Widely Touted Study on State and Local Taxes is a Sham

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APA
Agresti, J. D. (2015, January 17). Widely Touted Study on State and Local Taxes is a Sham. Retrieved from http://www.justfactsdaily.com/widely-touted-study-on-state-and-local-taxes-is-a-sham/
MLA
Agresti, James D. “Widely Touted Study on State and Local Taxes is a Sham.” Just Facts. 17 January 2015. Web. 20 October 2017.<http://www.justfactsdaily.com/widely-touted-study-on-state-and-local-taxes-is-a-sham/>.
Chicago (for footnotes)
James D. Agresti, “Widely Touted Study on State and Local Taxes is a Sham.” Just Facts. January 17, 2015. http://www.justfactsdaily.com/widely-touted-study-on-state-and-local-taxes-is-a-sham/.
Chicago (for bibliographies)
Agresti, James D. “Widely Touted Study on State and Local Taxes is a Sham.” Just Facts. January 17, 2015. http://www.justfactsdaily.com/widely-touted-study-on-state-and-local-taxes-is-a-sham/.

By James D. Agresti
January 17, 2015

The Institute on Taxation and Economic Policy (ITEP) is a self-described “non-partisan research organization” dedicated to providing “accurate, timely, and straightforward information” about tax policies. In a new report on state and local taxes, ITEP declares that “virtually every state’s tax system is fundamentally unfair,” because they take “a much greater share of income from low- and middle-income families than from wealthy families.”

The findings of this study have been uncritically cited in prominent venues such as the Washington Post, CBS, the Daily Beast, Newsmax, the Providence Journal, and the New York Times. For instance, the Times reported that “according to the study, in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.”

Glaringly absent from the media coverage is how this study uses the same type of deceitful methodology behind claims that the middle class pays a higher federal tax rate than the top 1% of income earners, Warren Buffet pays a lower federal tax rate than his secretary, and Mitt Romney pays a lower federal tax rate than the middle class.

As Just Facts has documented in detail, all of those oft-repeated assertions are fraudulent, because they are based on calculations that exclude certain taxes, use partial measures of income, or employ both of these charades. The result is that the actual tax rates of the wealthy are understated, while those of others are progressively overstated as their income declines.

For example, Warren Buffett’s famous allegation that he pays a lower tax rate than his secretary is based upon the dishonest practice of using “taxable income” for his calculations. As the academic textbook Federal Taxation explains, using taxable income to calculate tax rates is “a bit misleading,” because this “is a very narrow measure of income” that says “little about the true impact of a tax on the taxpayer.”

Buffett and his secretary won’t release their tax returns, so there is no way to be exactly certain how this particular sleight-of-hand (they also use another) warps their true tax rates. However, a similar and less egregious ruse (using adjusted gross income) has the effect of artificially raising the average middle-class tax rate by at least 23% and Romney’s by less than 1%.

Similarly, ITEP uses a partial measure of income in virtually all of its studies, and moreover, it carefully guards this fact from the public. ITEP’s recent report on state and local taxes is 139 pages long, but the authors never bother to explain how they measure income. Instead, on page 135, they refer readers to the organization’s website for more details about how the study was conducted. The website contains a 17-page description of ITEPs “Tax Model,” which is used in most of its studies. Like the study, this lengthy description neglects to define how they measure income.

I first noticed this omission in 2012 and sent ITEP an email asking what measure of income they use in their tax model. When I didn’t receive a response, I followed up with a phone call, which they also failed to return. In other words, through both their publications and communications, ITEP has chosen to obscure how they arrive at one of the key variables used in nearly all of their tax rate calculations.

This led me to spot-check some of ITEP’s figures against those provided by the Congressional Budget Office (CBO). The results were appalling. For example, CBO’s comprehensive and transparent estimate of average income for the poorest fifth of Californians was at least 64% higher than ITEP’s ill-defined figure. This means that ITEP’s methodological ploy has the effect of inflating the tax rate for these people by at least 64%. Other ruses may be lurking in their tax model, because their description of it is vague on some key parameters like the incidence of corporate income taxes.

Nevertheless, the media has been reporting ITEP’s study without even a hint of skepticism, much less an investigation of how they arrive at their figures. That is not practicing journalism but doling out free publicity.

This kind of subterfuge has profoundly misinformed the American public. For instance, CBO’s latest estimates of effective federal tax rates show that the top 1% of income earners pay an average tax rate of 33% or 2.7 times more than the 12% rate paid by the middle class. Yet, for the third straight year, a scientific poll commissioned by Just Facts has found that roughly 80% of voters think the middle class pays a higher federal tax rate than the upper 1%.

