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Under the U.S. Tax System, Do the Rich Really Get Richer?


A Review of David Cay Johnston's Perfectly Legal

By NEIL H. BUCHANAN


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Friday, Jun. 11, 2004
David Cay Johnston, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else (Portfolio 2003)

Which area of national policy currently suffers from the most degraded level of public debate? Surely, there are plenty of candidates for this dubious honor. In almost every area of public concern, we no longer seem to be thinking about solutions, but rather how to justify conclusions set in stone by a fixed ideology.

While the level of public debate is hardly inspiring on any issue, it seems safe to say that our discussions of taxes are uniquely inane. Anyone who doubts this assertion need only read David Cay Johnston's latest book, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else.

As Johnston argues, when it comes to taxes, "the sound bites of politicians of both parties bear as much connection to the reality of the tax system as my third grandson's belief in Santa."

Who Could Possibly Like Paying Taxes?

There has, of course, never been a golden age of public acceptance of the tax system. People do not like to be told to eat their vegetables, or to slow down on the highway, or to stop burning leaves in their back yard. We know that rules and laws exist for a reason, but we still like to have our own way.

And what makes the tax system unique is that it is so much a part of our daily lives. We add taxes to almost every transaction in a store, we are told to think about the tax consequences of our retirement plans, and we dread the deadline for filing our tax returns. (Tax professors dread it, too, by the way.)

The universality of tax angst shows up, as such things always will, in popular culture. Homer Simpson speaks for millions when he drives by the Internal Revenue Service building in Washington, leans out the window, and yells, "Boooooo!!!" As far back as 1959, Hollywood was ridiculing the IRS even in a romantic comedy like "The Mating Game," in which Tony Randall played a young IRS agent sent to audit an honest, salt-of-the-earth farmer who has never paid taxes. (The farmer, of course, had a daughter--in this case, Debbie Reynolds.) Even the new blockbuster "The Day After Tomorrow" includes a gratuitous joke about taxes.

When enough people complain about something, enterprising politicians listen. The result, when it comes to taxes, is not pretty.

The tax system has become the classic political cookie jar, with every politician adding sections to benefit favored constituencies. Those same politicians, of course, then decry the length of the very code that they have just larded with special breaks.

Bad and Getting Worse: A Tax System Full of Special Breaks to Be Exploited

As a result, our tax system is simply a mess. Johnston, the Pulitzer Prize-winning tax reporter for The New York Times, starts his book with a description of one of the most prominent tax lawyers in the country, Jonathan Blattmachr, a man who helps the super rich reduce their tax liabilities as close to zero as possible. In a jarring assertion, Blattmachr describes the U.S. tax system as completely unprincipled, "the most political law in the world." Rather than law based on broad principles, we have a tax code that is open to blatant abuse. And it has always been so.

It is not, therefore, that the problems Johnston describes are new. The sad state of affairs that Johnston depicts is, however, much worse than it has even been.

The intensity of anti-tax fever in this country started to grow in the late 1970's with the California tax revolt that led to the adoption of Proposition 13. Politicians soon realized that there is simply no constituency for "higher taxes."

People once argued that specific taxes needed to be raised for certain reasons, but "I'll raise taxes" is a statement last uttered by Walter Mondale on the way to his crushing defeat in the 1984 presidential election. Other politicians noticed Mondale's fate.

Politicians Take a Strongly Anti-Tax Stance, Whether Or Not It's Merited

By 1988, we had the first George Bush winning the presidency on his empty "No new taxes!" pledge. Seizing the raw anti-tax feeling that they had helped to exacerbate, Republicans have ever since hooked their political fate to the belief that they can always win as the anti-tax party. Here are a few examples:

Some Republicans tried to make taxes more painful for taxpayers. In the mid-1990's, former House Republican leader Dick Armey proposed eliminating withholding of income tax payments from paychecks, on the theory that the requirement to pay several thousand dollars all at once would make voters even angrier than they already were. