ProPublica outraged over own misunderstanding about tax deductions

December 10, 2021

By Tim Worstall

ProPublica reported that because a business is owned or run by a billionaire, then it must be a hobby. That’s the background to their claim that billionaires get tax deductions for their hobbies. The truth is that only a business that is trying to make a profit can create tax loss deductions. This is as it should be, and the IRS does check on this, too. 

What ProPublica is really outraged about is that if someone already rich has or runs a business that makes a loss then that loss is a tax deduction. But that’s how it should be. We are all taxed on out net income, not our gross. If we make a profit here and a loss there then it’s the net income that results which has the taxes applied to it. 

Instead ProPublica talks about “When You’re a Billionaire, Your Hobbies Can Slash Your Tax Bill,” which simply isn’t true at all. Hobbies don’t create tax deductions. As an example, they use horse racing, which is an excellent place to go and lose money. But they also say: “A victory would bring not only a seven-figure purse, but possibly also tens of millions of dollars in breeding rights over years to come.” 

Horse racing – owning and breeding horses – is one of those business areas where some few make vast profits and everyone else makes continual losses. But only those who are at least trying to make the profits gets to use the losses as a deduction. That’s just how the system has to work. Hobbies don’t give deductions, trying to run a business for profit does. 

ProPublica presents itself as a nonprofit newsroom that “produces investigative journalism with moral force “. It’s at 345 in the global listings of news and media sites and gains some 3 million visits a month. This reach is hugely expanded by republication of pieces in other media outlets. 

A helpful start to journalism is to understand the system that one is trying to investigate or critique. Facts do matter after all. The basic truth about the American taxation system is that it might not be perfect but does not allow hobbies or even personal desires to become tax write offs. Not even for billionaires is this true. A business loss that can be offset against other income can only be generated by a business attempting to turn a profit.

Telling the world otherwise, even implying it, is not journalism — it’s somewhere between misleading and just plain wrong.


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