small change toward a rich life

Obama vs. Romney tax calculator cherry-picks data and distorts results

There was not supposed to be a Pocketmint post today. The plan, in fact, was for the next post to be on Monday, and about something altogether different.

But I followed a link, and made a discovery, and suddenly it was two in the morning and I had so many pages open in my browser that each tab was only three millimeters wide. IRS, Congressional Budget Office, Census Bureau, Tax Policy Center, FactCheck.org … And now, twenty-four hours later (only five of which were spent sleeping), Pocketmint has a new post, and I’m way, way behind on everything else I need to do.

This is long, and I apologize for that. Please read it anyway. It’s important.

It started like this. WiseBread recommended an online tax calculator. From financial startup SmartAsset, it’s titled Your Post-Election Taxes: How will the candidates tax plans affect you?

At first I was pleased to see something so well-designed. Okay, graphically it could be improved, and there are some typos and other minor quibbles. But as information design goes, it’s quite good — easy to use and (mostly) clear in its display of results.

But then I read the fine print, and my pleasure turned to dismay. And the more research I did, the more disgusted I became.

Succinctly put, this calculator is a fraud. SmartAsset has cherry-picked its data, egregiously skewing the results to make Romney’s tax plan appear much kinder to poor and middle-class Americans than it actually would be.

Here’s how.

The SmartAsset.com Tax Calculator

“We do not allow tax credits to exceed income taxes”

Or in other words, they exclude the impact of refundable tax credits, which are a significant part of the current tax code.

‘Refundable tax credits’ is a confusing moniker for what are basically payments from the government that are independent of taxes. If you qualify for $2000 in refundable tax credits, the government will give you that money regardless of how much tax you owe. If you owe $3000 in taxes, your bill is cut to $1000. But if you owe $500 in taxes, you not only get a tax bill of $0, you get a check for $1500. Refundable tax credits = money in the bank.

What are these credits? There have been others in past years, now expired, but these are the ones currently relevant:

  • The Earned Income Credit for working persons with low incomes. All of the money goes to singles earning under $14K or families earning under $50K, heavily skewed in favor of parents supporting one or more children.
  • The Child Tax Credit for parents (or supporting guardians) of children 16 and under. It is refundable to persons who earn wages above a minimum threshold — approximately $9.7K for a single child, $16.3K for two. Phase-out begins at income levels of $75k for single and $110K for joint filers.
  • The American Opportunity Tax Credit for undergraduate college students. Up to $1000 may be refundable. Phase-out begins at income levels of $80K for single and $160K for joint filers.
  • The Health Coverage Tax Credit for certain persons paying health insurance premiums after either of a) a qualifying job loss due to foreign trade, or b) the failure of a private-sector pension plan (for persons over 55), plus their spouses and dependents.
  • Starting in 2014 there will be a new refundable tax credit under the Patient Protection and Affordable Care Act — aka “Obamacare” — that will apply to individuals making up to 400% of the federal poverty level but who are ineligible for Medicare, Medicaid, or health insurance through employment costing less than 9.5% of their income.

All of these refundable credits have one thing in common: they don’t benefit the wealthy. They all improve economic conditions exclusively for poor and/or middle-class Americans.

Romney plans to eliminate the American Opportunity Tax Credit (for college costs) entirely, eliminate the refundable portion of the Child Tax Credit, and cut back on the Earned Income Tax Credit benefits. And of course we know he’s in favor of scrapping Obamacare altogether, tax credits and all.

Obama supports keeping all of those credits intact. But all those benefits to low- and middle-income families — benefits that are proportionally enormous to the poorest Americans — are hidden by SmartAsset’s data exclusion.

“We have excluded the impact of certain tax provisions, including but not limited to: Social Security, Medicare …”

‘Payroll’ taxes — Social Security and Medicare — account for over 42% of the total taxes that individuals pay to the federal government. (Income taxes are about 57%; everything else less than 1%.) Excluding them from any calculator that professes to compute a future tax burden is ridiculous.

Furthermore, Social Security — which is 80% of the payroll tax — is a capped tax. Earnings above $110K are exempt. This means that people who make less money pay a higher percentage of their income into Social Security. (Investment income — typically a prerogative of the upper class — is also exempt from Social Security tax.) Poor and middle-class Americans bear a disproportionate amount of the Social Security tax burden.

•   •   •

Take payroll taxes and refundable credits out of the equation, and suddenly it looks like the poor and middle class are getting a much better deal. Consider, for example, a single mother of two children making $50K. The SmartAsset calculator tells us that she is currently paying 8% of her income in taxes, and that would stay the same under Obama. And it tells us that she would pay 7% — $500 less per year — under Romney.

