March 26, 2004
Cay Johnston, Author of "Perfectly
Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super
Rich -- and Cheat
Everybody Else," the
Book on How the Middle Class is Getting Ripped as the Rich Pad Their
A BUZZFLASH INTERVIEW
Is the American tax system ripping off just about everybody but the super rich Bush supporters? You bet.
Award-winning NYT reporter David Cay Johnston reveals the corrupt truth of the American tax system in "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else."
This is not your usual tax book. It was an immediate bestseller. John Kerry took two days off of campaigning in February to read it, Knight-Ridder Newspapers reported. (He also bought another copy recently at a much-covered trip to a Boston Borders.) A broad spectrum of Americans have endorsed the book, from Ralph Nader to Lou Dobbs.
What "Perfectly Legal" does is show how our national myth that the rich are heavily taxed to benefit everyone else is untrue and that the middle class and the upper middle class, those making $30,000 to $500,000, are heavily taxed to subsidize the super rich.
"Perfectly Legal" is based on nine years of reporting by David Cay Johnston, who won the Pulitzer Prize in 2001 and was a finalist for that award three other times.
And the story is told not in dry text, but through the lives of individual Americans from all walks of life who were rewarded, or punished or cheated and got away with it. The book even names two billionaires who did not file tax returns for 30 years and were never prosecuted.
You will learn that the income gap is vastly greater than you ever imagined -- the top 29,000 Americans have as much income as the bottom 96 million. And tax burden for the richest Americans has been falling sharply while everyone else's has risen. Most people making $60,000 pay a larger share of their income in federal taxes than the top 400 Americans, whose average income in 2000 was $174 million each. They paid just 22-cents on the dollar in federal taxes and under the Bush tax cuts would pay just 17.5 cents on the dollar.
Indeed, in 1970, the bottom group, a third of all Americans, had more than ten times the income of that very top group, the top 1/100th of 1 percent or top 29,000. By 2000 they were equal because the bottom third's income fell while the top group's income went through the roof.
"Perfectly Legal" shows how the tax police, the IRS, have been cut in size and then handcuffed, ordered to go after the working poor and to ignore tax cheating by the politically connected rich. And it names names throughout.
This book is written for the American public, not accountants.
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BuzzFlash: We were reading a Forbes interview you did. You're a reporter, of course, with The New York Times, and yet you take a position as an individual: You believe that taxes are an important part of government. And I'll quote from the Forbes interview: "Taxes are the means by which we decide how we're going to finance maintaining our democracy, who pays how much, how the burdens are distributed."
David Cay Johnston: It strikes me that that's the most fundamental, classic conservative statement you could imagine making about taxes. All civilizations have taxes. All civilizations that have lost their tax systems no longer exist. The Founding Fathers understood the importance of taxes. It's in Article I, Section 8, of the Constitution: "Congress shall have the power to lay and collect taxes." And except for three minor nits, one of which we've removed, the power to tax is virtually unlimited because the Founding Fathers understood that this was a political matter that needed to adjust with the times.
Let me just carry one further on that. You know, Athens was a tyranny at one time. And when it was a tyranny, it had a flat tax. Everybody paid the same tax. When the Athenians went to a tax based on ability to pay, democracy flourished. Your taxes are absolutely at the core of our democracy, and without taxes, there is no democracy. And I think that's a very classic, conservative observation.
BuzzFlash: You mentioned one has been removed. What were you referring to?
David Cay Johnston: The 16th Amendment removed the requirement that would have made an income tax impractical. And it's because of the 16th Amendment that we can have an income tax. Otherwise, each state would have ended up paying the same amount, even though there are different populations in each state.
BuzzFlash: Okay, let's play devil's advocate. Some would argue that basically we are a country with an anti-tax sentiment. After all, one of the events leading to the American Revolution was the Boston Tea Party, the revolt against the tax on tea imposed by the Crown of England.
David Cay Johnston: Actually that's not what happened. The Boston Tea Party was a demonstration in favor of a tax. What happened was that the Crown gave the East India Company an exemption from a tax. And the Colonists understood that that meant that anyone in the domestic tea business in the Colonies would be driven out of business over time, and would lose business. And so this was actually a demonstration in favor of fair and equal taxation, not giving a tax break to a favored few.
