March 29, 2004

A BUZZFLASH INTERVIEW, Part 2. Click Here For Part 1.

"The facts are that we're down 9 million jobs. You keep hearing in the news media we're down 3 million. You have about 3 million fewer jobs than we had in 2001. But during that period of time, normally we would have created about 6 million jobs. So we're really down 9 million jobs in America." -- 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."

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BuzzFlash: I know you're basically an economic journalist, but --

David Cay Johnston: No, I've been in investigative reporting my whole career. This is just part of investigative reporting.

BuzzFlash: In this case, you certainly would persuade anyone you had a background as an economist.

David Cay Johnston: Oh, sure. And I'm not an economist. I studied economics a great deal because I realized, early on, they were important to doing investigative reporting. But I've used this knowledge for other things, like I was the first reporter to seriously expose the Los Angeles Police Department in the L.A. Times. And a lot of what I was able to do was because I was able to show how they were spending money, and what it told you about the priorities of the police department.

BuzzFlash: With that in mind, let me ask you to speculate why, given the economic facts that you marshal in your book -- and again, it's quite detailed and well documented --

David Cay Johnston: It's all empirical evidence.

BuzzFlash: Why, politically, can't progressive Democrats make the case to the middle class that they're being pick pocketed by the Republicans?

David Cay Johnston: First of all, I don't think Democrats need to make it. I think politicians need to make it. I think it needs to be made to politicians. The principal thing that's going on, however, is that the conservative elements in Washington have a number of large institutions, which the media generally treats as think tanks, but which I think are primarily ideological marketing organizations. They craft and hone and develop arguments that appear to the general public to be for their benefit, but that, when carefully examined, turn out repeatedly to favor the super-rich. And the Democrats and the liberals, and the moderates in the Republican Party, they don't have anything like that. There is just nothing at all like that to develop and hone arguments for them. So we end up with a situation in which the conservative anti-tax Republicans have an agenda, and the moderates and the liberals, don't have a clue. There's no heavy ideological background for them.

Secondly, it's easy to be against something, and they've spent years demonizing both the tax system and the IRS. And that's a bizarre theme for conservative Republicans to be doing because I can't imagine a conservative Republican attacking law enforcement. But the IRS is the tax police. And the public needs to understand that they're the police. And if you're a businessman, and you're competing against businesses who are cheating on their taxes, and the government's not doing anything about it, you're going to get run out of business. Only when you demonize people and make them illegitimate can you get away with what is fundamentally an attack on the integrity and capacity of law enforcement. And that's what we're seeing.

The people who have benefited from that are the very wealthy, highly aggressive, anti-tax crowd. They have now succeeded in having a system in which we have two tax systems in America, separate and unequal. One is for wage-earners. The government knows what you make. It takes the money out of your check before you get paid. The government even knows how much you paid in mortgage interest. You can't cheat it. It's an effective and efficient system. You can chisel; that's all you can do. But if you are a super-wealthy individual who owns assets, and owns businesses, particularly if you're able to operate on a multi-national level, you are able to engage in all sorts of complex transactions and structures to make it appear your income is not as high as it is. And there's no law enforcement going on. Your odds of being audited if you invest in a partnership -- and those are primarily the province of the very wealthy -- one in 400. I've interviewed literally more than a hundred IRS auditors, economists, historians, sociologists, appeals officers, and tax collectors, who have all told me stories of how, when they have been digging into tax returns of the politically connected rich, have been ordered by low-level supervisors to back off. And I tell in the book about this. The system is rigged for those folks.

BuzzFlash: But you do point out the IRS doesn't hesitate to go after women, Hispanic, who earn $7,000 a year in East Los Angeles.

David Cay Johnston: Congress specifically gave money at the agreement of President Clinton and the urging of Senator Don Nickles of Oklahoma to go after the working poor. They didn't give them extra money to go after offshore tax cheats, corporate tax shelters. They gave the money to go after the working poor. Now think about this for a minute. If you were in the group that doesn't want to pay taxes, and you want to shift the burden of taxes off, you create a system that constantly says that poor are the problem. And you badly design the system for the poor. You generate statistics that show mostly mistakes, but you can lump in with abuse and fraud with the emphasis on fraud in your sentences.

