“Last year, there were 7,000 millionaires who didn’t pay a single penny in federal income taxes. Instead, ordinary Americans footed the bill — and that’s not fair.”

— Senate Majority Leader Harry Reid (D-Nev.), April 16, 2012

Before the Senate failed to advance to a vote on the so-called Buffett Rule, Reid made the case for the bill, saying it concerned “the basic fairness of our country’s tax system.” The proposal — named after billionaire investor Warren Buffett, who said he paid a lower tax rate than his secretary — would impose a surcharge on people with gross adjusted income over $1 million, eventually reaching 30 percent.

As we have noted, the problem is more symbolic than real. Most very wealthy people pay a good chuck of their income in taxes. Reid in his statement pointed to “7,000 millionaires” who paid no federal income taxes, which is not very much out of the nearly 250,000 taxpayers who file income taxes with adjusted gross income of $1 million or more.

Still, even that “7,000” figure seemed fishy to us.

The Facts

The White House, in its briefing paper on the Buffett Rule, includes this statement: “Of these millionaires, over 22,000 families paid less than 15 percent of income in Federal income and employee payroll taxes — and 1,470 managed to pay no federal income taxes on their million-plus-dollar incomes, according to the IRS.”

The Internal Revenue Service seems like a pretty good source, and the figures can be confirmed by looking at this spreadsheet for the 2009 tax year, the most recent available. Subtract the number of taxable millionaire returns from the number of all millionaire returns, and, voilà, you end up with exactly 1,470.

But we also checked with the nonpartisan Tax Policy Center. In their analysis of the bill, the center estimated that 2,000 to 3,000 taxpayers in 2015 with an adjusted gross income of more than $1 million would pay a tax of 15 percent or lower. That’s consistent with the IRS figures and still much lower than Reid’s number.

When we said we were puzzled, Reid spokesman Adam Jentleson responded via e-mail: “Shouldn’t be too puzzling. Our source is this study from the Tax Policy Center, which clearly shows that in 2011, 7K millionaires paid no individual income taxes.”

How could the same organization have different numbers? It turns out Reid was relying on a chart that is based on “cash income,” not adjusted gross income. This boosts the number of overall millionaires to 433,000, because it includes income exempt from income tax (such as much of their Social Security benefits) and also such items as employer-paid health insurance premiums, employer’s share of payroll tax and even corporate income tax.

“Because total cash income includes income from more sources than does AGI, it is bigger for most households,” said Roberton Williams, senior fellow at the Tax Policy Center. “And, as a result, more people are millionaires under the cash income measure than based on AGI.” (More on those differences can be found here.)

The definition of a millionaire in the proposed legislation is based on adjusted gross income, so Reid is taking substantial liberties by using an inflated figure. Even so, it still amounts to little more than 1 percent of all “cash income” millionaires, demonstrating how relatively puny the number really is.

In case people are wondering, how could someone making more than $1 million a year pay little or no taxes? The earner could be retired, not bringing in wage income but still earning interest on municipal bonds. (The person could also reduce tax liability with substantial charitable contributions.) In fact, a taxpayer like that would be largely untouched by the legislation because it exempts municipal bond interest.

Informed of our analysis, Jentleson defended Reid’s use of the figure. “The fact Senator Reid cited is correct. You checked it, I provided you with a citation proving that it is correct. End of story,” he said. “If you consider a true statement for which I can provide a clear citation to merit even a single ‘Pinocchio’ then the raison d’être of your blog is beyond me.”

The Pinocchio Test

Faced with a choice between using an actual IRS figure cited by the White House or using an inflated statistic with little relevance to the definitions in the bill, Reid chose the latter. That sort of gamesmanship should not be excused, especially when his quote was repeated in news reports on the debate.

Two Pinocchios

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