BuzzFlash: Opposing a tax break to a favored few.
David Cay Johnston: That's exactly right. It was in opposition to that. And understanding that story and how it is mis-taught in American schools is one of the most important lessons that I hope people get -- that the issue then was not against taxation. The revolutionary call was "no taxation without representation."
BuzzFlash: This has been misrepresented. And obviously when the Bush administration has used the slogan of "tax relief," that is a framing device that professor George Lakoff, a sociologist at University of California at Berkeley, has indicated is a hard slogan to resist, because it implies healing and relief, and taxes as a burden, rather than as a contribution to the community.
You, on the other hand, point out in your book that in reality -- and this is true under a Democratic or a Republican administration, because you go from the 1970s to 2000 -- the percentage of income tax paid by the most wealthy Americans has actually decreased as a percentage through Republican and Democratic administration alike. Your argument would be that the middle class -- people making $30,000 to $500,000 per year -- actually aren't getting relief.
David Cay Johnston: That's exactly right. What's going on in our system is we have representation, in that we have an elected Congress, but the people who are seriously involved in politics are people with really big incomes, and large corporations. Every member of Congress will say to you, "You can't buy my vote." Okay, I accept that. Occasionally we get a congressman who did sell his vote, but that's not the norm. The norm is you can't buy. What you buy is access. And the only people who have real meaningful access to members of Congress are the political donor class and the professional lobbying groups in Washington. They have been very actively involved in government, when millions and tens of millions of Americans have quit voting and have quit paying attention to what's going on. There actually was a survey in which more Americans were able to identify Jennifer Lopez' lover than their congressman.
So what we have is a small group of people within a huge economic stake in the government staying deeply involved in politics, and being able to increase their access because of our campaign contribution system, while at the same time tens of millions of other Americans were withdrawing from politics over the last 30 years, and amusing themselves with nonsense -- the glitz-mongering media. And, surprise, surprise, our government increasingly reflects the concerns and interests of those people who've stayed active in exercising their Constitutional rights. So if we want a tax system that serves all Americans, that rewards strivers, that rewards people who play by the rules, that rewards people who are trying to get ahead, we have to all exercise our duties as participants in a democracy, instead of ceding our democracy to a very narrow group of people.
BuzzFlash: There are some startling statistics in your book. You mention that in 1970 -- and I'll quote this; it's a paragraph -- the top 1/100th of 1 percent of Americans had about 1 percent of the income, and the bottom third had more than 10 percent of the income. Now they are equal, and just 27,000 people have as much income as the bottom 96 million Americans. And the number of people it takes today to account for 1 percent of all income -- well, in 1970, it was more than 20,000 people, and today, it's less than 400. How has this happened?
David Cay Johnston: President Bush actually explained this really well to people. President Bush says that the way to measure tax burdens is how much of your money do you get to keep. Now without quarreling with his interpretation, let's examine what he says. How much of your money do you get to keep? The more that you get to keep, the more you have the freedom to either spend it on your lifestyle today or save and invest for the future. Well, for people at the very top of the income pile, their tax burden has been falling, and they have more and more income to save and invest. Now if you are in the top group -- if you're making $10 million or more -- you can't spend your entire income unless you're a gambling addict or, actually, I don't know how you could spend it unless you're a gambling addict, because, if you're buying oil paintings, those don't lose value unless you're a complete idiot. You mostly are investing that income, okay? Well, investing works, as anybody who got in a 401k plan knows, over the long term. Forget about the downturn of the market right now. It's a snowball. You add new contributions to the snowball and the market returns part of it to you. And pretty soon the magic of compounding interest is bigger than your contribution, and that snowball gets bigger and bigger, and your income gets bigger and bigger. So that if you are relieved of a substantial burden of taxes, and you have the capacity to save substantial amounts, you will get wealthier and wealthier.
