ProPublica's Bombshell, Bullshit Tax Story
What happens when journalists don't have any friends in finance to challenge their thinking?
I recently published a story about ProPublica as part of a series about putting gold-standard outlets under the microscope. I had no intention of writing about them again for a while, if ever. I’d said what I meant to say, which was a roughly even mix of complimentary and critical. I liked that they at least aimed high.
But then I came across this tweet on my feed this morning:
Richard is the “first employee and now outgoing president of ProPublica”, so his rather extreme framing here piqued my interest.
But it took about a minute of reading to realize that not only was his claim, ah overstated, but that this was the worst thing I’ve ever read by ProPublica, and a real contender for the worst thing I’ve read so far in 2021 from a credible outlet. And reading the rest along with its supplements did not disabuse me of those feelings.
I don’t think anyone involved at ProPublica knows what tax avoidance means 
I don’t think anyone involved at ProPublica grasps why virtually all developed countries don’t tax unrealized capital gains [2*]
I don’t think anyone involved at ProPublica tried very hard (at all?) to learn about what they didn’t know before publishing this piece
I don’t think anyone involved at ProPublica gave nearly enough thought to the implications of violating privacy laws (or at least norms) to publish a non-story
As ever though, to show is better than to tell. So what follows will dive in.
[EDIT 10:30pm PT 06-09-21. While I added a marked edit and correction yesterday, I have more to add in response to the many comments received. I didn’t want to make the doc too janky-looking, so see new appendix at the end. If you see a footnote number in the main text, there’s a matching note at the bottom. If there’s a * next to the footnote, it’s a correction in some form.]
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Also, to make my biases clear, I’m fine with criticizing the rich. I think we should do more of it! But we have to make those criticisms count. When journalism overstates an accusation, it sacrifices trust in proportion. We ought to appreciate the consequences of that by now.
Deconstructing the Main Concern
Let’s start with ProPublica’s central thesis, found in paragraphs 3 and 4 of their main article (the first of a series, of which it looks like four parts are out as of today):
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.
Their concern then gets more granular in paragraph 7:
America’s billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell.
So two things here:
Delaying a tax is not avoiding a tax. Tax avoidance is a term of art (distinct from tax evasion) that speaks to maximizing deductions/credits and optimizing income categorization. Not paying taxes on an asset you haven't sold and aren’t planning to sell isn't tax avoidance. It's just not selling a thing. ProPublica made this mistake all throughout. I have no idea how it got through editing.
They’re right about the laws, but incurious about why the laws are that way (not just in the US, but across the developed world).
Instead of stepping back to wonder what the positive motivations might be for not taxing capital gains until they’re realized (i.e., until the underlying asset is sold), ProPublica charged on bravely to immediately add:
To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.
We’re going to call this their true tax rate.
Setting aside the reliability of Forbes’s estimates (lmao), I don’t know how to explain how batshit this is without sounding hyperbolic. But it borders on propaganda. Instead of asking why the tax code treats unrealized gains (on things you haven’t sold) differently from realized gains (on things you have sold), they just invented a new measure to make it seem like folks with lots of unrealized gains are avoiding taxation.
(There’s a segment deep into the piece that raises the fair-ish point that there are some trust schemes where inherited shares can avoid estate taxation. But even there either the heirs are withdrawing money to spend or they aren’t. If they are, it gets taxed. If they aren’t — but are instead say borrowing against the value of the trust — that’s fine too, for reasons we’re about to get into. But either way it’s an aside to the basic miscomprehension here that delaying taxation is akin to avoiding it.)
[EDIT: I got a lot of comments about the “step-up in basis” practice, where inherited wealth is exempted from capital gains taxation on accruals. This is an easily misunderstood thing. The point of that allowance is to avoid double-taxation , as the estate is already being taxed at 40% on assets above the baseline.]
Why We Don’t Tax Unrealized Gains
When you have to pay taxes on an asset you own, where do you get the money to pay those taxes? In many cases you’ll have to at least partially liquidate the asset (e.g., sell some stock). And if you force lots of shareholders to do this (especially at roughly the same time), you cause the value of that stock to fall — perhaps by a lot.
One thing about the modern world is that developed governments can borrow money very cheaply, and in more complicated ways can even borrow it for free. So when it comes to taxation, their natural interest is in maximizing total inflows over time, not in any immediate tax year. If letting a pool of money grow would mean far more to tax later, letting it grow is good. The government can effectively borrow the money it would have taken from the pool, then collect a larger sum later that repays said loan along with additional profit it wouldn’t have otherwise had opportunity to collect.
