Grading PolitiFact: Barbara Boxer and the freeloading top 400

To assess the truth for a numbers claim, the biggest factor is the underlying message.
--PolitiFact editor Bill Adair

The issue:

(clipped from PolitiFact.com)

The fact checkers:

Louis Jacobson:  writer, researcher
Martha Hamilton:  editor

Analysis:

PolitiFact's founding editor, Bill Adair, must fairly glow with pride when one of his PolitiFact teams cuts through the malarkey to identify the underlying point for a numbers claim.  The team of Louis Jacobson and Martha Hamilton pegged Sen. Boxer's underlying point in their opening paragraph:

During a Sept. 20, 2011, interview with Al Sharpton on MSNBC, Sen. Barbara Boxer, D-Calif., sought to highlight how America’s richest taxpayers have benefited economically in recent years.

PolitiFact provides all the context we're going to get without a subscription to Congressional Quarterly:

"The top 400 earners in this country are worth more … than half of the American people," Boxer said. "And since 1995, the top 400 wealthiest families have seen their incomes go up 400 percent and their tax rates go down 40 percent."

We checked the first part -- that the top 400 tax payers saw their incomes grow by 400 percent -- in March 2010, giving it a rating of True. But the second half of her statement was new to us, so we decided to look into it.

Apparently somebody watches MSNBC.  I'd like to know the full story behind the choice to grade this statement from Boxer.

PolitiFact:

When Boxer made her comments, the question of how much the wealthy should pay in taxes was at the top of the national agenda. In remarks on Sept. 19, 2011 about his plan for reducing the federal debt, President Barack Obama said that "middle-class families shouldn’t pay higher taxes than millionaires and billionaires. That’s pretty straightforward. It’s hard to argue against that. Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett." (Buffett is the legendary investor who for years has placed high on the list of richest Americans.)

The premise of Obama's statement is very probably false, though PolitiFact apparently can't be bothered to question it here.  The rich pay more in taxes.  They pay the same or higher tax rates, with the caveat that some types of income are taxed at a lower rate and some of the rich make a high percentage of their income from capital gains and investments.  But a middle-class taxpayer pays the same rate on those types of investments.  And in terms of the effective overall federal tax rate the rich again pay more than those in the middle class.

But at least PolitiFact continues to sniff around Boxer's underlying point.

PolitiFact:

As we explored elsewhere, Obama is correct that it’s possible for a secretary to pay a higher tax rate than a very wealthy person, but it’s also not typical.

PolitiFact's analysis failed to take effective federal tax rates into account despite the availability of a CBO report making clear the higher rates paid by higher earners.  The story tabled the concept of double taxation on income derived from corporate profits, which the federal government already taxes separately.  It may yet be possible for a secretary to pay a higher effective tax rate if the secretary spends all disposable income on gasoline and cigarettes--both heavily taxed by the federal government--but clearly that wasn't Obama's point.

PolitiFact:

In general, wealthier taxpayers do in fact pay a higher percentage in taxes than less-affluent people. The main exceptions are people in Buffett’s category -- the richest of the rich, whose income comes mainly from capital gains and dividends, which are taxed at 15 percent rather than the maximum of 35 percent for wages and salaries, and hedge fund managers, who benefit from a tax code provision that also taxes their earnings at 15 percent.

Note the continued failure through this point to examine the picture in terms of effective tax rates.  PolitiFact allows that most high income earners pay a higher tax rate while at the same time alleging a certain class of exceptions.  But PolitiFact provides flawed evidence in favor of the existence of those exceptions and grants itself, President Obama and Warren Buffett an exception to its "burden of proof" criterion.

PolitiFact:

In her comment, Boxer explicitly focused on Buffett’s peers.

Her data comes from a periodic Internal Revenue Service report that looks at the income and tax data from the 400 tax returns with the highest adjusted gross income. (In case you’re wondering, these 400 titans aren’t named, and their data is aggregated.) Technically, these aren’t "families" necessarily, but for a comment made during a television interview, we think it’s close enough.

The truth-finding experts at PolitiFact appear to misunderstand the data in the IRS report.  The top 400 earners are only "Buffett's peers" if Buffett himself appears on the list, and even then only in a sense perhaps too loose to float Boxer's point:

Over the 17 tax years a total of 6,800 returns were identified for the table. There were 3,672 different taxpayers representing the top 400 returns of each year. Of these taxpayers, a little more than 27 percent appear more than once and slightly more than 15 percent appear more than twice (see columns 2 and 3). In any given year, on average, about 39 percent of the returns were filed by taxpayers that are not in any of the other 16 years (see columns 4 and 5). In each year, 4 (or 1.0 percent) of the returns are for taxpayers who can be found in all 17 years. Thus, the data shown in the table mostly represent a changing group of taxpayers over time, rather than a fixed group of taxpayers.

IRS.gov

At least four filers, and probably no more than that, occur in the top 400 for the first year of data collected as well as for the the most recent year.  To the extent that Boxer's statement implies a particular group of people receiving the benefit of a lower tax rate, that impression is misleading.  PolitiFact takes no notice.

PolitiFact:

We’ll take Boxer’s two claims in order. The data we’re using, which goes back to 1992, is adjusted for inflation.

"Since 1995, the top 400 wealthiest families have seen their incomes go up 400 percent."

In 1995, the aggregate adjusted gross income for all 400 tax returns worked out to $17.4 billion, or an average of $43.6 million per return.

By 2008 -- the most recent year available -- the aggregate income for the top 400 soared to nearly $66 billion, or more than $164 million in adjusted gross income per return.

It actually took me a bit of time to figure out what PolitiFact was doing with the above.  The PolitiFact team uses the column from the report giving all figures in 1990 dollars.  The method succeeds in adjusting proportionally for inflation, but offers a distorted picture of what the top 400 were making in 2008.  Aggregate income for the top 400 exceeded $108 billion in 2008 rather than the $66 billion figure from the story.

