The WSJ’s dubious fiscal reporting

By Felix Salmon
May 3, 2011
John McKinnon, whose WSJ story, headlined "High-Earning Households Pay Growing Share of Taxes", appears in the paper's ostensibly impartial news pages, as opposed to its wing-nut editorial page. Here's the lede:

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I’m not impressed with the fiscal reporting of John McKinnon, whose WSJ story, headlined “High-Earning Households Pay Growing Share of Taxes”, appears in the paper’s ostensibly impartial news pages, as opposed to its wing-nut editorial page. Here’s the lede:

As President Barack Obama pushes to raise income taxes on high earners, opponents are seizing on data that indicates these U.S. households already pay a large and growing share of taxes, even compared with high-tax European countries.

The context is clearly laid out in the opening words: the big debate on income taxes which is going on right now between the White House, which is pushing — um, hang on a sec. What debate? What push? As far as I can tell, President Barack Obama is engaged in quite a large number of fiscal debates at the moment, not least the one surrounding the debt ceiling and how he can persuade Congress to raise it. But there’s rather a large difference between the debt ceiling, on the one hand, and “income taxes on high earners”, on the other.

After all, it’s only a few months since President Barack Obama extended the Bush tax cuts on people earning more than $250,000 a year, saying that doing so was “a win for American families, American businesses and our economic recovery”. As far as I can tell, he has evinced no desire whatsoever to reopen that particular can of worms since then.

So what’s McKinnon talking about when he says that Obama is pushing to raise income taxes on high earners? A link would help, but McKinnon seems to be allergic to links. The story is peppered with references to primary documents — the second sentence, for instance, refers to “a new congressional study” showing that most US households paid no federal income tax in 2009. But there’s no link to that study. Maybe because it’s not really a study at all: McKinnon is just talking about a memo from the Joint Committee on Taxation which would easily fit on a single page if it wasn’t for the size of the letterhead. And far from being a formal study, in fact it’s just a “backcast” — a forecast of what the 2009 numbers are likely to show when the final data arrives.

The WSJ then puts together this graph, with its “heavier burden” headline:

burden.jpg

The first thing to notice is that this is one of those charts where the top is a straight line — we’re looking at the percentage of the total tax base, not at total taxes. What happens in these charts has nothing to do with whether taxes are going up or going down. (In fact, of course, thanks to the Bush tax cuts and to the recession, they’ve been going down for a while.) Insofar as the richest Americans are paying a higher share of taxes, then, they’re just contributing a larger slice to a smaller tax-collection pie. But there’s no way you can tell that from these charts.

The big picture, when it comes to taxes, is that we’re not paying enough of them. Government expenditures are high and are set to rise substantially in coming years, thanks to healthcare cost inflation and an aging population. Meanwhile tax revenues aren’t nearly enough to cover those expenditures. So they have to go up.

If the European countries that McKinnon is talking about cut their federal tax burden to less than 15% of GDP, I’m sure that they would look more progressive too. But instead they have taxes, like nationwide sales taxes, which increase the total national tax burden but which are also regressive. It’s easy to make your tax system look progressive when you’re only raising a relatively small sum in taxes. But that’s a point which McKinnon never makes. And obvious factual points about the limitations of the income-tax factoid are turned into partisan talking points:

As for those Americans who pay no federal income tax, most of them still pay Social Security and Medicare payroll taxes that can take a significant share of their income, Democrats said.

There’s absolutely no need for the “Democrats said” appended to that sentence — unless you want to cast sly doubt on the assertion, which is entirely true and uncontroversial.

Meanwhile, McKinnon’s bikini statistics (what they reveal is less interesting than what they conceal) are presented as simple fact, rather than being attributed to Republicans:

Upper-income taxpayers have paid a growing share of the federal tax burden over the last 25 years.

A 2008 study by the Organization for Economic Cooperation and Development, for example, found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes. “Taxation is most progressively distributed in the United States,” the OECD study concluded.

Meanwhile, the percentage of U.S. households paying no federal income tax has been climbing, and reached 51% for 2009, according to a new analysis by the Joint Committee on Taxation.

Again, there’s no link to the OECD report, which is much longer and much more carefully hedged than McKinnon makes it sound. (The “conclusion” comes on page 104 of the 312-page publication.)

McKinnon does have a classic “to be sure” graf at the very end of his piece, quoting “some experts”:

To be sure, some experts say the share of tax borne by the wealthy is not the best measure of a system’s progressivity.

Well of course it isn’t. But that doesn’t seem to have stopped McKinnon writing a whole article based on the implicit assumption that it is. If he’s going to do that, he should at least try to make the case that metrics like the share of tax borne by the wealthy are particularly interesting or useful variables to look at. And the fact that he doesn’t is a strong hint that this article is more a parroting of Republican talking points than it is a dispassionate look at a vital matter of fiscal policy.

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Comments
8 comments so far

All these articles use the term “taxes” pretty liberally. They typically refer only to federal income taxes, and ignore state (sales),local (property).

You could also go all Grover Norquist on it and count local / state fees & rates as well, which are all regressive.

Posted by djiddish98 | Report as abusive

I am suspicious why the WSJ would use CBO, and not go straight to the original sources?

http://www.irs.gov/taxstats/index.html

Posted by GRRR | Report as abusive

Felix, you are way behind the curve on this one.

This is the same information linked to by Mankiw which set off a shitstorm of people trying to refute it. E.g., Yglesias sounding like a bonehead here: http://yglesias.thinkprogress.org/2011/0 3/unequal-incomes-and-the-unequal-tax-bu rden/ .