If there's fraud -- all capital letters -- and abuse -- all capital letters -- but mostly there are just errors you can demonize the poor as unjust beneficiaries of your taxes. Then there's a fair amount of auditing of people who are in the moderately prosperous class, people who are making $100,000, $200,000, $300,000 a year. They will get audited somewhat. And then you say there's no money to audit the very rich, and you set up mechanisms within the IRS that allow, behind closed doors, to shut down a lot of audits of the super rich if the audits are getting into troublesome areas. This goes on again and again and again. The audit bosses tell the front line auditors to close an issue. That's the phrase used -- the term of art -- "close an issue." And you have the best of all possible worlds. Then you get Congress not to investigate this favoritism for the politically connected rich, but instead Congress investigates the alleged -- and it turns out, non-existent -- abuses by the jack-booted legs of the IRS. And you also reduce radically the number of employees at the IRS who are law enforcement people. Auditors are detectives. They're just tax detectives instead of burglary detectives.

BuzzFlash: Now in the interview with Forbes magazine, they challenged you. They used a phrase that is used, I believe, by the Bush administration, or certainly it's a perception that the Bush administration believes, which is that the super-rich are really wealth creators. And therefore, tax cuts for the wealthy are basically something that benefits society as a whole. What is your response to that?

David Cay Johnston: Well, the dollar that I invest or that you invest is the same as the dollar invested by someone who's very wealthy. And in all likelihood, you and I put it into an investment pool through a mutual fund, which is a secondary investment. Or we save it, and it's invested. And its yield is just as valuable as anybody else's dollar. That would be my first argument. Now some economists will come back and say: No, no, no. You are not going to take the high-risk investments that people with very large incomes will. Okay, I'll buy that. That's actually true. But at the same time, if I spend that dollar, then I'll spend it on something which those high-risk investments are trying to exploit through selling a product or a service, one way or another.

Secondly, and perhaps much more importantly, because we have one set of rules for capital on a global scale and another for labor, we are creating what is known on Wall Street as an arbitrage. There is no question, I think, at this point, that tax cuts for very wealthy Americans have resulted in investments and job creation. And right now we're seeing that a great deal of the money that people are not paying in taxes is being invested to create jobs in India, and in China, and in Malaysia, and in other countries where there is little or no tax on these companies. And once you move your money out of the United States -- trust me, if you're not going to Europe or Japan or Canada, you can arrange to pay little or no tax on the profits you've earned. And as long as you don't repatriate the money, the U.S. government won't tax you on that money.

We have a tax system that says to people with great wealth: Move your money out of the United States. Invest it offshore where labor costs are lower, where taxes are lower, and make a higher return and get even richer. The problem is that, back in this country, you are creating economic illness. You are draining the life out of our democracy. Now those people who believe we should have a big foreign aid program should be thrilled-- you know, foreign aid has been a fraction of 1 percent of the U.S. budget, and it's mostly spent in America, buying American goods. If we give a hospital somewhere to a foreign country, they have to spend the money buying American technology and having Americans come in and build the hospital for them. We now have a very massive foreign aid program, and it's called tax cuts for the super-wealthy.

BuzzFlash: So in some ways, the series of Bush tax cuts has created jobs, but the irony is that the jobs have been created then overseas.

David Cay Johnston: The facts are that we're down 9 million jobs. You keep hearing in the news media we're down 3 million. You have about 3 million fewer jobs than we had in 2001. But during that period of time, normally we would have created about 6 million jobs. So we're really down 9 million jobs in America. And the reason we have low unemployment is lots of people have quit looking for work. Now this trend, though, did not start with the Bush administration. It started with the Democrats. The Bush administration has simply run with it. And that's the ball on that thought. It is important, and the news media has not made this clear to Americans. I don't think most Americans, from my talking around the country -- and in the first two months of this year I made 31 flight segments this year around the country, talking to people -- most Americans do not understand that it is the stated policy of the Bush Administration to eliminate all taxes on capital. Now we can decide to eliminate all taxes on capital. The Constitution allows that, and if Americans want to stop all taxes on capital, then we should do that. But the news media has not explained to people both that that's the policy and what it would mean. Fundamentally what it means is if you don't tax capital, there's only one other thing to tax: labor.

