Monday, August 22, 2011

Grading PolitiFact: Warren Buffett and taxes on the "super-rich" (Updated)

TRUE – The statement is accurate and there’s nothing significant missing.
--Principles of PolitiFact and the Truth-O-Meter

The issue:

(clipped from

The fact checkers:

Angie Drobnic Holan:  writer, researcher
Martha Hamilton:  editor


A tale of devilish deception, spun by left-leaning non-partisan Pulitzer Prize-winning PolitiFact:
It's not often you see someone stand up and say, "Tax me more!"

Yet that's just what famed investor Warren Buffett has done in an op-ed in the New York Times headlined, "Stop Coddling the Super-Rich." Buffett says that very wealthy people like himself pay lower tax rates than the middle class, thanks to special tax categories for investment income.
Let's pause to note that "special tax categories for investment income" are not special tax categories for very wealthy people.  Anyone can receive investment income.  An unemployed person can receive investment income.  It just happens wealthier persons are more likely than their peers to draw a high percentage of income from investments.  For that reason, we are not talking about a different statutory tax rate for rich people in this instance.  We are talking about an effective tax rate.  That is, the rate that a given group of persons pays in taxes, usually figured for evaluation of a tax system as the tax percentage of income.  The Congressional Budget Office routinely calculates effective federal tax rates.  Here's how the CBO briefly explains it:
This Congressional Budget Office (CBO) study examines effective federal tax rates—tax liabilities measured as a percentage of income—over the 1979-1997 period for all households and for quintiles, or fifths, of the income distribution.
For purposes of illustration, suppose we have a worker who earned $15,000 over the course of a year.  After deductions, the worker has $1,000 of taxable income, and that falls for purposes of our illustration into a 10 percent tax bracket.  The worker would owe $100 in taxes, and that tax payment would  represent an effective tax rate of  0.67 percent (100/15,000).   Alternatively, one might use adjusted gross income as the denominator in the equation.  In that event the effective tax rate in our example would equal the marginal rate (10 percent).

With that bit of background out of the way, let us continue to follow PolitiFact's twisted tale:
"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks," he writes.

As an example, Buffett said he paid an effective tax rate of 17.4 percent, while people who worked in his office made much less but paid higher effective tax rates of between 33 percent and 41 percent, averaging 36 percent.

"If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot," Buffett wrote. "To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."
In the context of the above explanation of effective tax rates, it should be instantly obvious that Buffett is talking about effective (federal) income tax rates on adjusted gross income.  In Buffett's version of events, the progressive system of tax credits and deductions does not exist.  Neither counts against the type of effective tax rate he measures with his informal workplace survey.  Misleading?  Yeah.

(W)e decided to fact-check Buffett's statement that "the mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. ... (The middle class) fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."
The PolitiFact team selects a very narrow understanding of Buffett's statement.  Buffett sends his readers the message that the "mega-rich" pay a lower effective tax rate than does the middle class.  Buffett accomplishes that aim by ignoring CBO data showing that the mega-rich, in fact, pay a considerably higher effective federal tax rate with corporate taxes figured in.

CBO (bold emphasis added):
The overall federal tax system is progressive—that is, effective tax rates generally rise with income. Households in the bottom fifth of the income distribution paid 4.3 percent of their income in federal taxes, while the middle quintile paid 14.2 percent, and the highest quintile paid 25.8 percent. Average rates continued to rise within the top quintile, with the top percentile facing an effective rate of 31.2 percent.
Claiming that the middle class pays a lower effective tax rate than the "mega-rich" in the terms Buffett and PolitiFact use leaves out approximately half the story.

Writer Angie Drobnic Holan next spends some time explaining how income tax brackets apply in practice, albeit with a noticeable slant toward Buffett's method of calculating effective tax rates on adjusted gross income.  Drobnic Holan states, for example, "the income between $0 and $17,000 is taxed at 10 percent" when she's actually saying the taxable income between $0 and $17,000 is taxed at a 10 percent marginal rate

We get to the meat of the issue in the next section on investment income.

