Actually this could be called Part Three of a Lil White Lies post on a Sublime Bloviations/PolitiFact Bias cross-post of two critiques, on the way PolitiFact makes use of “effective tax rates” in its rulings. The first part, however, had to do with one fact-check to another, so I made that a separate post. Both of these have to deal with those effective tax rates.
Author Bryan White claims that PolitiFact has shown a “persistent pattern of ignoring and/or minimizing data on effective federal tax rates, including a study by the otherwise esteemed Congressional Budget Office.” So, do they? Well, it depends.
Carried Away with Carried Interest. Let's first take a look at the payroll tax, where one half is paid by the employee and the other is paid by the employer, for herein lies the "rub." For effective tax rate purposes, the half paid by the employer is usually shown as part of the employee’s tax burden, because supposedly their income would be increased if they did not have this tax. I realize there’s currently a payroll tax holiday of 2 percent, but we know that’s going to have to end sooner or later. The total tax for Social Security and Medicare is 15.3 percent, and that is taxed on all income from the get-go. The carried interest rate is the capital gains rate of 15 percent on taxable income—that’s income after deductions. So it could be said that if you’re not an investor, you’re saddled with pay roll taxes at a slightly higher rate than the carried interest. But there’s more-- the carried interest person is “done” at this point—they owe no more. You still have to pay federal income taxes. That’s why Warren Buffett calls payroll taxes "heavy."
So with that in mind, when Buffett talked about his secretary and Sherrod Brown talked about sheet metal workers and teachers in Cleveland (although I have a few misgivings about that one, explained below), they were comparing capital gains/carried interest tax rates versus middle class straight compensation tax rates. For the middle class (in 2011) it’s 10 percent up to $8,500, 15 percent up to 34,500, then 25 percent (single--double that for married filing joint). When it gets to the top rate of 35 percent it’s not “middle class” anymore. But compare that 25 percent to the 15 percent flat rate for capital gains and carried interest, and then think about the payroll taxes already paid. It should be obvious the investors pay far less in income taxes.
So with that in mind, when Buffett talked about his secretary and Sherrod Brown talked about sheet metal workers and teachers in Cleveland (although I have a few misgivings about that one, explained below), they were comparing capital gains/carried interest tax rates versus middle class straight compensation tax rates. For the middle class (in 2011) it’s 10 percent up to $8,500, 15 percent up to 34,500, then 25 percent (single--double that for married filing joint). When it gets to the top rate of 35 percent it’s not “middle class” anymore. But compare that 25 percent to the 15 percent flat rate for capital gains and carried interest, and then think about the payroll taxes already paid. It should be obvious the investors pay far less in income taxes.
Where a statement used “hedge fund managers” or implied carried interest/capital gains (as Buffett did when he said “investors”) PolitiFact writers seemed to keep that in mind, awarding Buffett and Sherrod a “True.”
Historically Taxing. White’s beloved overall effective tax rate which includes corporate tax rates was used in comparing taxes paid historically, as in two rulings about rates in the 1950’s compared to now, from Obama and Debbie Wasserman-Schultz. It was also used (the CBO reports to which he refers) in a ruling on a statement by Timothy Geitner. He was ruled Half True because his statement was a combined one: he said “For people in the top 1% of income, ‘your effective tax burden is in the low 20's, the lowest it's been in decades’ (effective tax rates = True) ...’lower than somebody who might make substantially less money’ “ (effective tax rates = False, because he’s NOT talking about carried interest/capital gains).
Call Me Maybe. When the context of the statement isn’t clear—where it may be referring to investors as well as those compensated ( both types in one income group), PolitiFact generally equivocates to Half True. Obama’s statement about Mitt Romney's 14% tax rate being lower than most other Americans , or when he stated that a construction worker who made $50,000 shouldn’t pay a higher tax rate than someone making $50 million a year, were both rated Half True. However, in a similar comment made a few days before the one about the construction worker, Obama said “somebody who's making $50 million a year in the financial markets should be paying 15 percent on their taxes when a teacher making $50,000 a year is paying a higher rate” which is clearly about carried interest/capital gains, and probably would have garnered Obama a higher ruling. But Obama was not that specific in the statement PolitiFact decided to rate.
