Retracting Some Recent Estimates

By :: September 23rd, 2011

On September 21, TPC published several tables (T11-0359 through 0362) that examine how effective tax rates vary within income groups. Those tables were intended to shed light on recent claims that some high-income taxpayers face low tax rates.

Unfortunately, we made an error in our calculations. That error, which involved rollover distributions from 401(k)s and similar retirement plans, caused us to significantly overstate the income of some high-income taxpayers and thus understate the tax rates they paid. We have therefore retracted the tables while we work to fix our estimates.

We regret this error and apologize to our many users for any inconvenience. TPC is committed to providing the highest-quality information about America’s tax system. We fell short this time. But we have sharpened our pencils and look forward to releasing new estimates.

11Comments

  1. Michael Bindner  ::  5:56 pm on September 23rd, 2011:

    Everyone makes the occassional error. Not a problem. You have not exactly entered the S&P Zone yet. The important fact of the tax rates for the wealthy is not the revenue raised but the incentives the marginal rates for CEO level pay, dividends and capital gains have on their propensity to seek productivity gains at the expense of the workforce – which is hardly good for job creation.

  2. Vivian Darkbloom  ::  5:34 am on September 24th, 2011:

    Well, mistakes happen and one must give credit for acknowledging the mistake. I’m sure the TPC “is committed to providing the highest-quality of information about America’s tax system”. These type of estimates play a big role in the public debate over tax policy.

    WIth that in mind, I would suggest the best thing the TPC (and similar tax policy centers) could do to improve the quality credibility of the information published is to provide much greater detail on the methodology they use to arrive at estimates. If insufficient information is provided about methodology, mistakes like this one are more likely to go undetected.

    Here’s just one example of what I’m talking about. It appears that the “effective tax rates” the TPC is citing are based on a comparison of tax paid to adjusted gross income. That “tax paid” comes after tax credits, and notably for high income taxpayers, those credits include the foreign tax credit. The foreign tax credit is designed to prevent double taxation. So, if we’ve got a “millionaire” earning $1 million of foreign source dividends that are subject to the customary foreign withholding tax of 15 percent, the US tax on those dividends would be zero as reported by the TPC and the public will be up in arms that “this millioniare pays no tax”. And yet, the effective tax rate is actually 15 percent. Those high income taxpayers are the ones that derive a greater portion of their income from investments, including foreign investments.

    So, when the TPC goes back to the drawing board, perhaps it can share with its readers a bit more of its methodology. To do so would mean that we would not have to guess about the specific issue I’ve raised here, and many others like it. And, the public would be better informed of what, exactly “the actual effective tax rate” really means.

  3. AMTbuff  ::  8:40 am on September 24th, 2011:

    My biggest beef about any income statistics, generally from sources other than TPC, is failure to disclose what is and is not included in “income”. For example, there are good reasons to include employer contributions to health care or even imputed rental value of a home, but these items need to be explained to the reader.

  4. Len  ::  9:18 pm on September 25th, 2011:

    Vivian, TPC tries to be as transparent as possible about its methodology. See the documents listed on this page: http://www.taxpolicycenter.org/numbers/related.cfm I think virtually everything having to do with TPC’s model, assumptions, and tables is laid out in detail. It explains what an effective tax rate is, and much, much more.

  5. Vivian Darkbloom  ::  2:05 am on September 26th, 2011:

    Yes, the TPC does do a better job than most in providing information about its methodology. Nevertheless, I think improvements could be made. It is rather difficult to tie the assumptions used in the tables to the narrative description you linked to. A far better practice would be to list the key assumptions and methodologies in the tables themselves. When mainstream journalists pick this information up and report it to the public, they carry only the headline news which can be very, very misleading.

    Now, to the specific issue I raised, which you didn’t address. Looking at similar existing tables, I now assume that the tables that were pulled use “cash” income instead of AGI to calculate the effective tax rate (I can’t tell because they are no longer accessible). Further, consistent with other tables, it appears to me that the federal tax is calculated after tax credits. That would include the foreign tax credit.