“Taxes” included payroll taxes, but was limited to federal taxes. All the chart really shows is that the rich in the US pay much more of the overall taxes, and the poor pay less, compared to any other country looked at. That’s it. Although it depends on your exact definition of “progressive taxation”, the US already has the most progressive taxation in many ways.

“What push?,” Felix? Really? Did you miss where Pres. Obama said that rich people “like me [Obama]” will have to pay more? When you focus to effort to raise taxes (or cut tax breaks) while only mentioning the extremely rich,
that’s a push.

Frankly, if “we’re not paying enough of them [taxes],” it would be unprecedented to get more from the extremely rich. The countries which are able to get more than 30% of GDP in tax revenues heavily tax the middle class and poor. Their rich pay much less of the tax base than in the US. Their poor pay a much much higher percentage of the tax base than their counterparts in the US.

Posted by FuManchu | Report as abusive

Excellent fact check on the WSJ’s reporting in the era of Murdoch. Thank you, Mr. Salmon.

Posted by trexbean | Report as abusive

Felix allow me to “cast sly doubt” on the assertion that the middle class pays it’s fair share due to payroll taxes.

Under the current social security system (which won’t change much) an average worker will collect slighltly more in benifits than they paid in taxes.

Under the current medicare system (which will morph into a bare bones bandaids and asperin plan) an average worker will collect MANY TIMES what they paid in.

Do you see the difference there between the income tax and payroll taxes? One transfers wealth earned by workers to the goverment to pay for services. The other transfers wealth earned by workers to other workers and due to demographic shifts it’s paying out more than it’s taking in.

For those who want to hold on to the quaint idea that the lower and middle class really is pulling their own weight via the payroll tax… I’ve got a deal for you… double my income tax withholdings today and then next April when I file my return give me a credit which allows me a refund of 105% of what I paid in.

Did you tax me? How much? Because that is exaclty how the payroll tax works… it’s just just a longer time shift.

Posted by y2kurtus | Report as abusive

Felix, we know how much you hate the WSJ for being a paper that dares not be left wing.

The basic point of the article is simple and factually true. Taxes in the US have definitely become more progressive over the last 20 years. I would bet any amount of money that most Americans think the reverse is true.

In fact, I would argue that state income taxes (which McKinnon doesn’t include) are usually more progressive still, because they don’t have the payroll tax components.

But your point that the tax pie has shrunk is a good one. Taxes and spending are way out of line. Your solution of course is to hike taxes of course because the spending part is fine, fine!

Posted by DanHess | Report as abusive

DanHess, it is almost certainly not true that ‘taxes in the US have definitely become more progressive over the last 20 years’, and the article does not argue that. It makes the point that FEDERAL taxes have become more progressive over that times span. Because the article does not focus on state and local taxes, it makes no claim on overall US taxation progressivity.

For those interested, Brian Roach wrote a paper 8 years ago analyzing overall US progressivity (http://ase.tufts.edu/gdae/pubs/wp/03-10 -tax_incidence.pdf)

His conclusion at the time (2003):

“Recent changes to the federal income tax should not be analyzed in isolation but rather as
part of the entire U.S. tax system. The progressiveness or regressiveness of any
particular tax is not nearly as important as the incidence of the entire tax system. Using
the tax progressivity index, this paper shows that the U.S. tax system is composed of both
progressive and regressive taxes. Overall, right now the U.S. tax system is slightly
progressive. The progressiveness of the U.S. tax system in 2000 was at a similar level to
that during the 1970s, although progressiveness has not remained constant and has been
impacted by legislation. The recent Bush tax cuts have made the federal income tax, and
thus the entire U.S. tax system, less progressive, particularly if the sunset provisions in
the tax cuts are extended or made permanent. There is a possibility that even this small
degree of progressiveness could be eliminated from the U.S. tax system in the future.
Making state or federal social insurance taxes more regressive, or making the federal
income tax less progressive, could be sufficient to make the entire U.S. tax system
regressive.”

I wold love to see a similarly detailed analysis of overall US taxation with more recent data, but it seems to me to be hard to find.

Having said that, to me Felix has never seemed more like a Democratic shill than in this post. This article presents a series of facts; facts that will matter when it comes time to talk about increasing federal revenue. Felix writes “the big picture, when it comes to taxes, is that we’re not paying enough of them.” The data presented in this article argues that when it comes time to change tax laws so as to increase federal revenue, we will need to do so in ways that increases revenue from all segments of the income distribution, not just the top 10% or 20%.

Posted by MattJ | Report as abusive

MattJ — good points.

I tend to still think taxes have gotten more progressive, sort of, although you have to look deeper than just the top earners.

For one thing, about 50% of filers (roughly the bottom half in income) owe no income tax. That is without precedent in modern history.
http://finance.yahoo.com/news/Nearly-hal f-of-US-households-apf-1105567323.html?x =0&.v=1

Another thing is that a look only at the topmost earners doesn’t present a full picture. In fact the topmost earners have probably gotten a better deal from recent tax changes than top tier professionals just below them. For example a salaried surgeon or pro athlete probably has a higher tax rate than their boss the hospital or team owners whose income is in the form of share appreciation and dividends.

By looking at the top 1%, we are mostly capturing business owners. The got a great deal from the Bush tax cuts. Top salaried people, less benefit. The bottom half? Clearly things look pretty progressive to them.

Posted by DanHess | Report as abusive
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