But all of that is false. Add in Social Security and Medicare, and her real current tax rate is roughly doubled, to around 15%. Under Obama — both now and in the future — much of the income tax portion of that 15% is offset by refundable credits.

But under Romney she would still owe the same payroll taxes (not shown), only without most of the offsetting credits. Her personal tax rate would increase under Romney, not decrease as the calculator claims.

Those are the visible flaws based on what SmartAsset chose to reveal about its methodology. There may be others, as their list of starting assumptions is incomplete.

SmartAsset’s calculator appears to be a factual, nonpartisan, data-driven comparison, when in reality it selectively ignores data that impact the overwhelming majority of American voters. Is it coincidence that it does so in ways that make Romney’s tax plan appear more favorable to the bottom 90% of American income earners than it really is? I don’t see how it could be. Some of its exclusions — like the federal impact of state taxes — are perfectly justifiable on grounds that it would overcomplicate the calculations. But including the impact of Social Security taxes would not be excessively complicated. Likewise, two of the three major refundable tax credits — Earned Income and Child — can easily be determined with the base information about income, marital status, and number of dependents that the calculator already asks for.

The BarackObama.com Tax Calculator

What makes this fraud even more appalling is that the only other available calculator is the one on Obama’s own web site.

This is bad for two reasons.

Good data

First, because given differing results, it would be reasonable for people to assume that numbers from a calculator on a third-party site are accurate and those from a candidate’s site are biased. In this case, that conclusion would be wrong.

The simplifying assumptions on the Obama site calculator are all justifiable, in that not making simplifications in those areas would make any such calculator so unwieldy as to be useless. Examples are assuming that “for married filers, income is split evenly between the two earners” and that “taxpayers claim the standard deduction”.

At first I wasn’t sure about the assumption that “All income is from wages” — or in other words, that investment income and corresponding taxes are excluded. Unlike the omission of payroll taxes, this is a reasonable simplification (and therefore one I would expect that the SmartAsset calculator made as well, although they don’t disclose one way or the other). But it is an area of major difference between the candidates, so I looked up some numbers to determine what effect the exclusion might be having on the results.

First of all, taxable investment income, as I mentioned above, is largely a prerogative of the upper classes. No poor families, and few in the middle class, can even afford to max out their tax-advantaged retirement accounts, never mind having cash left over to invest in taxable ones. In fact, almost all of the investment income in this country accrues to persons with an annual income of over $1 million.

For someone at any income level who is lucky enough to have taxable investments, the tax rates — even under Obama’s proposal — are lower than for earned income. So if there were a way to include investment income in the calculator, it would have no effect on the low end of the scale (no taxable investments). And it would lower the effective tax rate on the high end compared to wage-only income — but it would lower it more under Romney’s plan than under Obama’s. In other words, the wealthiest 10% or so of Americans, on average, would benefit even more strikingly from Romney’s plan than the Obama calculator shows. (And the wealthiest 1% would all make out like bandits.)

Since the Obama campaign is making a major point out of the way Romney’s plan favors the rich, I don’t think that failing to show the full extent of that favor could be considered fraudulent. In fact, from the standpoint of pure numbers the Obama calculator is scrupulously fair. I read the Tax Policy Center report that they used for the Romney side of the data; it is a sort of best-case scenario approach to Romney’s plan, filling in the many gaps with the possible solutions that are gentlest to Americans with middle and low incomes. The actual implementation could be far more harsh.

Terrible design

The second reason that I am appalled at the lack of alternatives is that the design of the Obama calculator is egregiously bad. Oh, it’s attractive enough with regard to typography and layout. But from an information design standpoint, it’s a disaster. A guest blogger on the Christian Science Monitor says the Obama calculator ‘produces honest numbers … but the presentation is confusing.’ I consider that an understatement.

To show you what I mean, let’s input $50,000 — the median U.S. household income — into the Obama site calculator. Leave the other defaults at married-with-two-children.

The numbers that appear then are $2168, $3600, and $641. At a glance, it appears that you’re supposed to compare them directly: Obama’s future, Obama’s past, Romney’s future. But if you read the rest of the text, including the little ‘Learn More’ popups, you see they are measuring three separate things.

$2168 is the amount you would save in one year if the Bush era tax cuts are extended (again by Congress) for households earning up to $250K per year, as Obama proposes.

But although Obama’s people label it ‘continued savings’, the current income tax structure (in place for nearly a decade now) has long since become the norm. From the perspective of most Americans, including our hypothetical family earning $50k, Obama’s plan for the future is a net zero on the income tax front, not a ‘savings’. (This is a psychological reality which the format of the SmartAsset calculator does capture, despite its other factual errors.)