PolitiFact:

That amounts to a 276 percent increase. If Boxer had been using data one year older, she would have been correct: Using 2007 data, the rise was almost exactly 400 percent. This illustrates how sensitive this measurement is to economic conditions.

Credit to PolitiFact for doing the math correctly.  Boxer's figure ends up inflating the actual figure by nearly 45 percent.  PolitiFact probably stresses too little the sensitivity of the measurement.  Boxer, after all, is trying to make the case that the richest taxpayers are getting an increasingly good deal in recent years.  Certainly the trend for income is up, but it's a rocky trend.

(IRS.gov, click image for enlarged view)

Here's what it looks like graphically:

The first peak comes from tax year 2000 at the tail end of the Clinton economic expansion.  The second peak occurs in tax year 2007, at the end of the Bush economic expansion.  Boxer could have chosen to compare 1995 with the tax year 2000 and ended up with an increase of over 200 percent.  This helps illustrate the degree to which Boxer is cherry picking her data.  Additionally, one might detect a correlation between increases in income for the highest earners and good economic times.

None of this particularly assists Boxer's underlying point, needless to say.

PolitiFact:

"Since 1995 the top 400 wealthiest families have seen … their tax rates go down 40 percent."

From the same IRS document, we can see that the average tax rate for the top 400 returns was 29.93 percent in 1995 and 18.11 percent in 2008. That’s a decline of 39 percent -- for our purposes, close enough to Boxer’s claim to be accurate.

"Close enough" again involves ignoring the effective federal tax rate in favor of the average rate of income tax paid on adjusted gross income.  And inside the numbers we can see that between 1995 and 2000 the decrease in the average rate was 25.5 percent.  From 2000 to 2008 the decrease in the average rate was 19 percent.

Does that support Boxer's underlying point?  If not, perhaps PolitiFact should keep it quiet.

Note again that the this is not primarily a statutory change in tax rates.  Clinton did decrease the capital gains tax and George W. Bush did institute a broad tax decrease that affected the tax rates of the top 400 earners.  But the average tax measurement varies primarily because the top earners increasingly receive a greater percentage of income from capital gains.  So, contrary to what Obama, Boxer and PolitiFact assert, the question isn't really what percentage of their earnings the wealthy ought to pay, but rather whether it is a good idea economically to tax capital gains at a rate roughly equal to the second lowest marginal rate on salary income.

Admittedly, putting it that way takes the fun demagoguery mostly out of the equation.

We near PolitiFact's conclusion:

On the data, Boxer is right for one claim and wrong for the other, though on the one for which she’s incorrect, she would have been right using data from one year earlier.

More broadly, even the smaller, 276 percent increase supports her underlying point -- that for the richest of the rich, incomes have grown by leaps and bounds while average tax rates have declined for the same group by 40 percent.

More precisely, Boxer's numbers are correct for one claim but not the other, and neither set of numbers supports the underlying point that "America’s richest taxpayers have benefited economically in recent years" from tax policy except under a fairly loose concept of "benefit"--earning a higher percentage of their overall income from capital gains and investments.  That seems like a dubious measure of benefit.  The statutory rates haven't changed all that much.

As we’ve noted, extrapolating tax-burden patterns from the super-rich (like these 400 tax-paying units) to the merely very rich, the rich or the plain old affluent should be done with care. As the Congressional Budget Office has determined, the tax system is generally progressive, despite the lower tax rates for Buffett and his peers. The poorest one-fifth has an effective tax rate of 4.3 percent, the next fifth has a rate of 10.2 percent, the middle fifth has a rate of 14.2 percent, the second-highest has a rate of 17.6 percent, and the top fifth has a rate of 25.8 percent. And the rates keep going up the higher you climb. The top 10 percent of earners had an effective tax rate of 27.5 percent, the top 5 percent had a rate of 29 percent, and the top 1 percent had a rate of 31.2 percent.

In other words, the top 400 have a distinctly different tax pattern than even the richest 1 percent of American taxpayers, a much larger group that includes about 1.1 million households with an average pre-tax income of $1.7 million.

Ladies and gentlemen, we have a howler.

The PolitiFact team distorts or misunderstands the import of the CBO study it finally got around to citing.  The CBO report refers to the effective tax rate, which includes the estimated impact of corporate taxation.  Apply the impact of corporate taxation to the richest 400 earners, which the IRS report doesn't touch, and it will probably boost the effective tax rate up very close to the rate paid by the rest of the top 1 percent because corporate taxes have a greater impact on investment and capital gains income.  It's the old double taxation issue.

Compare PolitiFact's attitude on this fact check to the one exhibited in a fact check of Michele Bachmann from not too long ago:

Bachmann would have been right if she’d said, "the top 1 percent of income earners pay about 40 percent of all income taxes into the federal government." But she didn’t say that -- and even if she had, her decision to focus on income taxes, rather than looking at the whole federal tax picture, would have presented the numbers in such a way that wealthier Americans would look more heavily taxed than they are.

Likewise, Boxer and Obama find it more favorable to talk about income tax "rates" without mentioning that they are averages and while ignoring data on effective tax rates.  PolitiFact did the same thing before finally taking notice of the CBO report on effective tax rates--and then reporting on it so inaccurately that it might as well have been ignored.


The grades:

Louis Jacobson:  F
Martha Hamilton:  F


Why does the PolitiFact team give Boxer a pass on her stinker of an underlying point?  Probably because they believed that point with relative confidence prior to doing the fact check.  That's how ideological bias works when it manifests unintentionally.  The troublesome facts receive a faulty interpretation that helps them jibe with the accepted view.