Another thing about the modern world is that stock markets are de facto savings pools, which many of us have an interest in via pension and investment accounts. So when this pool is bigger, we all gain in paper wealth. Which is good.
But imagine that we forced lots of people to sell shares every April to pay for their gains. There’d be more sellers than buyers as everyone raced to raise cash, and prices would go down, and our collective wealth with it. No one really wants this. (To the degree that anyone wants it, it would be the rich — as they have the collective borrowing power to buy back shares on the cheap while poorer folks can’t.)
[Correction: Received a lot of notes about this, and I agree that this hypothetical was poorly framed. The IRS would try to spread things out in some way. The trouble is that there’s basically no good way to do this that doesn’t introduce similar or worse problems. But it was a rushed and poorly-considered paragraph, so I’m awarding a collective correction bounty in the form of a $50 donation. See tracker here.]
So instead of this obviously bad system, most countries use the very sane solution of staggering sales by only imposing a tax when an asset is sold. While some people still need to liquidate a few stocks at tax time, no one is forced to arbitrarily, and most are able to defer payment to some future day.
Now this is a very simple version of the story. There are other angles:
Though stock markets are mostly global savings accounts loosely tied to the value of the individual companies underneath, those companies do things like grant employee stock options and sometimes sell stock to the public. When they do this at higher valuations, it generates more end taxation. 
Even if you only force the wealthy to liquidate, they're going to start with their common shares. And that will depress prices for all common shareholders (i.e., everyone). This is bad.
While some rich people take loans against the value of their stock, that just kicks the can down the road (which is fine!) while also stimulating the economy. (Borrowing money against shares is also not necessarily tax avoidance, as the underlying motivation is usually orthogonal to taxation. If you think the value of a company you control will rise by more than the interest rate on your loan — which lots of successful entrepreneurs believe — then it’s a good trade.)
Forcing serious stock liquidation every year will hurt smaller companies more , which is harmful for long-term innovation / competition.
Sometimes stock prices go down, and that's generally not a write-off. So taxing the upside at an arbitrary point is unfair and kind of just silly. 
Successful companies induce enormous tax receipts for governments at all levels (corporate taxes, income taxes, property taxes, payroll taxes, headcount taxes, etc). If Bezos is paying less percentage-wise today because he's holding his Amazon stock, where said holding makes Amazon more valuable, that's a good net deal. The alternative world where he’s routinely trimming his shares and thus reducing his economic stake in Amazon's future isn’t really ideal for anyone.
Anyway, the point here isn't to suggest this is the only way of looking at. Some folks (mostly a few progressives at the far left end) have their arguments for taxing unrealized gains.  While I've never found any of them to be even a little intellectually compelling, they do exist. The point here is that ProPublica didn't even rise to a halfhearted adjudication between the sides of that debate. They just assumed that not taxing unrealized gains is grift-y and then moralized the shit out of it. I have no idea what positive vision of journalism such an approach could possibly be consistent with.
But it wasn’t even the most concerning thing about their take.
The Privacy Angle
Quoting now from one of the supplemental articles (about why they published stolen data protected by personal privacy laws):
Many will ask about the ethics of publishing such private data. We are doing so — quite selectively and carefully — because we believe it serves the public interest in fundamental ways, allowing readers to see patterns that were until now hidden.
Even if we allowed that there’s a public interest here (which I very much disagree with, given that this story is essentially a bad policy op-ed disguised as a bombshell news feature), let's be clear about the patterns part. Virtually everyone that knows anything about finance could have told you that the people in this article pay very little in personal income tax. This is not a revelation.  Bezos, Musk, and Buffett in particular are notorious for believing deeply in the value of their companies as exceptional holders of value. The only part that's new is ProPublica leaking information from their personal tax returns to qualify exact amounts.
Anyway, they continue:
Tax experts have long understood that the wealthiest Americans reap outsized benefits from the federal tax code’s emphasis on taxing income rather than assets like stock holdings and property. Yet, when The New York Times disclosed in 2020 that President Donald Trump had amassed so many deductions he paid no taxes in 11 of 18 years, it was assumed that his case was an anomaly, reflecting the unique breaks real estate developers receive under our tax system.
It is now clear that there isn’t just one such taxpayer — there are many, in multiple industries. We believe that disclosing the identities of billionaires who paid little to no taxes in years their fortunes grew by billions of dollars will help readers understand the magnitude of the tax advantages the ultrarich enjoy.
We also believe that disclosure of specific figures about the tax returns of people like Jeff Bezos, Michael Bloomberg, Warren Buffett and Elon Musk will deepen readers’ interest and understanding of this complex and arcane subject.