BuzzFlash: Can you define capital?

David Cay Johnston: Sure. That's the money that you get from dividends, rents, interest, some royalties -- not all. Book royalties, for instance, are labor income, but royalties from a patent that you own, or for licensing something, those are capital royalties. And then capital gains -- that is, you buy an asset for a dollar, and you sell it for 10 dollars. That's a gain. And people think of that in the stock market, but it's true of all kinds of activities.

BuzzFlash: Buying a building and selling the building.

David Cay Johnston: Buying a building and then selling it later. And so if we want to have a system where we only tax labor, we can do that. I just think Americans need to understand what we're doing. And we're not hearing a rounded, focused debate about the issues.

BuzzFlash: Just a few more questions. I came across an article that quotes you. I thought I would bring it up because it's the kind of example of a legal taxpayer rip-off we read about all the time around the nation. It was, in the scheme of things, a relatively minor municipal project that offered investors an 11 percent annual return tax free. But it symbolizes so much.

David Cay Johnston: Right.

BuzzFlash: This one was specifically in Texas. In Grapevine, Texas.

David Cay Johnston: Which is a wealthy suburb of Fort Worth.

BuzzFlash: And it involved an aquarium that would eventually revert to the city after 20 years in the form of a nonprofit organization. And the city needed like $12 million additional investment, so they set up this scheme. And they asked you for your response here. What's wrong with this? The journalist did a pretty good job in explaining how the whole project unfolded, and how it came to be. And, of course, it was all perfectly legal.

David Cay Johnston: Now my observation was that this is part of a trend of what's called narrowing the tax base. In 1986, we had fundamental reform of our tax system. And the reason we were able to lower tax rates, at least for those at the very top, and at the top the rate fell to 28 percent of your income, was that we said we're going to tax more income. Currently in America, according to John O. Fox, who is a professor at Mount Holyoke, almost half of the income in America is not currently taxed, because of deferral devices and loopholes, and explicit policies of Congress. When we say to people: You don't have to pay taxes on this income, and we're going to create a device over here for you to not pay taxes, we are narrowing the base and shifting the burden of taxes onto other people.

BuzzFlash: So the small 11 percent project --

David Cay Johnston: I'd love, in today's market, to find a safe 11 percent investment.

BuzzFlash: But in the scheme of things relative to all the schemes going on, this is, I mean, it's a $12 million project. But let's look, for instance, at how many stadiums are built nowadays with tax-free --

David Cay Johnston: Sure. Yes, yes, yes. It's not substantial; it's a little project. But you have hundreds of these little projects all over the country, or thousands of them. A billion here, a billion there -- now you're talking real money.

BuzzFlash: And in some cases, I know Jim Bouton, the former baseball star, wrote a book about how for a minor league team, he was trying to save a historical stadium in Pittsfield, Massachusetts. And there were all these forces that were conspiring to build a new stadium no matter what, because there were tax deductions involved and investors who stood to gain. (http://www.jimbouton.com/foulball.html)

David Cay Johnston: There were big tax benefits and other economic benefits doing the other projects.

BuzzFlash: So even though people wanted to save this traditional, great city ball park, the investment scheme was so powerful, as were the forces around it, that he was basically railroaded. This little example of what's happening in Grapevine is really a model of what's happening everywhere. And this 11 percent that these investors are getting, you're saying, is, when you keep adding it up with all sorts of other things, contributes to the half of an income that isn't taxed in the United States.

David Cay Johnston: Exactly correct. And most of that untaxed income is not from working stiffs.

BuzzFlash: Someone's got to pay it, and it ends up that the working stiffs pay it. So even if they're getting minor tax relief, they're paying it more in the end because the wealthier are paying less.

