Tuesday, January 5, 2016

The big lie or bad reporting?

You be the judge.

In article entitled “Wealthiest Face Bigger Tax Bite” somebody should have done some editing for content.  Since it is not clear who was responsible for the snafu, it seems appropriate to point out both the author and the source of what may be the deceptive statement.  The article appeared in the final issue of 2015 (Thursday, December 31) of the WALL STREET JOURNAL.  It represents an embarrassing way to finish the year.

First, let's start with what is either the big lie or sloppy report.  The bold has been added for emphasis.  The author has the following quote from Len Burman, director of the Tax Policy Center which he reports as follows: “Capital gains taxes bring in more than $100 billion in some years ‘and almost all of it is realized by people with very high incomes,’ he said.”  The author then goes on to report: “In 2013, the 400 households earned 5.3% of all dividend income and 11.2% of all income from sales of capital assets.” It would seem to me that “11.2%” is not “almost all.” Further, the $100 billion figure does not refer to the 400 households.

The bait and switch in the contrast between Len Burman’s quote about very high incomes and the reporter’s citation of 2013 data about the 400 households makes it clear that someone is either being intentionally deceptive or is misusing potentially interesting data.

If Len Burman was aware that the article was about the 400 highest income households then clearly he was being deceptive.  He would know full well that 400 highest income households do not pay “almost all” capital gains tax.  The reporter cites The Tax Policy Center as a nonpartisan think tank. If Len Burman knew how the quote was going to be used, one would have to seriously question whether the Tax Policy Center is really nonpartisan.  

However, even if Len Burman was intentionally being deceptive, the author of the article, Josh Zumbrun, can be faulted for a poor selection of a supposedly nonpartisan source.  It is also quite possible, and highly likely, that nonpartisan is the label the Tax Policy Center chooses to disguise its partisan efforts, in which case Josh Zumbrun can only be faulted for his political naivety or intentional bias. One should learn to question the partisan motives of anyone who cites capital gains figures without any reference to the fact that capital gains are by their very nature non-repetitive.  When one takes a capital gain, it is a onetime event.  Citing capital gains as if they were ongoing sources of income for a fixed set of households is inherently deceptive.

What is particularly distressing is that there is considerable evidence that the reporter was intentionally being deceptive and that the editor let it get published anyway.  The article starts out with the statement: “Tax rates on the 400 wealthiest Americans in 2013 rose to their highest average since the 1990s, after policy changes that boosted levies on capital gains and dividends.”  So the author has clearly set up the article to be talking about a very limited group of people, 400 households. 

The author even makes a meaningless comparison of what was paid by the 400 households in 2013 with what was paid by a different set of 400 households in the 1990s.  The author treats them as if they were the same households.  He then attributes the higher taxes to changes in tax rates on capital gains and dividends without making any reference to the fact that the incomes of the 400 households were different in different years.  He never makes any reference to how much of the increase in the taxes paid by the households in 2013 could be attributed to the interaction between a progressive tax structure and higher incomes.

One might conclude from that opening sentence that the article was going to be about the taxes of the 400 wealthiest Americans.  But, the very next paragraph makes it clear that the author does not know the difference between a stock of wealth and a flow of income.  That is not a major offense.  It is a very common misunderstanding among reporters and conforms to a common misuse of economic terminology among the general population.  However, one would think a journalist would be literate enough to properly use the English language and careful enough to select the words with the least ambiguity.  Further, one could hope that a newspaper that reports on financial markets would have the good sense to employ reporters who understand the difference between wealth and income.  Using the two words interchangeably is not only sloppy, it is deceptive.

Newspapers will often use wealthy to refer to high income as a simple expediency to cut down the number of words in the headline.  But to continue to misuse wealthy in the text of the article is a more serious issue.  It is particularly awkward since the author’s lack of clarity on the difference between wealth and income is a major deficiency in the article’s reporting on the taxes paid by the 400 highest income households.  One would hope that the WALL STREET JOURNAL would employ reporters who understood the implications, origins, and reason for differences in taxes on changes in wealth (the stock) versus income (the flow). 

That understanding is a precondition to accurately portraying the implications of the quotes that the article has gathered from Scott Greenberg, an analyst at the Tax Foundation; Gabriel Zucman, a professor at the University of California, Berkeley, and Len Burman, director of the Tax Policy Center.  Further, how can a newspaper ever hope to meaningfully report on financial markets if it employs reporters who have no understanding of the difference between a cash flow and market value?

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