$3600 counts specific tax credits and reductions across the past four years (not one!) — two years of the Making Work Pay credit (2009 and 2010), and two years of a 2% reduction in Social Security tax (2011 and 2012). The former is long over, and the latter will expire at the end of 2012 unless Congress extends it. This number is basically a red herring — meant, I suppose, to remind you that Obama’s policies have helped you out before. But as true as that may be, already expired tax credits don’t belong in a calculator comparing future tax plans.

In fact, once you take into account the expiration of that 2% payroll tax break, 2013 is going to feel like a tax raise to working poor and middle-class Americans, no matter who wins the election. It will just be a smaller raise under Obama’s plan than under Romney’s.

The third number, $641, is under the Romney column. The way it’s presented, one could be forgiven for thinking that our $50K earner will be saving $2168 with Obama and paying $641 more with Romney, for a total difference of $2809. But no.

A well-designed comparison would have Obama’s plan and Romney’s plan each compared to some baseline — ideally, the 2012 tax policy, since that’s the baseline from which people will experience any change in 2013. But the blue number of the Obama future is relative to current law, not current policy. The law has the Bush-era tax cuts expiring at the end of 2012. The red Romney number is relative not to current policy or the current law, but to the Obama number.

Again, this is spelled out in the text below each figure, but a lot of people aren’t going to read that text, or fully work out the ramifications if they do. The results ought to be obvious from the numbers at a glance, and they aren’t — in fact, the arrangement implies something altogether different.

Now, go up there and add a zero to the end of the income box, making it $500,000. Watch what happens to the number on the Romney side: it goes from $641 to $36,319. But what’s not immediately obvious is that the number that was previously an ‘increase’ is now referring to a ‘savings’. So that would be $641 more under Romney at $50K, and $36,319 less at $500K — again, compared to Obama’s future, not our current present. (And it’s red in both cases! Which yes, can signify Republican, but in the context of currency and accounting red means a negative number.)

I could keep going, but trust me — it’s a mess. The data is real, but that hardly matters because the presentation sucks so badly. Some of the suckage appears to be in service of making Obama’s future look more favorable than it actually is — not just in comparison to Romney, but in comparison to the current reality. The other design flaws, some of which actually work against Obama’s interests, seem to be the result of incompetence.

•   •   •

I fear that given only these two options, people are going to gravitate to the clear SmartAsset calculator over the bizarrely confusing Obama one. And without knowing how the SmartAsset calculator is manipulating data, they may make voting decisions based on it.

It’s one thing to be in the top 10% of Americans by income or wealth and say, I’m voting for Romney because his approach will benefit me and my family personally. (There’s an argument to be made against that stance, but I won’t do it here.) It’s another thing entirely to be in the remaining 90%, and be deceived into believing that your self-interest also lies with Romney when it does not.

What we need is a calculator designed very much like the one at SmartAsset, but which uses all the relevant data that can reasonably be included, not a deliberately skewed subset of it. (Also, the Obama campaign apparently needs someone with some decent UI and information design chops.)

For an unbiased, factual, clear comparison, the best I can do for you right now is this table of comparative tax policies posted at Bankrate.

It’s also worth noting that Romney’s tax plan has been proven mathematically impossible. Unbiased economists have run the numbers and concluded that there is no way to implement Romney’s policies without either raising taxes on poor and middle-class Americans or dramatically increasing the federal deficit. So when he continues to promise that neither of those things will happen, he’s speaking out of either willful ignorance or calculated deception.

(Comic by xkcd.)

5 responses

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  1. Cindy says

    Excellent work! It doesn´t matter where you live…. politicians are always a fraud!!

  2. Will @ Wise Bread says

    Wow! Thank you so much for this detailed analysis. I really appreciate this feedback (and the reminder to catch up on my xkcd). We’ve added this to the original post on Wise Bread to encourage people to take a look at your analysis, as well as doing some of their own research:

    “Editor’s note: As Smart Asset’s calculator points out, Romney’s tax plan is somewhat incomplete. Therefore a lot of assumptions are made by both calculators, some of which you might disagree with. Make sure you read the fine print and form your own conclusions (like Karawynn of Pocket Mint did in this post where she evaluated both calculators [link]). This should only be the starting point of your research. As we get closer to election time and more details are revealed about both candidate’s tax plans, there will probably be more accurate calculators.”

    • Karawynn says

      Thanks, Will! I hope you’re right and someone comes up with a better calculator … though as I hope is obvious now, the failures of the current ones are not due to lack of data, but about selectively ignoring known data, or displaying it in a misleading way.

  3. ayall sagi says

    lol. i love the avatar in this article.

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