David Cay Johnston: That's exactly right. The people with higher incomes are paying less; paying a shrinking share of their incomes, which are exploding. Wealth and incomes don't always go together. There are people who have enormously high incomes and no wealth because they spend it all. Or they're profligate, or they're idiots. But we are fundamentally, in this country, without a public debate about it, and without people understanding it, not just giving tax cuts to people at the top -- there's been news coverage about that -- but more importantly we are shifting the burden of government off of those people who had received the greatest economic rewards from being in America onto everyone else.

We live in a society where -- and you see this in CEOs all the time -- there is the culture of what I call "I." How many times have you seen a CEO say: I did this. I did the following. I created this wealth. I should get paid all this money because I did this. Not the tens of thousands of people who worked for the company -- "I." And the fact is nobody who is wealthy in America did it on their own. Bill Gates is a wealthy man because, long before he came along, we invested in an education system that created the knowledge that made computer technology come to life in our age. Hilton Hotels, the Hilton family -- Paris Hilton running around, you know, behaving as she is -- had that money because we have political stability and peace in this country. And Conrad Hilton, in his will, talks about how he owes his fortune to that, and how bad war is for being in the hotel business. It was we as taxpayers who built highways, and airports, and we improved ports, and we have an education system, and we have honest courts, and we have a system to enforce property rights and contracts -- without those things, you can't be wealthy.

Many, many wealthy people got there because of their hard work or their smarts. But many of them got there because of the family they were born into what Donald Trump calls "the lucky sperm club." But all of them owe that fortune, and their good fortune, in part, to the society in which we live.

If we don't pay attention to our tax system, America will not endure. It is not written in stone there will always be an America. People fought to create this country. A lot of people died to keep this country. And if all you think about is how much money can I have today, then you're not thinking about perpetuating our society, about making America endure. And taxes are fundamental to making the idea of America, the greatest idea in the history of the world, endure.

BuzzFlash: We saw a period, and it hasn't ended, where many CEOs of companies were rewarded with lavish bonuses even as their companies were tanking. Is that in any way tied to the tax code -- that a company can make out well for its board and its CEO, while going down the tubes?

David Cay Johnston: Yes. I wrote a story in The New York Times a few years ago about a little chart the IRS produced that I've never been able to find them having produced again. And it tracked increases in executive compensation over a long period of years. I took that data and compared it to increases in a wages overall, and in corporate profits. And -- surprise, surprise -- executive compensation was growing faster than both, which means that the executives were gouging the shareholders.

The fundamental problem in a publicly traded company is that the managers of the company -- we're talking about the hired help, the Jack Welches of the world, as opposed to the Ted Turners and the Bill Gateses who created the things -- they're hired help. And it's called by economists the agent-principle problem. You hired this person to run the company for you, and you want them to run it in your interest as a shareholder, but they want to run it in their interest as an executive. So you've seen this era of CEO greed brought on in large part by computerized financial records, in which executives have basically learned how to do something called net present value, or NPV. They say: Oh, well, look -- here's the stream of income for the next 10 years. Let's reduce it back to what its present value is today, and I'm going to take that money now.

First, you haven't earned the profits yet. They may not be there. But you're going to take them. We see this in stock options, where, by running up the price of your company temporarily, and exercising your options, you reap a profit. But the shareholders who remain may or may not. It depends on how healthy the company is.

One of the ways to reform this would be to say to executives: You can be paid with company stock, and we'll pay you as much as the market will bear. But when you leave the company, you can only cash out 20 percent a year for five years. That means you better leave the company pretty healthy so the next guy doesn't run your fortune into the ground. That is an example; I'm not specifically promoting that idea. But it would be an example of how we could design systems that tend to encourage long-term responsible conduct.

BuzzFlash: Your last chapter, asks the question: Are we ready for reform, or can we reform the tax code system? There don't seem to be, other than the flat tax proponents, many people who at least rise above the level of babble and who are articulating a vision of a new tax code that might be a fairer one.

