Grading PolitiFact: President Obama and the Buffett fallacy (Updated)

Context matters -- We examine the claim in the full context, the comments made before and after it, the question that prompted it, and the point the person was trying to make.
--Principles of PolitiFact and the Truth-O-Meter

The issue:

(clipped from PolitiFact.com)

The fact checkers:

Louis Jacobson:  writer, researcher
Bill Adair:  editor


Analysis:

President Obama's words, in context (yellow highlights added to indicate the portion quoted by PolitiFact, "laughter" and "applause" notes deleted):

THE PRESIDENT: Now, this isn’t to punish success. What’s great about this country is our belief that anybody can make it. If you’re willing to put in the sweat, if you’re willing to roll up your sleeves, if you’re willing to work hard, you’ve got a good idea, you’re out there taking a risk -- God bless you. You can make millions, you can make billions of dollars in America. This is the land of opportunity. That’s great. All I’m saying is, if you’ve done well -- I’ve done well -- then you should do a little something to give something back. You should want to see the country that provided you with this opportunity to be successful, and be able to provide opportunity for the young people who are going to be coming up behind you.

And all I’m saying is that everything should be fair. You know, you learn the idea of fairness when you’re two, three years old. Right? You’re in the sandbox and you don’t want to let somebody play with your truck and your mom or your daddy go up and they say, “No, hon, that’s not fair, you’ve got to share.” Isn’t that what they say? Things have to be fair. So all I’m saying is that Warren Buffett’s secretary should not be paying a lower tax rate on her income than Warren Buffett.  That doesn’t make any sense. A construction worker who’s making 50 or 60 grand a year shouldn’t be paying higher tax rates than the guy who’s making $50 million a year.  And that’s how it’s working right now. Because they get all these loopholes and tax breaks that you don’t get.

So for me to say, let’s close those loopholes, let’s eliminate those tax breaks, and let’s make sure that everybody is paying their fair share -- there’s nothing wrong with that.

 After noting that Obama's statements contain quite a bit of unverifiable opinion, the fact checkers weigh in on the fact check:

In his Cincinnati speech, Obama did make a comment that was Truth-O-Meter-ready. By saying "and that’s how it’s working now," Obama is saying this pattern of taxation is a common practice.

Though the president's statement qualifies as slightly ambiguous, the PolitiFact judgment seems reasonable on its face:  Obama is saying that a $50,000 earner is routinely taxed at a higher rate than the $50 million earner.  Therefore the president requires more than just a few appropriate individual cases to justify his claim.

PolitiFact:

We found an IRS chart for tax year 2008 that shows a variety of tax information broken down into 18 ranges of adjusted gross income for the filer.

This chart lists three types of tax returns -- filers who have income for a child who earns more than $1,900 (meaning the child’s income is taxed at the parent’s rate); those who have income reported on Schedule D (primarily capital gains); and those without either of these types of income. For the purposes of our calculations, we are combining data for all three types of returns.

It's hard to see why PolitiFact went to all that trouble when the Congressional Budget Office--ordinarily a trusted source--has already done the work for them. 

PolitiFact crunched the IRS numbers, after a fashion, and didn't find much to vindicate Obama:

By these calculations, Obama would be incorrect in most cases.

I saw nothing in the calculations, inadequate though they might be, to indicate that Obama would ever be correct.  If any reader sees it differently I'd love to see the explanation.

Never fear, fans of liberal media bias.  There's more to come.

PolitiFact:

But that’s not the end of the story. These figures are for federal income taxes only. There are also a bunch of other federal taxes that could, and probably should, be included in the calculation. The burden for some some taxes, including corporate taxes, excise taxes and estate taxes, are hard to attribute to individual returns, so we’ll set those aside. But one federal tax is straightforward to throw into our calculations: payroll taxes.

Figuring the burden for corporate taxes, excise taxes and estate taxes may well provide a stiff test for researchers, but given the admitted relevance of those taxes why not make use of the previously-mentioned CBO report that estimates the effective tax rate with corporate and excise tax burden estimates figured in?

(Clipped from CBO report, click image for enlarged view)

Apparently PolitiFact's version of fact checking only involves consideration of the most regressive tax (by far) in the group, payroll taxes.  Ironically, payroll taxes are probably the least relevant tax in the group since the Social Security tax is peddled as retirement insurance--a premium paid for a fixed benefit package at retirement.  The argument for progressive insurance premiums based on the ability to pay lacks something in terms of moral authority.  Shall the rich also pay more per unit for milk, tea and gasoline?

PolitiFact:

We asked two researchers at the Urban Institute-Brookings Institute Tax Policy Center, Roberton Williams and Rachel Johnson, for their advice on how to factor in payroll taxes. They estimated that combining the workers’ share of the payroll tax with the employer’s share -- the usual practice among economists -- would mean an extra 15 percentage points for our hypothetical middle-class worker, and less than 2 additional percentage points for the high-income taxpayer.

Don't you just love the back-of-the-envelope methodology?