Meanwhile, people in the middle class and the upper middle class are confronted by two things. A growing share of their income is going to taxes, and we have seen falling wages for the bottom, about 40 percent, of Americans; stagnant wages for the next 40 percent of Americans; infinitesimal growth in income for the next 10 percent -- that brings us to the 90 percent percentile -- and this incredible concentration of incomes at the very top. When one-third of Americans belonged to unions, more than two-thirds of Americans benefited from that because there were employers who did not want to have unions, so they paid premium wages -- and by the way, tended to get the very best workers as a result, as classic economic theory says they should. Lots of low-level managers at companies, their wages were basically set by the unions. To the extent that we set up the rules to shrink unions, we drive down wages -- and America is the only nation in the modern world that is driving down wages.
BuzzFlash: That's extraordinary.
David Cay Johnston: They get a 15-cent-an-hour job in Malaysia making Nike tennis shoes -- that is a wage growth strategy for Malaysia. We are the only country in the world that is in the pursuit of lowering wages. And it's been a very successful program. So you combine all of those forces, and you can see why the data, the official government data, which were right there for anybody to report on, but nobody in Washington announced: Oh, the top 400 taxpayers -- it's actually about a thousand people when you count the spouses and children -- the top 1,000 people in America are earning more than 1 percent of the income, when 30 years earlier, it took more than 25,000 people to earn the top 1 percent of income in America. No one announced it, and, therefore, to most of the news media, it's not a story.
BuzzFlash: Again, to play devil's advocates on a political level, let's take Howard Dean. Howard Dean says let's roll back the tax cuts, and pundits and your fellow journalists, the ones on television, say that's political suicide. The American public -- you just can't tell them you want to roll back tax cuts.
David Cay Johnston: Well, if that's what you tell the American public, of course people would be against that. That's like the question that was asked by the opponents of the estate tax. Since the estate tax represents third, fourth and fifth taxation of the same dollar, and it's destroying American jobs, are you in favor of the estate tax? And, surprise, surprise -- 80 percent of Americans or 90 percent said no, they're against that tax. The question's not true. The people you see on television, in most cases, are not serious journalists. And many of those who are serious journalists, they're not investigative or enterprising reporters; they're political reporters. And they're telling you the perceived political wisdom. I don't do that. I do enterprise work. I decide what I think is news based on what I find, and this is what I've done my whole career -- well, maybe not the first five years when I was learning. But I decide what's news, and I go persuade my editors that it's news, and get it in the paper.
It is one of the great bad things happening in America -- that we do not have the degree of skepticism in journalism that we had in the 70s and the 80s. It is this constant acceptance of this official version of events. There's a very tricky number, Mark, to get to the real key people who do not want to pay taxes in America: the Koch brothers, the Mars family, Richard Mellon Scaife. (J. Howard Marshall Koch was the doddering old man who married Anna Nicole Smith). The people who've been financing the anti-tax movement have hired a whole coterie of very smart people in Washington to figure out how to design arguments that favor what they want, but make it sound like it's good for you. And one of the best ones they've got is: The top 1 percent of Americans pay 37 percent of the taxes -- that's for the year 2000, more than 37 percent. Well, actually, the top 1 percent, who made 21 percent of the income, paid more than 37 percent of the income taxes. When you look at all federal taxes -- gift taxes, estate taxes, Social Security taxes, Medicare taxes, excise taxes on gasoline and things like that -- the top group only pays 25 percent, which isn't much more than their 21 percent share of the income.
But the measure is a bad measure. Every top businessman and every senior executive believes that if you want to make profits, you have to measure what you're doing. You have to measure, measure, measure. You have to spend a lot of money measuring. But you have to measure the right things. Well, the entry point for the top 1 percent income group in America is not much above $300,000. Because my wife works and I work, and I have this book out, I'm in that group at the moment, okay? But it goes all the way up to a couple of billion dollars of annual income. I have nothing in common with somebody who makes $10 million a year economically. And when you break down the top 1 percent, and you say what's going on here, you find out the people at the bottom of the top 1 percent -- people making $300,000 $400,000 $500,000 a year -- they are being squeezed by the system. And people who make tens of millions of dollars a year are getting enormous relief on their taxes.
