A boring post about things I don't know

Last week, I was reading Hilzoy's post about the distributional effects (which income classes gain/lose how much) of the income taxation proposals of Senators Obama and McCain, and I took special note of this sentence, “Note that while this graph shows taxes going up for people in the top quintile under Obama's plan, a more detailed breakdown (p. 45) shows that taxes only go up for the top 5% (incomes over $226,918/year.)” That's an interesting feature of Obama's tax plans, but that's not the main reason I bring it up. I highlight it up because I want to know what it means.

My first instinct in restating the quoted sentence so would be to say, “Five percent of Americans make more than $226,918 per year, and Obama's plan is to raise income taxes on those people alone.” In fact, I said that1 to a family member this weekend. And they responded incredulously, so I thought about it, and realized it had to be wrong. There are roughly 300,000,000 Americans and five percent of them would be 15,000,000 people, and it doesn't seem plausible to me that 15,000,000 people in the U.S. make more than $226,918/year. So then I was wondering what the 5% was a percentage of, such that one twentieth of that number could have incomes over $226,918/year. Which also led me to wonder how they're defining income. The latter question is easy, as the chart on p. 45 (pdf page 47) refers to what they're charting as "cash income percentile," and the Tax Policy Center tells me elsewhere that cash income means,
“Cash income includes wages and salaries, employee contribution to tax-deferred retirement savings plans, business income or loss, farm income or loss, Schedule E income, interest income, taxable dividends, realized net capital gains, social security benefits received, unemployment compensation, energy assistance, Temporary Assistance for Needy Families (TANF), worker’s compensation, veteran’s benefits, supplemental security income, child support, disability benefits, taxable IRA distributions, total pension income, alimony received, and other income including foreign earned income. Cash income also includes imputed corporate income tax liability and the employer’s share of payroll taxes. This puts the income measure on a pretax basis.”
At this point, I know that 5% of some number of entities has more than $226,918 of all that combined in 2008. But I still don't know what I'm taking 5% of, and the chart's annotation doesn't get me much further. It tells me that,
“The cash income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. Again, I know from elsewhere on their cite that “A tax unit is an individual, or a married couple who file a tax return jointly, along with all dependents of that individual or married couple.” So I think what the chart means is that tax units which contain five percent of the population (approx. 15 million people) have cash incomes over $226,918, which isn't quite the thing I thought couldn't be true (a tax unit can contain a large number of dependents, so there are presumably far fewer than 15 million individuals each making over $226,918/year), but isn't that far from that either. I've e-mailed the tax policy people to see if they can clarify for me.

Finally, it turns out that the second part of my attempted restatement,
and Obama's plan is to raise income taxes on those people alone is also false. They're the first group of people who will, on average, experience a tax increase under Senator Obama's plans, but in fact some percentage of people in every income quintile would have higher taxes under the Obama tax plan than they would under the Tax Policy Center's baseline assumptions of Bush tax cut expiration and no fix for the AMT.

1. Actually, I at first said “$246,000 and change.” But I know my memory is imperfect, so I checked later and gave them the accurate figure.