implies a uniform income tax rate of 10%.

College age respondents, then, favor what economists would call a “proportional,” or “flat” income tax. Anybody who has filled out their own 1040 form, however, knows that the federal income tax is not flat but progressive: The higher your income, the higher the percentage of your income is due in taxes.

So, interpreted in light of national politics, a random set of young people invariably favor an income tax policy that is more conservative than what the federal government has actually been doing since early in the 20th century.

The federal income tax is not the entire story, of course. If you add in state and local taxes, many of which are regressive, and transfer payments like Medicare and Social Security, then the entire national fiscal system looks fairly flat as a percentage of income—except at the extremes.

And that, it would seem, is what most Americans believe to be fair. Which answer did you choose?


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