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| Click to enlarge: This graph from the Piketty/Saez tax rate report shows how rates have changed at the top over the years. |
And when Obama made a statement that some billionaires pay one percent, PolitiFact hit him with a Mostly False, because although it was possible, there was no real evidence.
Richest 400. Some statements rated by PolitiFact often refer to the “Top 400” (the 400 with the highest adjusted gross income) from a table published by the IRS, and in two cases compared the 400 to what was deemed an individual “average taxpayer.” MSNBC commentator Chris Hayes received a Half True because he compared the top 400 average to a single tax payer who had made the median income. PolitiFact’s reasoning for the Half True was that single tax payers make up only 46% of returns.
Lil White UNLies. But a ruling on Rhode Island Senator Sheldon Whitehouse, to me, was one that should make it to the annals of “Grading PolitiFact”—and not liberal-style. Whitehouse compared the average rate of the top 400 (the tax they paid on an average $344 million annual income) to a “hospital orderly” making $29,000 a year, based on a hypothetical tax return of single with the standard deduction and one exemption, and then adding in the payroll taxes. According to the PolitiFact ruling, the difference was .07% more paid by the hospital orderly, making this claim “Mostly True” when the payroll taxes are included. No effective tax rates, no consideration that, as Lou Jacobson did in the Chris Hayes ruling two months later, single taxpayers make up 46% of returns. I mean, if you’re an orderly with one dependent child, you’re probably going to get all your tax back plus more because of a change to "head of household" tax rates, and the earned income tax credit. Perhaps Jacobson was a bit better on understanding the complexity of the tax system than PolitiFact Rhode Island’s C. Eugene Emery, but somebody needs to tell Emery his methodology was very weak. Since the ruling was done over a year and half ago, it may be too late to change it, but it certainly doesn’t deserve a Mostly True.
Lil White UNLies. But a ruling on Rhode Island Senator Sheldon Whitehouse, to me, was one that should make it to the annals of “Grading PolitiFact”—and not liberal-style. Whitehouse compared the average rate of the top 400 (the tax they paid on an average $344 million annual income) to a “hospital orderly” making $29,000 a year, based on a hypothetical tax return of single with the standard deduction and one exemption, and then adding in the payroll taxes. According to the PolitiFact ruling, the difference was .07% more paid by the hospital orderly, making this claim “Mostly True” when the payroll taxes are included. No effective tax rates, no consideration that, as Lou Jacobson did in the Chris Hayes ruling two months later, single taxpayers make up 46% of returns. I mean, if you’re an orderly with one dependent child, you’re probably going to get all your tax back plus more because of a change to "head of household" tax rates, and the earned income tax credit. Perhaps Jacobson was a bit better on understanding the complexity of the tax system than PolitiFact Rhode Island’s C. Eugene Emery, but somebody needs to tell Emery his methodology was very weak. Since the ruling was done over a year and half ago, it may be too late to change it, but it certainly doesn’t deserve a Mostly True.
The ruling mentioned earlier on Sherrod Brown also might merit a “Grading PolitiFact” smack-down as well. While the “carried interest/capital gains” tax rate loophole helped insure the veracity of this claim, writer Tom Feran never mentioned “effective” rates per se, in fact, he concluded the ruling comparing marginal rates. And instead of trying to find an income for “hedge fund managers” per Brown’s statement he decided to only use the “Top 25” from a "rich list" report in a hedge fund magazine.
PolitiFact does use a lot of different sources in doing these rulings, so I’d have to agree to some extent with White’s complaint. The CBO Report itself was only used in one of these, although “The Tax Policy Center” of the Urban Institute and Brookings Institution base their effective rates on the same CBO percentages. In some cases only IRS reports were used. While the inconsistency doesn’t change the rulings a whole lot, there should be some standard, some baseline, PolitiFact writers should go by in assessing statements relating to tax policy, especially where effective rates come into play.
The table below shows nine of the ten rulings discussed above, listed by most recent first, to show the many different ways PolitiFact looks at tax rates. It shows that for the most part, context drives how the ruling is arrived at, and the source for tax rates used, although as I’ve noted, some PolitiFact writers miss the mark.