Journalists, commentators, politicians, and organizations like ITEP have succeeded in manipulating the vast majority of Americans into believing the total opposite of reality about this and many other issues. This threatens harm to all Americans, regardless of their political inclinations, for as John F. Kennedy observed, “Only an educated and informed people will be a free people,” and “the ignorance of one voter in a democracy impairs the security of all.”

3 thoughts on “Widely Touted Study on State and Local Taxes is a Sham

  1. “As the academic textbook Federal Taxation explains, using taxable income to calculate tax rates is “a bit misleading,”

    The overriding thrust of your article is that the ITEP analysis is grossly misleading yet you quote from another source that using taxable income is simply a “bit misleading.” There’s a big difference between “a bit” and what your article is suggesting.

    “Buffett and his secretary won’t release their tax returns, so there is no way to be exactly certain how this particular sleight-of-hand (they also use another) warps their true tax rates.”

    Again the overriding thrust of your article is that there is significant misrepresentation yet you acknowledge that “there is no way to be exactly certain how this particular sleight-of-hand (they also use another) warps their true tax rates.”

    “The CBO’s latest estimates of effective federal tax rates show that the top 1% of income earners pay an average tax rate of 33% or 2.7 times more than the 12% rate paid by the middle class.”

    You fail to mention what income the CBO figures are based on and there is no reference to the phrase “taxable income” in the CBO document you link to. Comparing apples with oranges in a less than detailed analysis!

    “CBO’s comprehensive and transparent estimate of average income for the poorest fifth of Californians was at least 64% higher than ITEP’s ill-defined figure. This means that ITEP’s methodological ploy has the effect of inflating the tax rate for these people by at least 64%.”

    With a progressive tax system (where tax rates rise as income rises as opposed to a flat tax system, just so you understand that the term “progressive” here is not used in the political sense) a 64% differential in income does NOT equate to a 64% differential in the tax rate or even in the dollar tax amount. Major math fail!!

    “Yet, for the third straight year, a scientific poll commissioned by Just Facts has found that roughly 80% of voters think the middle class pays a higher federal tax rate than the upper 1%.”

    You use the phrase “a higher federal tax rate” but fail to state if you are referring to an average rate or a marginal rate. Very ambiguous indeed and it does make a difference depending which one is referenced.

    To me your whole analogy is a mishmash of data and information and apples vs oranges. I have worked in an Accounting/Tax environment for 40 + years and this analogy is no better than the one you are criticizing. I’m not saying that the ITEP is categorically right and you’re wrong or vice versa, just that your analogy here is inconsistent .

    A far better approach would have been to show your own detailed analysis on the basis you believe it should be shown and point out the bottom line differences arising then. Instead you have simply dissected some of the ITEP’s data and incorrectly reported variances (the 64% in both income AND the tax rate). Doesn’t inspire confidence!

    • Peter,

      You write: “You fail to mention what income the CBO figures are based on and there is no reference to the phrase ‘taxable income’ in the CBO document you link to.”

      I explicitly used the phrase “effective federal tax rates” with regard to the CBO study, and the broader context of the article and the specific link I provided explains exactly what this means. In short, it is all taxes divided by all income. The key takeaway from this article is that to calculate accurate tax rates, one must account for all taxes and all income.

      You won’t find the phrase “taxable income” in the CBO report, because as I documented in the article, it “is a very narrow measure of income” that says “little about the true impact of a tax on the taxpayer.” These quotes, which are from the textbook Federal Taxation, refute your suggestion that using this form of income to calculate tax rates is only slightly misleading.

      You write: “With a progressive tax system (where tax rates rise as income rises as opposed to a flat tax system, just so you understand that the term ‘progressive” here is not used in the political sense) a 64% differential in income does NOT equate to a 64% differential in the tax rate or even in the dollar tax amount. Major math fail!!”

      This has nothing to do with tax progressivity. It is simple division, with taxes in the numerator and income in the denominator. Hence, a misleading figure for the denominator will produce a proportionally misleading tax rate. For example, if the denominator is decreased by 50%, the tax rate doubles.

      You write: “You use the phrase ‘a higher federal tax rate’ but fail to state if you are referring to an average rate or a marginal rate. Very ambiguous indeed and it does make a difference depending which one is referenced.”

      That is a blatant falsehood. I explicitly wrote in the sentence before the one you quoted that I am speaking of the “average tax rate.” The link I provided also makes this clear.

      James D. Agresti | President | Just Facts

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