Who are the typical leaders in cities and towns across America? The minute you get away from Los Angeles and New York, and you go to Cincinnati, or Rochester, New York, or Anytown, America, what is the income level of the leaders of that community? $200,000 $300,000, $400,000, $500,000? There's a few people who make a million. There are one or two there who make $5 or $10 million. But for the core group, that's their income range, $200,000 to $500,000. They're being squeezed. And when your civic and local business leadership class is being squeezed it assumes the people above are being squeezed even more because that's what they see. But the people who make 10 or 100 times more are not being squeezed. And this false belief that the higher your income the bigger the share of it you pay in taxes is being exploited by people above them, so that the people at the very, very top who don't want to pay taxes can continue to benefit from tax relief. And the people down below haven't figured out that they don't have common cause with those people -- and are actually subsidizing those who make much more than they do.
People who make $200,000 are very well off. But they still go to work every day. They still have mortgages on their houses. They're not in the group of people who own a private jet, and have limousines, and own six houses. That's a totally different world. And innumeracy is a fundamental part of this problem. People don't grasp the difference between $200,000 and $200 million.
BuzzFlash: Your book is called "Perfectly Legal" and in it you're describing a tax code that has been worked upon by the very rich.
David Cay Johnston: Most Americans believe we take from people at the top to benefit those below. And what I show in the book from the data is that's not the case. Our national myth -- and I use that in the classic sense of the word "myth" -- is wrong. We take from people who make $30,000 to $500,000 to give relief to those, who make millions, or tens and hundreds of millions of dollars a year.
BuzzFlash: And you mentioned one of the vehicles that undercuts the notion that the middle class -- let's say the person earning $50,000 or $60,000 -- is getting tax relief is the alternative minimum tax. Can you explain that? Because I think a lot of people don't really know what that is, or how it's affecting them.
David Cay Johnston: I often call it the stealth tax, because it sneaks up on you. In 1969, it was revealed by the Johnson administration, three days before it ended, that 155 Americans who made the equivalent of a million dollars a year or more in today's dollars paid no income taxes. Remember, the U.S. government taxes you on your worldwide income to Americans. So nowhere in the world did the 155 people pay taxes. Congress got more letters about that that year than they did about the Vietnam War. It really struck home with people. So Congress passed a law that was designed to make sure that if you made the equivalent of a million dollars or more, you have to pay some taxes, because most people that make that pay a lot of tax.
Well, over the years, the laws morphed and were changed by Congress. And it largely ceased to be a tax on people who make more than a million dollars a year. But under the Bush tax cut, it will become a huge government moneymaker from the middle class and the upper middle class. Since 1986, under this law, if you take a lot of deductions, you lose your exemption for yourself and your spouse, and your children. You cannot deduct your state income taxes. You cannot deduct your property taxes on your home. If you or your spouse or one of your children is sick, and you're trying to keep them alive -- let's say they have cancer, and you're spending 10 percent of your income or more on your medical bills -- our government will tax you for trying to keep your loved one alive. You can even lose the standard deduction -- the most passive thing you can do as a taxpayer. You don't itemize; you just take the standard deduction. If you're a married couple with three children who made $75,000 last year, you lost part of your standard deduction to the alternative minimum tax or stealth tax.
Now under the Bush tax cut, by the standards of President Bush, there is a one-half trillion dollar increase in alternative minimum taxes. And that money is explicitly being used to finance the reduction in taxes for people at the very top who make millions of dollars. You can go back into the government documents and see this. It was even discussed at the time in the general news media that Congress would only approve a $1.3 trillion dollar tax cut. The President wanted $1.6 billion. It was probably as a number of critics have argued really a $2 trillion dollar tax cut -- but how do you stuff more than $1.3 trillion into a $1.3 trillion dollar bag? Well, the way you do it is the alternative minimum tax takes away the Bush tax cuts for millions and tens of millions of people in the middle class and the upper middle class, and that allows you to maintain the full Bush tax cuts for people at the very top.
If you are married and have children, you are 30 times more likely to pay this tax than if you're single. So much for, "We're here to help the American family." If you make $75 to $100,000, and have two or more children, there's a 97 percent chance you are going to lose part of your Bush tax cut to this tax. And, overall, 42 percent of the tax cuts for people in that income group will be lost because of this stealth tax. By the way, the only way you know if you pay it is you look on your tax return on line 43.
Click Here for Part 2 of the BuzzFlash Interview with David Cay Johnston.
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