Statement
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PolitiFact Ruling
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Source/ Rate Used
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| Barack Obama (Aug. 9, 2012):
"Mitt Romney paid only 14%, probably less than you."
| Half True: "There are two main ways to make this calculation, and they lead to opposite conclusions." | Urban Institute and Brookings Institution Tax Policy Center: Effective Federal Income Tax Rate + Payroll. Effective Rates also shown with "imputed corporate income tax liability" but exclude excise. |
| Barack Obama (Sept. 27, 2011): " A construction worker who's making $50 or $60 grand a year shouldn't be paying higher tax rates than the guy making $50 million a year. And that's how it's working right now." | Half True: "The reality is it's hard to know for sure." | IRS: "Tax Classified by Type of Tax Computation and by Size of Adjusted Gross Income" 2008. Effective Federal Income Tax Rate + Payroll Taxes (very roughly estimated) |
| Debbie Wasserman-Schultz (Sept. 13, 2011): "In terms of the wealthiest Americans, we're at the lowest tax rate since the 1950's." | Mostly True: "Since 1960 the top marginal income tax rates -- the most common way to measure Wasserman Schultz's statement -- were lower only between 1988 and 1992 than they are today." | Tax Foundation, "Federal Individual Income Tax Rates History, Income Years 1913-2011. Ruling mentions "effective tax rate at its lowest level" as well but not clear what it consists of; Tax Foundation link does not work. |
| Sherrod Brown (Aug. 22, 2011): "Wall Street hedge fund managers pay a lower rate than a sheet metal worker in Parma or a teacher in Cleveland." | True: "That 25% is higher than the capital gains rate of 15% that the carried interest tax loophole allows hedge fund managers to pay on their income." | IRS 2011 Tax Table and 2010 Tax Rate Schedule. Used incomes of top 25 hedge fund managers even though "top" not used by Brown. Marginal tax rates ONLY, plus cross reference to similar earlier Obama ruling. |
| Warren Buffett (Aug. 18, 2011): "The mega-rich pay about 15% in taxes, while the middle class fall into the 15 to 25% brackets, and then are hit with heavy payroll taxes to boot." | True: "...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." | Urban Institute and Brookings Institution Tax Policy Center which in turn sources its data to CBO. Also the Tax Foundation and IRS. Effective Federal Income Tax Rate + Payroll. |
| Timothy Geitner (July 12, 2011): For people in the top 1% of income, "your effective tax burden is in the low 20's, the lowest it's been in decades...lower than somebody who might make substantially less money." | Half True: "Geithner was largely correct when he said the top 1% pay rates in the low 20s...But he's wrong that the wealthiest enjoy effective rates 'lower than somebody who might make substantially less money.' " | CBO, "Historical Federal Tax Rates for All Households" April 11, 2011, and IRS. Effective rate includes corporate income taxes and excise taxes. |
| Barack Obama (June 29, 2011): "If you're a... wealthy CEO or a...hedge fund manager in America right now, your taxes are... lower right now than they've been since the 1950's." | Mostly True: "...effective tax rates for high income earners were either at their lowest since 1960 or very close to the lowest." | Thomas Piketty and Emanuel Saez "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective" (Journal of Economic Perspectives, Vol. 21, #1, 2007) "Individual, corporate, estate and gift." |
| Chris Hayes (April 19, 2011): "The average American pays about 22% of their income to federal taxes. The richest 400 Americans... pay about 16% of their income to federal taxes." | Half True: "But the calculation was only based on one type of filer, so we do think it's important to add context." | IRS, "Table 1.1: Selected Income and Tax Items" plus IRS report on 400 tax returns with highest Adjusted Gross Income. Based only on single worker at median wage plus payroll tax from article by David Cay Johnston |
| Sheldon Whitehouse (Feb. 25, 2011): The richest 400 taxpayers are taxed at a rate lower than a $29,000 worker." (he was quoted as saying "someone making $344 million"--which was the average AGI for the top 400 for 2007) | Mostly True: "...when you include Social Security and Medicare taxes, the effective tax rate for the 400 wealthiest Americans would have been 16.72% in 2007; the tax rate for a worker earning $29,000 a year would have been 16.79%." | IRS, "SOI Tax Stats - Individual Statistical Tables by Tax Rate and Income Percentile" plus IRS report on 400 tax returns with highest Adjusted Gross Income. Also CPBB report on 400 richest. Based only on single worker at $29,000 income with standard deduction and personal exemption, then adding payroll tax. |
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