The tax rates on investments tend to be lower than taxes on regular income. If you make money buying and selling stocks or receiving dividends from stock ownership, those earnings are generally taxed at 15 percent, the rate for long-term capital gains and qualified dividends.

Defenders say the lower tax rate helps the economy because it rewards investors for risk-taking and entrepreneurship. They also argue that taxing dividends amounts to double taxation because corporations pay taxes on their income before investors are paid dividends. We won't settle the argument here, but there's no doubt that investors get lower tax rates on their income than workers.
Drobnic Holan's final sentence in the second paragraph is startling.

Think about it.  If it is true that the tax system creates double taxation on investment income then it places in doubt the proposition that investors get lower tax rates on their income than workers.  And, as a matter of fact, the CBO has published data making the point obvious.  In effect, Drobnic Holan writes Buffett a free pass on the very significant missing context we witnessed from readily available CBO reports.

The CBO's middle quintile paid 14.2 percent.  Buffett's middle-class sample supposedly paid an "average of 36 percent."  To the uneducated layman that disparity might appear suspicious.  To PolitiFact it represents just another Buffett half-truth fit to be ignored.

Getting back to Buffett's op-ed, his claims rest on how these taxes interact with each other. The fact we're checking here is that "the mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes," while middle class taxpayers "fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."

He's right that a billionaire whose income is mostly from investments is probably taxed at a lower rate than someone who has an ordinary job. Very little of this taxpayer's income is wage income, so payroll taxes don't take much of a bite. It seems likely that much of this hypothetical person's income would be taxed around the 15 percent rate. And, in fact, as Buffett says, statistics from the Internal Revenue Service show that the 400 wealthiest taxpayers pay tax rates of less than 20 percent.
The wealthiest 400 taxpayers do pay a slightly lower effective tax rate than others who occupy the highest quintile of earners, and by ignoring the issue of double taxation along with other complexities of the tax system PolitiFact can read Buffett's statement as perfectly true.  But the "mega-rich" pay a much higher effective federal tax rate than those in the middle quintile.  Buffett's claims leave the opposite impression.  PolitiFact leaves that false impression intact.

On the other side of the equation, people who work for a living, especially those who make higher than average salaries, get taxed at higher rates. It gets a little complicated, given how the tax brackets work, but basically, people who make between $100,000 and $200,000 are paying around 20 percent in income taxes, and it goes up from there, according to an analysis from the nonpartisan Tax Policy Center.
PolitiFact pulls a fast one with the above paragraph, which follows on the heels of the one quoted above  concluding that much of higher earners' income is taxed at a 15 percent rate.  Drobnic Holan's story encourages the reader to compare the 20 percent figure above with the 15 percent figure in her preceding paragraph.  But the table she links at the Tax Policy Center actually follows the pattern we saw in the CBO's report on effective tax rates:

The top row shows earnings at the modest end of the scale.  The bottom row shows the highest earners.  Note that the federal tax rates (second column) simply increase for the higher wage groups.  The Tax Policy Center chart has the highest earners paying a 29.1 percent rate ("Average Federal Tax Rate"), not something in the neighborhood of 15 percent.  Drobnic Holan buries the contrast in the brief phrase "it goes up from there."

The problem stems from Buffett's ambiguity.  Buffett writes of the "mega-rich" but does not define the group except to say that they make the bulk of their income from investments.  Drobnic Holan steps in to cover for Buffett with examples using the top 400 earners, with those examples apparently based on income tax rates rather than effective overall federal taxation, and quite possibly excluding consideration of income taxed at 0 percent.

The unsuspecting reader gets only part of the story from Buffett and Drobnic Holan.

Economists Thomas Piketty and Emmanuel Saez help underscore the importance of the full picture:
(I)nternational comparisons confirm that is it (sic) critical to take into account other taxes than the individual income tax to assess properly the extent of overall tax progressivity, both for time trends and for cross-country comparisons.
"How Progressive is the U.S. Federal Tax System? A Historical and International Perspective"
If for time trends and cross-country comparisons then also for the degree of progressivity itself.

