7,000 millionaires "gamed the system" to pay zero federal income taxes, U.S. Senate candidate Tammy Baldwin says

U.S. Rep. Tammy Baldwin, D-Wis., sounds a populist theme when she says she wants all Americans to pay their fair share f taxes.

It’s part of an effort to brand herself as a fighter for the middle class and to contrast herself with her U.S. Senate opponent, former Republican Gov. Tommy Thompson, whom she casts as a wealthy Washington insider.

In that vein, Baldwin sent a fund-raising email to supporters Sept. 22, 2012 repeating a claim that Thompson wants to raise taxes on the middle class in order to give tax breaks to millionaires like himself. We previously rated that claim Half True- the millionaires part of Baldwin’s claim was correct, but the middle class part far less clear.

In the same email, Baldwin got more specific.

She claimed she "is fighting for a country where opportunity exists for everyone -- not just the 7,000 millionaires who gamed the system to pay no income taxes on their fortunes."

Did 7,000 millionaires pay no income taxes because they "gamed the system"?

7,000 millionaires, no taxes

Baldwin campaign spokesman John Kraus cited as evidence a table published in July 2011 by the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution in Washington.

The center estimated that 7,000 households that earned "cash income" of more than $1 million in 2011 paid no federal income tax. That’s an estimate based on taxpayer data, not a hard number.

Roberton Williams, a senior fellow at the center, told us the center now believes the figure is 4,000 millionaires, but said he doesn't fault Baldwin for using the larger number given that the table has not been revised. The 7,000 figure has been widely cited on the Internet.

As for the "cash income" measure, it includes compensation that isn’t taxable, such as employer-provided health insurance. Williams said the Tax Policy Center viewed that as a more accurate way of defining millionaires, but he acknowledged it is a broader measure than what the Internal Revenue Service uses.

Indeed, that’s what The Washington Post Fact Checker found in examining the 7,000 figure in April 2012, nine months after publication of the table Baldwin relies on.

If adjusted gross income -- the figure at the bottom of your 1040 tax form -- is used, 1,470 millionaires paid no federal income taxes in 2009, according to the most recent IRS figure available. According to the Tax Foundation, another Washington, D.C., research group, the figure dropped to 1,403 in 2010.

As for millionaires as a class, according to the Tax Foundation, millionaires paid an effective tax rate of 25 percent and paid 22 percent of all federal income taxes collected in 2010.

So, Baldwin relied on a respected group for the 7,000 figure, but the number is actually smaller, and that had been established months before she made her claim.

Gaming the system

The second part of Baldwin's claim -- that millionaires who paid no federal income taxes had somehow "gamed the system" -- suggests they did something improper.

Kraus, Baldwin’s spokesman, provided as evidence a May 2012 news article in the Milwaukee Journal Sentinel about Beloit billionaire Diane Hendricks, who serves as treasurer of Thompson's campaign. The article said Hendricks paid no state income tax in 2010, which was attributed to a change in the corporate structure of a company she owned.

But Baldwin's claim was about federal taxes. So at best, Kraus is off point.

Williams, of the Tax Policy Center, said the roughly 1 percent of millionaires who pay no federal income taxes are able to do so because some sources of their income aren’t taxed and because of deductions provided in the tax code.

Aside from employer-provided health insurance, other types of income that aren’t taxed include tax-exempt municipal bonds. In addition, some high earners, such as certain hedge fund managers, can avoid higher tax rates by receiving more of their pay as capital gains rather than earned income.

Items that can reduce a millionaire’s taxes to zero include credits for taxes paid on income received in foreign nations, and deductions for charitable contributions made, as well as for state and local taxes paid.

Scott Hodge, president of the Tax Foundation, agreed that foreign tax credits and deductions for charitable contributions are key reasons why some high earners pay no federal income tax. Another big reason is many of those households own businesses that suffered losses, he said. Hodge said none of those factors constitutes having "gamed the system."  

Indeed, when it was disclosed in September 2012 that GOP presidential nominee Mitt Romney said 47 percent of Americans pay no federal income taxes, PolitiFact National rated his statement True. Utilizing Tax Policy Center research, our colleagues found that about half of people who don’t pay income taxes are simply poor, and the tax code explicitly exempts them, while the rest benefit from tax breaks.

Williams said that if people feel there is something wrong with a system that allows some people to pay no income taxes, they should work to "fix the system, don’t complain about people doing perfectly legal things."

Our rating

Baldwin said 7,000 millionaires "gamed the system to pay no income taxes."

But her figure is high and she provides no evidence that millionaires "gamed the system." What’s clear is they worked within the system, however flawed it may or may not be.

We rate Baldwin’s statement False.  

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