Again, ProPublica needs to get out more and talk to someone who knows anything about this subject. Anyone who assumed that Trump was the only rich person to pay little to nothing in personal income taxes is unquotably ignorant here. Lots and lots of paper-wealthy entrepreneurs are in this category. This is the opposite of a secret.
(That said, I have no doubt that posting personal financial details about the rich and famous will interest ProPublica’s readers. That’s half the tabloid business model. It’s just deeply sad to see ProPublica stoop to it.)
Anyway, it gets even dumber:
We understand that nearly everyone who provides material to a reporter is doing so in ways that reflect their worldview, agenda or biases. We have long held that those motives are irrelevant if the information is reliable.
This is an … insane statement? — both rationally and morally. Truth can't ever be a sole criteria for publishing. [9*] It's necessary, but not sufficient. To suggest otherwise ought to flunk someone out of first year journalism school.
And then to bring us all the way to the bottom:
There is also a legal question here, and we want you to know we have taken it seriously. A federal law ostensibly makes it a criminal offense to disclose tax return information. But we do not believe that law would be constitutional if applied to bar or sanction publication of a story in the public interest when the news organization did not itself remove the information from the control of the IRS or solicit anyone else to do so — as we did not. And this is not our first experience with this law.
So they think what they’ve done is legal (and just morally swell) because they didn't directly induce the theft of information.
When, as an industry, you wave a flag saying "hey if any of y'all find good dirt that will help us sell newspapers, hit us up and we’ll probably print it", you’re collectively inducing just that sort of theft. People will leak things to you for all sorts of motivations, many of them bad, and if your only criteria for publishing are some measure of verification and some measure of newsworthiness, that’s a moral hazard.
The public has no right to private info where no crime (or serious moral evil) has been committed. No crime is even being alleged here, and holding on to one’s shares because one believes in the company they’re building is not, last I checked, either a great personal failing or a source of real public interest so far as precise details.
I get that it’s popular to hate billionaires. And perhaps some (or even many) of them do some shady shit tax-wise. Let’s look into it. But this kind of reporting just makes the world worse, and I find it incredible that an org like ProPublica mangled it so badly.
[1a] I explained this twice in the main text, but still got a million comments / emails / attempted dunks about it. Let’s imagine there are just two motivations for someone like Bezos to hold his shares: (a) because he wants to avoid taxation, (b) because he wants to retain his economic ownership of Amazon, including his voting rights. If his motivation is (b), that has nothing to do with tax avoidance. He’s just holding an asset that he thinks will rise in value, and/or ensuring he retains maximum control. Now read ProPublica’s article again and determine for yourself how much room they left for (b), or really for anything except (a). Whether or not one thinks Bezos should be allowed to hold indefinitely is distinct from what his motivation is in doing it. If no tax law requires you to sell a thing, and you don’t want to sell it anyway, that’s not tax avoidance in any meaningful sense. If I ask you “hey will you sell me your gaining-in-value house right now” and you reply “wut", me saying “aha, tax avoider!” would be very silly.
[1b] As a related note, the political winds have clearly been in favor of increased capital gains taxes (and to a lesser degree also wealth taxes) for a while. So it’s incredibly unlikely that these people are thinking “hmm, I could just hold these assets until some more favorable time to sell them arises from a tax perspective”. It’s more (arbitrary numbers here) “why would I sell something I don’t have to if it’s paying me 8-10% per year vs. my 3% cost of borrowing against said shares?” (The government has a similar incentive. They can, in their own way, borrow against their share of those shares at a much lower cost than the increase in value to their share of shares — with low risk.)
[2*] A half-dozen readers pointed out “aha, four countries in Europe and maybe two elsewhere still have some type of wealth taxes that affect stocks”. While they’re right so far as that goes, that’s a distinct thing from taxing unrealized gains directly — in the same way that property taxes (a classic wealth tax) are not the same as making homeowners realize their gains. While they’re certainly related, in that a wealth tax is a super-tax that includes a (usually quite small) bit of unrealized gains, two related things are definitionally two different things. I also said “virtually all countries” and not “all” for a reason, as smaller economies do experiment a bit. That said, I agree that I should have been clearer it the original text to avoid misleading ambiguity. So I’m awarding a general $25 bounty to charity. [See entry in corrections log here.]
[3a] So, so much confusion around the double taxation thing. First, it’s a general tax principle, not a hard law — something like “we shouldn’t tax the same thing twice unless there’s a new commercial transaction involved” (with the exception of taxation happening concurrently at different levels of government, as on income). You can see one articulation of it here, but there’s no canonical version and I imagine many tax lawyers have many competing takes on it. Also some existing taxes (e.g., on property) already defy it. But my point wasn’t whether the principle is good, or even fairly or consistently applied here. My point was why the step-up rule exists (which exempts the inheritors from paying capital taxes on gains that the deceased never realized). And as it happens it was introduced specifically to avoid double taxation vis-a-vis the estate tax (currently a high end of 40%). But don’t take my word for it. See page 31 from this Congressional Research Service report which says quite unambiguously “[t]he purpose of the stepped-up basis rule was to avoid double taxation.”
