Since election day, the so-called “fiscal cliff” has moved to the top of the political news agenda, and CJR has already critiqued the shallow reporting and false frames on display in much of this coverage. Unfortunately, some of the reporting on the purported economic consequences of the “cliff” isn’t much better.
Consider an article earlier this week from The Washington Post, reporting in part that people are rushing to sell assets before year-end to avoid possibly higher taxes on investment gains. The story is a model of how not to do it.
“Financial advisers and accountants say people are trying to avoid the higher taxes that will take effect in 2013 if Washington does not avert the ‘fiscal cliff,’” reporters Michael A. Fletcher and Dina ElBoghdady write up high in the article.
Investors named? None. Named sources? One policy analyst, one accountant, one lawyer who claims he is “swamped” with business, one financial planner, and one real estate agent (not even a broker, but a sales agent).
Late in the story, the agent shares an anecdote that actually offers the most specific piece of evidence in support of the article’s thesis: he “said he has been approached by two people in the past 90 days who are eager to sell their investment properties before the capital gains rate jumps. One of them is furiously negotiating with two potential buyers as he tries to move his North Potomac townhouse before Dec. 31.”
That’s a thin reed. To test its hypothesis, the Post could have consulted with a variety of organizations that collect data on the real estate market—or even examined the trendline for listings of multi-family properties in its own pages, compared to earlier periods. And what of this basic economic fact, left unexamined in the Post’s report: If lots of owners are rushing to sell by a fixed deadline that should push prices down, offsetting some or all of any tax benefit.
But there are two more serious problems with this vague anecdote, and both are revealing about the muddled quality of much “fiscal cliff” reporting.
First, real estate prices have come down, so overall investments in real estate have muted profits to losses, not fat gains. Though they have recovered substantially from the low point in spring 2009, housing prices in Washington, DC are still down about a quarter from early 2006, according to the Case-Schiller index. At the end of September, home prices in the district were at about the same level as in the summer of 2004.
That means that many owners of investment properties face, if they sell, no capital gains tax. And if investors are poised to take losses, those losses may be more valuable under a regime of higher taxes, when they could offset gains on other properties. Such a scenario would augur for delaying a sale until taxes go up, not rushing it to beat the hike.
But the deeper problem is that the tax most likely to affect this “furiously negotiating” unnamed seller is not scheduled to change Dec. 31, when the Bush tax cuts are set to expire and long-term capital gains rates are set to rise. The levy in question is the so-called “recapture tax” on depreciation of buildings, a paper loss that is part of what makes investment real estate a tax shelter for buyers who qualify for the tax benefits. The recapture tax rate is 25 percent in most cases, and it is not scheduled to change next year. That crucial fact undercuts, if not obliterates, the premise of the Post anecdote.
Dean Baker, a liberal economist who spotted the housing bubble years before it burst, critiqued this same Post piece at his Beat The Press blog.
Baker initially misstated what the Post had reported, and commenters jumped on him. But their posts were also riddled with misleading statements. None seemed aware that recapture rates are not scheduled to change, among other misunderstandings.
The point here is not that reporters, or even economists and their critics, should become expert at tax law. The point is that reporters should report—which means seeking out hard data rather than anecdotes, and sharing it with readers—and not just accept what they hear in the echo chamber of Washington or in interviews with secondhand sources. Start with a skeptical attitude, and you are less likely to end up with unsubstantiated claims under your byline. (There is one part of the Post that excels at this: its online Wonkblog, which gives readers smart explanations of the issues in plain English and almost always gets its economics solidly reported.)
On the broader subject of the economic effects from the possible end of the Bush tax cuts and automatic spending cuts (which President Obama has said are “not going to happen”), meanwhile, there are some other ways to examine behavioral responses and test political rhetoric against reality.
One test would be to look at how much businesses are spending on new machinery and other equipment in light of changing depreciation schedules.
Historically, companies wrote off new equipment over three to 15 years. But companies got to take an immediate 100 percent write-off on all new equipment in 2010 and 2011. That fell to 50 percent this year. Barring any deal, the normal depreciation schedules will be restored, reducing depreciation significantly. Most small businesses invest so little that they get an immediate write-off, so the issue here is mostly with companies that count sales in the tens of millions and up.
So we’d want to see data that tell us: Did bigger companies increase capital spending in 2010 and 2011 and, if so, by how much? And are companies racing to take advantage of the 50 percent write off before month’s end?
No matter the answer, there is a story there—yes, the “fiscal cliff” matters to current economic decisions; or not so much, if at all.
Either answer leads to other questions. If companies are racing to get equipment in service by the end of the month, what is happening to production? Are equipment makers putting workers on overtime to fill these orders before the deadline? Are trucking companies hiring extra drivers to get machinery delivered? Are machinists and welders and engineers working weekends to beat the deadline?
And would such hiring and extra pay be good for the economy or bad?
Alternatively, if the “fiscal cliff” is not driving a rush to get new equipment installed immediately, what does that say about the unstated premise that tax rates are driving investment decisions, both of companies and of individual investors in those companies?
It would also help if reporters noted in their stories that tax laws can be changed, retroactively and sometimes have been. Focusing on such facts will help free us from the obfuscating term “fiscal cliff.”
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Rise Above, CNBC’s move into advocacy
David Cay Johnston covers fiscal and budget matters for CJR’s United States Project. He is a reporter with 46 years of experience, including 13 at The New York Times; a columnist for Tax Analysts; teaches tax and regulatory law at Syracuse University Law School; and is president of Investigative Reporters & Editors (IRE). Follow him on Twitter @DavidCayJ.