David Cay Johnston: But there's really two questions here, Mark. First, let me deal with the flat tax. The flat tax isn't what you think it is. If we enacted the Steve Forbes flat tax plan, Steve Forbes would never pay taxes again for the rest of his life. Under the flat tax plan, anyone who is an inheritor of great business assets -- not financial assets, business assets; that is, someone who owns a company, not someone who owns stock in a publicly traded company -- would no longer have to pay taxes just so long as their lifetime consumption was less than the value of those assets on the day they began paying taxes under the Forbes flat tax. And it would heavily shift the burden of taxes off of high-income people and people who have asset incomes, and onto people who have those capital incomes and people who have labor incomes. The genesis for that idea is, of all things, George McGovern's promise in 1972 that if elected he was going to give each American a thousand-dollar check every year. It was the final nail of the coffin of his miserable campaign. So the flat tax isn't what people think it is. It's been sold, like many of these other things, by not telling people what it really is.

Now the other question about fundamental reform. We have been told again and again in America we have problems that are so intractable we can't do anything about them. Well, that's the prescription for the end of the United States of America. We started this country on the principle that we don't need King George to tell us what to do. We can solve our own problems. It says in the Preamble to our Constitution that we created this Constitution to promote the general welfare. We can solve every single problem we've had, but we have to be citizens, and we have to do the hard work of maintaining our democracy. The reason we can't solve lots of problems in our society is that we aren't trying. We're hoping somebody else will.

People say to me everywhere I go to speak: Well, how would you fix this? And my answer is: I don't know. Because I'm not God. I'm not omniscient. Here's what I do know: If everybody in America will pay attention to our tax system, and you think how much money you pay in taxes, think about whether it's worth spending less time worrying about who Jennifer Lopez is sleeping with, and more about your tax dollars. If all of us paid attention and listened, and spent some time learning, we would get out of our collective wisdom a tax system that does what a good tax system should do. A good tax system greases the wheels of commerce. It rewards responsible conduct. It rewards strivers. It encourages investments in the most valuable asset we have, which is the human mind. Whereas now, we put huge economic obstacles in front of intellectual development in this country. A good tax system promotes political stability, without which there is no great wealth. And we can come up with a tax system that will do those things.

Now we are going to have to come up with that tax system, or a new tax system, because the economic order has changed. Tax systems must flow from the economic order. If you live in a pirate society, the tax is what the chief pirate takes as his share of the booty. If you live in an agrarian culture, the tax is that share of the crops taken by the king to support the operation of the government. We have a tax system designed for a national industrial wage economy. It worked real well for a long time because we basically were an industrial national economy, with mostly wage earners. We are moving into a global services, assets-based world in which capital in the punch of a button moves across borders, and labor cannot, even if it wanted to -- you're not going to take a job in India, in all likelihood.

So we have to have a tax system that recognizes those things and adapts to it, and that promotes the economic order instead of getting in the way of it. But what we're getting instead is a big, huge moat being put around the incomes and fortunes of those who are already rich. Of the super-wealthy in America, some of the super-high-income people don't want to pay taxes, but that's not all of those people. Many people in that group are very responsible and understand what's going on. But the narrow segment within that group that hates taxes -- that group is having enormous success in putting a moat around its money and its finances, and saying: We got ours. That's not America. That's not American.

Warren Buffet the other day said that if class warfare is being waged in America, his class is very clearly winning. And he did not mean that as a good thing. I'm in favor of higher incomes, more wealth. But what we need to have is a system that creates higher incomes and more wealth, not protects those who already got theirs.

BuzzFlash: One could argue that the second system you describe, with the moat around the currently wealthy, does not promote economic stimulation. It leads to economic stagnation.

David Cay Johnston: I agree. That's exactly what it does. In fact, one of the reasons for the French Revolution was that because of trusts, all of the wealth and opportunity to get ahead was tied up. There was no movement. There was no ability to get rich unless you already were rich. And we have this current notion that if I work my whole life and I make a fortune, that my children and grandchildren and great-grandchildren should also have that fortune. That's not how it works. I made the fortune. I'm entitled to it. But my children and grandchildren are not entitled to it and if we want future children to grow up and, by dint of their hard work, make new fortunes we have to create a system that allows that. Fortunes come and go. A tax system that says once you have your fortune the government will help you keep it forever by making it harder for others to build their own fortunes is a system that will, in the long run, destroy America. And that is the worst possible tax policy.

A BUZZFLASH INTERVIEW

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