    The issue that has gotten great attention recently (and partly because of data put out by the TPC) is what the effective tax rate is for those “Buffett millionaires”. If I’m right about your methodology (you are free and indeed invited to confirm or correct me) these high income taxpayers derive the bullk of dividend income. That includes foreign dividends and the foreign taxes that go along with them. The IRS publishes data on the amount of foreign investment income and the amount of foreign tax credits claimed by individuals. Thus, it should be easy to tie these taxes back to those high income earners.

    It appears to me that there are two ways to deal with this situation, but the TPC has apparently done neither. First, since we are starting with “cash income”, the “cash income” reported to taxpayers could be reduced by the foreign taxes they pay. Alternatively, the income could include those taxes, but the tax paid should be added to the tax burden of those taxpayers. I believe that the second method gives a much more accurate picture of how much “tax” those persons pay and I believe the difference would not be statistically insignificant.

    Now, you might counter that we are talking here only about “federal taxes”. If that is your argument I think it would be a distortion of economic reality. Among other things, these withholding taxes are generally reciprical. The US is able to impose tax it collects on the dividends of foreigners precisely because those foreign jurisdictions are allowed to assess tax on US residents.

    It is also not clear how the TPC is treating the signficant number of US citizens and lawful permanent residents who live outside the US and pay tax to foreign jurisictions. Many of them are high earners. Per the IRS, about 5.2 million taxpayers live outside the US and file form 2555 (many more file returns without that form electing instead to claim only the FTC). And, these taxpayers tend to have above average “cash income”. Yet, it appears what TPC is doing is to claim their gross foreign source income as “cash income” and then to calculate the effective tax rate after reduction for significant foreign taxes paid. If true, that is a major distortion.

    Len, I appreciate your response. If the TPC really wants to be transparent, would it be so kind as to address these substantive issues?

  6. Blinder  ::  1:39 pm on September 28th, 2011:

    As I understand it from the description of terms, the Cash Income Level includes losses incurred and is thus AGI (give or take). So, can someone explain how someone with >$1M in AGI does indeed pay <10%? What could permit that?

  7. Blinder  ::  1:52 pm on September 28th, 2011:

    One example: $20M invested in tax-free munis generating $1M in income, yes?

  8. Vivian Darkbloom  ::  2:47 pm on September 28th, 2011:

    The foreign tax credit, for one, but the TPC is not going to admit that, apparently. So much for that vaunted transparency.

    Now, let’s take the municipal bond example, which could be another reason. Taxpayers investing in municipal bonds might well have a very low federal income tax rate. But, investing in those bonds comes at a cost—lower interest rates. So, in fact, those investing in municipal bonds (as well as the federal government) should be seen as subsidizing state and local governments. Similar to the logic applied to “tax expenditures”, this subsidy in the form of lower interest rates could (and should) properly be seen as a payment in lieu of tax. Like tax exempt entities investing in private equity partnerships who relinquish “carried interest” to the general partners, the state and local governments are sharing their tax exempt status with bond investors. Those bond investors nominally pay zero federal income tax, but in economic terms they are paying some level of tax to the state and local governments they are financing through below market interest rates.

  9. Blinder  ::  3:26 pm on September 28th, 2011:

    Good point on foreign taxes.

    It’s funny because Krugman cited this TPC report as a way to bolster his case that the millionaires aren’t paying their fair share. But the TPC report in fact showed that MOST millionaires are paying much higher tax rates than MOST secretaries.

    But Krugman does raise an interesting point that some with $1M in AGI pay almost nothing. Most people that hear that probably turn red with rage.

    And yet, if that “nothing” occurs due to the fact that they are paying a lot in foreign taxes OR reaping the government-sanctioned benefits of tax free investments, then this is really much ado about nothing.

    A commenter on the Krugman blog noted that almost $3T were invested in tax-free municipal bonds…that is quite a big chunk of change the fed government is foregoing to help the states

  10. Medicare Benefits Direct  ::  1:43 pm on March 9th, 2012:

    When you thinks the Democrats jump in and ruin medicare supplements?

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