ProPublica‘s outgoing president called its recent story on the tax returns of wealthy Americans “the most important story we have ever published.” Discerning readers were surely disappointed then to find not a bombshell, but a giant nothing burger. Far from highlighting misconduct or unfairness, the story found only the lawmaker-intended tax treatment of capital assets.
What ProPublica discovered was not some vast tax evasion scheme, but the mundane fact the wealthy individuals tend to own assets and those assets can grow in value over time. Moreover, so long as those gains are unrealized, they go untaxed. Thus, a person can see their wealth grow during a particular tax year but pay little or no income taxes that year.
‘Income’ is the operative word here. Paper gains are not income, and there is good reason not to tax them as such. When an asset increases in value, such as your home or 401k, it doesn’t change your material circumstances. You have to engage in consumption to do that, which means first selling your asset. And then it is taxed as a capital gain. Even borrowing against the value of an asset only gets you so far. Loans must be repaid with interest.
To push a class-war narrative, the ProPublica piece claims to calculate the “true tax rates” of Jeff Bezos, Elon Musk, Warren Buffet, and others whose information they exposed. But it’s pure sleight of hand. They divide income taxes paid not by yearly income, but by total wealth. This of course provides a small number which readers are then expected to compare to their much higher actual income tax rates, which don’t include wealth, and be outraged over.
The real story is not what is contained within the tax returns; it is how the supposedly private data came to be in ProPublica’s possession at all.
The IRS has a long and ignoble history of failing to protect taxpayer data or, worse, weaponizing it for political reasons. I cited a few examples in a paper back when the BEPS project was first announced:
For instance, Propublica reported that it received from the IRS nine supposedly confidential applications for conservative groups during the time that the IRS was targeting such groups for extra scrutiny.8 The IRS also admitted wrongdoing and paid $50,000 in a settlement with the National Organization for Marriage for leaking confidential information from the organization’s tax returns to its political opponents.9 In May 2015, the IRS reported that data on 100,000 taxpayers was stolen by “organized crime syndicates” who exploited an application on the IRS website to view the past returns of victims.10 Numerous IRS officials have even been jailed for various criminal schemes that took advantage of their access to private taxpayer information.11
So the Wall Street Journal is on solid ground when it implies bad motives here:
The story arrives amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968. The main Democratic argument for a tax hike is that the rich should pay their “fair share.” The ProPublica story is a long argument that somehow the rich don’t pay enough. The timing here is no coincidence, comrade.
Far from demonstrating a problem with the taxation of the wealthy, the primary lesson to take from this story is that the IRS should be entrusted with as little of our personal financial information as possible.