[3b] Lots of readers argued that many rich (though not ultrarich) inheritors get exempted from the estate tax and thus pay neither tax. This is true, but orthogonal. Maybe we should remove those exemptions, or lower the cutoffs. But the question of “should some people pay neither of two taxes” is separate from “should other people pay two taxes”. And even with the latter, it’s fine to think that the double-taxation principle is antiquated or wrong, or to think that the estate tax should be higher. There are arguments (with tradeoffs) we can make there. But ProPublica, without quoting anyone or linking anything, just said flatly “[t]he ‘step-up in basis’ is widely recognized by experts across the political spectrum as a flaw in the code”. It’s one thing to explain the positive intent behind a thing and then argue why one believes the decision still came short. But their presentation makes it seem like a loophole rather than a deliberate tradeoff decision made within a definite context.
 Say Amazon decides to sell shares directly to raise capital. Using arbitrary numbers, they can do this at $1,000 or $1,100. If they do it at the higher number, there are a few possible-to-likely advantages to government coffers. To cover three: (1) If they decided to sell a set amount of shares, the extra money they get this way may make them more profitable, which may increase the amount of corporate tax they pay. (2) Even if they don’t pay more corporate tax in any immediate sense, that extra money is likely to spark something positive that’s taxable elsewhere, like wages. (3) If they decided to raise a specific amount of money, their earnings per share (because they didn’t dilute themselves as much to raise the cash) will increase in a relative sense, which may make the market happier, which could mean a relatively higher share price.
 Really large companies (e.g., those in the S&P 500) have two advantages over smaller ones when it comes to weathering storms. First, more of their shares are owned by index funds who can’t sell any single specific stock. Second, they generally have more ability to rebuy their own shares to stabilize prices. (The first is the bigger deal.)
 Some commenters raised the counter of “well we tax income at arbitrary points, so why can’t we do the same to capital gains”. Three things here: (i) cash income doesn’t require market-moving liquidation to become cash, (ii) income is largely taxed after you’ve earned a definite amount, where its value is largely locked (setting aside inflation or currency exchange etc), (iii) we already let people opt out of (some) immediate taxation via 401k allowances etc, where the logic rhymes a bit with unrealized gains (i.e., we’ll settle accounts later from their winnings, as there are upsides to forgoing that cash today in order to let it experience market growth).
 For an example of a “let’s tax unrealized gains directly” plan (one mentioned by ProPublica), see Senator Wyden’s. The gist (see page 9) was marking assets to market on Dec 31st and then taxing them as income (currently a top federal rate of 37%).
 Lots of people on Twitter felt ProPublica’s reporting kind of was a revelation, in the sense that there’s a big swathe of the reading public with no background here as far as the world of unrealized gains. While my point was narrow to none of it being a revelation to people who already understood said world, I agree that this was probably news to a lot of people. I just wish they’d had a more intellectually honest intro. There’s a quote ProPublica uses, from LBJ’s treasury secretary: “We face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes.” I reckon this is true in a way. People are getting angrier about wealth inequality, and all anger will go somewhere. Hence why it’s important to ensure their anger is well-informed. But this series won’t help with that.
[9*] Two readers (one here, one on Hacker News) pointed out that I said “[t]ruth can’t ever be a sole criteria for publishing” (which as a side point should have been “criterion”), where ProPublica didn’t say it was. While I’d extended the thought later in the text to “if your only criteria for publishing are some measure of verification and some measure of newsworthiness” (which are the main criteria that ProPublica posed), I agree that there’s an obvious tension here, and that the first usage was wrong. I’m giving $15 to each of those who flagged it, and donating $25 to ProPublica as a gesture.
[10*] Though it’s not a mistake I made in the main text here, a journalist pointed out by DM that I’d said elsewhere that Bezos’s long-term capital gains rate would be 15%. This was wrong is two ways. First, for people in higher brackets the baseline is 20%. Second, there was a 3.8% surcharge added in the Obama era. So it’s 23.8% As a show of good faith, I’m making a donation of $25 in his name to GiveWell.
Thanks for writing this, it needed to be said.
So what happens with AMZN if down for a year and Bezos liquidates his stocks? Would ProPublica run a story about Bezos' negative tax rate for the year?