ProPublica's Bombshell Tax Report That Wasn't

In a report hyped as a "bombshell," investigative journalism outlet ProPublica managed to get access to and publish the private tax returns of thousands of the nation's wealthiest individuals. They claim the data "demolishes" the "myth" that the wealthiest Americans pay the most in taxes, and the authors employ tortured reasoning to attempt to come up with a new, nonsensical "true tax rate" for the tax data that no genuine tax policy expert would take seriously.

The idea that the tax code is already fairly progressive is not a myth at all, though—wealthier Americans pay a much higher tax rate on their income than lower-income taxpayers do.

Despite ProPublica's best efforts to make the information enclosed within seem damning, the data tell us little we didn't already know. For the 2018 tax year, the last year for which we have data, the top 1 percent paid over 40 percent of federal income taxes, despite earning just under 21 percent of total adjusted gross income (AGI). The bottom 50 percent of taxpayers earned 11.6 percent of total AGI, but paid less than 3 percent of income taxes. The same story holds when looking at all revenue sources too, so it's not just the income tax that is progressive.

ProPublica, however, tries to make the case that the wealthy are getting away with murder through the tax code, so they "do a calculation that has never been done before," comparing growth in wealth over the course of a year to taxable income. They use this to calculate an individual's "true tax rate," which is sort of like handing out wins in a baseball game in the middle of the early innings and calling it the "true outcome" of the contest.

It's hard to overstate how nonsensical this comparison is (which is perhaps why it's never been done before). Our tax system rightly does not tax growth in one's wealth until it is realized as income. After all, the alternative is a monstrously complex and unfair system of wealth taxation that developed countries have avoided.

The reason that wealth isn't taxable is fairly straightforward: You aren't directly benefiting from it until it's turned into income (at which point it is taxable). Wealthy Americans may not pay taxes on the growth that their net worth sees, but should they wish to sell assets that have appreciated in value, they would be liable for capital gains taxes on that growth.

And this is hardly some special carve-out for the wealthy. If you own a home, a retirement account, or even a car, it probably appreciated in value over the past year. And yet unless you sold those things and locked in those on-paper gains, you didn't pay taxes on that increase in value.

That doesn't constitute tax evasion; it's just how the code works.

It's worth noting how intentionally deceptive this is. ProPublica easily could have scored plenty of Twitter clicks by taking this data and using it to show the impact of a wealth tax on rich Americans, for example. Instead, they chose to deliberately mislead readers in order to advance a narrative of corruption and shadowy backroom carve-outs for wealthy bogeymen.

ProPublica is hardly the first group to use creative accounting to try to argue that the wealthy don't pay their fair share. 

Take Gabriel Zucman and Emmanuel Saez, progressive economists who have long pushed for a wealth tax. They received a great deal of fawning media attention several years ago for claiming that they had groundbreaking new data showing that the wealthy pay a lower tax rate than everyone else.

To arrive at this conclusion, the economists simply ignored parts of the tax code that weren't convenient. Refundable tax credits like the child tax credit or the earned income tax credit are heavily progressive, and are in the tax code in part to offset the regressivity of other levies like the payroll tax. Yet Saez and Zucman decided to simply leave them out of their analysis.

Or more recently, take the widespread reports of the wealthiest Americans making a killing on the stock market last May as many other Americans struggled to deal with the pandemic. These reports came from calculating the growth of stock portfolios from mid-March through mid-May—a cleverly-designed starting point which omitted the February to mid-March period where the stock market cratered as fears of COVID-19 rose. This allowed analysts to disguise the subsequent recovery back to baseline values as though it was a massive windfall of new profits.

Or take the outrage over reports of large corporations paying zero income taxes in a given year. Reports of very low or zero corporate tax rates ignored the fact that this generally came from these businesses spreading out their losses from a previous year or taking advantage of research and development tax incentives––provisions in the code that enjoy bipartisan support.

Relying on the inherent complexity of the tax system to convince taxpayers that they're getting the short end of the stick may be an effective way to achieve political goals, but it's deceptive and sure to lead to ill-advised policy making. 

The biggest takeaway from the ProPublica data reveal should be just how much the data lined up with what we already know. There was no exposure of secret tax evasion and fraud—just the obvious point that the wealthy have a lot of non-liquid assets, presented as a smoking gun.

It's also worth noting that someone may have committed a serious federal crime when handing over sensitive tax return information to ProPublica. That's something that senators currently pushing to increase the IRS's tax enforcement capabilities should keep in mind: If the IRS can't safeguard the tax data it's entrusted with today, adding 87,000 new agents and giving them access to bank account information for every American is a recipe for disaster.

Taxpayers should not be fooled by this "exposé." Instead of exposing misdeeds on the part of the wealthy, ProPublica exposed the lengths to which some are willing to go to deceive the public in service of the grand progressive campaign for higher taxes.