PolitiFact's series of concluding statements form a thicket of misinformation and misdirection.
Buffett slightly glosses over the fact that if you're in the 25 percent tax bracket, your overall tax rate is less than 25 percent. And, the more money you make, the more income taxes you pay, while payroll taxes seem less and less significant as a percentage of income.
Buffett entirely glosses over the marginal implementation of the federal tax system, but far worse than that he uses a concept of the federal tax rate that gives his readers a distorted picture.
We're dubious someone would pay as high as a 41 percent tax rate, as Buffett claims someone in his office now pays. (The top income tax rate is 35 percent, but payroll taxes as a share of income decline as income rises, which makes it difficult to get above 37.9 percent, according to the people we ran this by at the Tax Policy Center.) We contacted Buffett's offices as Berkshire Hathaway about this point but didn't hear back.
PolitiFact simply excuses Buffett for the apparent inaccuracy by focusing attention on a different aspect of his claim.  And it's even tougher to get to Buffett's 41 percent figure if one counts non-taxable income (the portion of income taxed at 0 percent) as part of the denominator while figuring the effective tax rate.
One final note: People who don't pay any income tax at all tend to have limited incomes, or they qualify for enough deductions -- think of child tax credits and mortgage interest -- that they have no income. When Buffett talks about people in the middle class who pay more taxes than he does, he's thinking of people who make much higher than average salaries.
Angie Drobnic Holan, Telepath.

Seriously, how does she know what Buffett is thinking?  The story even treats his middle class examples as coming from the middle quintile.  That's average salary territory, as are the 15 and 25 percent marginal income tax rates Buffett mentioned.  And don't forget the CBO had the middle quintile paying a 14.2 percent effective federal tax rate in 2005.  That includes payroll taxes.

click image to enlarge (source:  CBO)

Who pulls the wool over our eyes?  Warren Buffett.  And PolitiFact helps.

More.  Wool.  Pull.  Eyes:
(W)hen it comes to Buffett's statement, there are two categories: the rich and the really rich. And the evidence tends to point to the conclusion that the really rich pay less in taxes as a percentage of income then their merely well-to-do counterparts -- if their income comes primarily from investments. Overall, we rate Buffett's statement True.
Buffett explicitly referenced the middle class for purposes of his comparisons.  I won't try to imagine why Drobnic Holan and PolitiFact engage in this creative spin.

Buffett's statement is accurate for one method of figuring effective tax rates, coincidentally the method that supports the thesis of his op-ed.  Buffett left out a considerable amount of relevant information the omission of which is supposed to lead to "Half True" ratings on the "Truth-O-Meter" if not worse.
HALF TRUE – The statement is partially accurate but leaves out important details or takes things out of context.

BARELY TRUE – The statement contains an element of truth but ignores critical facts that would give a different impression.
Principles of PolitiFact and the Truth-O-Meter
Instead, PolitiFact attaches the rating associated with "The statement is accurate and there’s nothing significant missing."

The grades:

Angie Drobnic Holan:  F
Martha Hamilton:  F

The CBO's standard method of calculating effective tax rates for overall federal taxes and income taxes in particular was missing along with the associated data that put Buffett's thesis in doubt.  The omission is significant enough that the label "journalists reporting badly" applies.


Ever since a recent PolitiFact story placed great emphasis on the ideological bias of a Libertarian think tank and how it discredited information from that source, PolitiFact's own use of such expert sources draws greater interest.  PolitiFact's source list ran top-heavy with citations of the center-left and certainly ideologically engaged Tax Policy Center.

The lone exception was this page from the conservative Tax Foundation.

Can you say "token conservative"?

Sure.  I knew you could.  Now review Tim Groseclose's method of evaluating political bias in the media.


An Associated Press fact check also contradicts PolitiFact's (per)version of the truth:
This year, households making more than $1 million will pay an average of 29.1 percent of their income in federal taxes, including income taxes, payroll taxes and other taxes, according to the Tax Policy Center, a Washington think tank.

Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.
An insignificant omission in PolitiFact's eyes? 

Hat tip to Hot Air.

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