Let's take a figure calculated by journalists based on data that ignore a number of relevant taxes such as excise and corporate taxes, then call on the left-leaning Tax Policy Center to give us a modification based on (regressive) payroll taxes.  While we're at it, let's ignore the work done by the highly respected CBO touching the issue.

PolitiFact doesn't tell us what method (see Update below) the Tax Policy Center experts used to estimate an additional 15 percentage points for the middle-income worker.  Based on this chart from the Social Security Administration I'd hazard the guess that they assumed that the worker is self-employed.  Either that or they figured the employer's share of the payroll tax as a tax on the employee's income.

(Social Security Administration chart; click image for enlarged view)

For what it's worth, the CBO figured the effective tax rate for payroll taxes at 9.5 percent for both 2004 and 2005.  That figure seems very plausible if the CBO took into account both employees and self-employed workers, falling as it does between the 7.6 percent and 15.3 percent figures from the chart above.  The 9.5 percent figure matches well the expectation that most workers in the middle quintile are employees rather than self-employed.

It's kind of hard to take PolitiFact seriously on this fact check, but let's keep trying.

PolitiFact:

Adding these to the percentages we previously found for the income tax alone produces a new, "final" rate of 22 to 23 percent for the construction worker and 20 to 30 percent for the $50 million earner.

So it’s certainly possible that a given construction worker pays a higher effective tax rate than a given $50 million earner -- but it’s also not a guarantee. There is a lot of variation for taxpayers in both categories -- especially when you consider that we have been using average tax rates rather than median tax rates, which means that a small number of very high incomes can throw off the average.

Summary:  If you fudge the numbers enough in Obama's favor you can make it seem possible that he's possibly correct in some individual cases.

Just don't take the highly progressive effects of corporate taxation into account and you can believe that there's some basis in truth for Obama's claim.

Whoopee!  It's conclusion time:

Our ruling

Obama has made a sweeping statement that it’s common, even typical, for a $50,000-a-year construction worker to pay a higher tax rate than someone earning $50 million a year. The reality is that it’s hard to know for sure.

We found that a typical taxpayer with $50,000 in income pays 22 to 23 percent in income and payroll taxes, while the comparable rates for very, very wealthy taxpayers are in the 20 to 30 percent range. The data isn’t specific enough for us to be able to say if a majority of $50 million earners pay tax rates at the low or high end of that 20 to 30 percent range. We do think it’s safe to say that some of those very high earners pay a smaller share of their income in taxes than workers who earn $50,000, and some don’t. So, on balance, we rate the statement Half True.

The evidence supporting PolitiFact's view that "some high earners pay a smaller share of their income in taxes than workers who earn $50,000" comes from an extremely dubious process that ignored taxes that place a greater burden on the rich along with a very suspicious estimate of the effects of payroll taxes on middle-income earners.  The CBO's numbers seem far more reasonable on the face of it, and they do not support Obama's statement at all.

And one other thing.  PolitiFact takes context into account, right?  There's nothing in the story about the things the president claimed as the cause of the unfair application of the tax code ("all these loopholes and tax breaks").  The tax rate on capital gains is not a loophole.  It is an intentional aspect of the tax code designed to promote risk and investment.  Neither is it a "tax break" any more than the lower income person in the lowest tax bracket is receiving a "tax break" for not having his income taxed according to the rate in the next bracket up.

PolitiFact quotes the president's demagoguery but fails to call him on it.  Instead, we get the next best thing to partisan spin if it isn't 100% partisan spin.


The grades:

Louis Jacobson:  F
Bill Adair:  F

I'll assign "F" grades for relatively modest journalistic flaw given the importance I place on accuracy and objectivity where a story receives the label "fact check."   But this story is a stinker through and through, receiving the special tag "journalists reporting badly."  Any journalist not predisposed toward Obama's position ought to question a 15 percent markup for the effective tax rate based on payroll taxes.  It doesn't add up.

Afters:

I'm tempted to hypothesize that PolitiFact's continued difficulty with providing accurate fact checks on these tax issues has to do with the Democrats' apparent reliance on the class warfare strategy for the coming election.  Rather than based on sympathy with the Democratic Party itself, journalists may feel sympathy with the class warfare angle.  It jibes with the way many journalists view their role in society, I suspect.

After Afters:

Some readers may find it fascinating to compare my critique of this PolitiFact item with that of an enthusiastic Kossack (language warning).


Update (Oct. 3, 2011):

I should have credited PolitiFact with a partial explanation for its procedure of adding 15 percentage points to the effective tax on the $50,000 income worker.  Yes, one can consider the employer's share of the OASDI payroll deduction as part of the employee's income.  But one does not then calculate the percentage tax paid using $50,000 as the denominator as PolitiFact ends up doing by simply adding the employer's matching 6.2 percent to percentage tax paid by the employee.  It is explained in slightly more detail here.


Update II (Oct. 4, 2011)

Turned the "m" right side up to make "may well" instead of its predecessor, "way well," and eliminated a stray two-letter word in the same paragraph.  Hat tip to Jeff Dyberg for pointing out the errors.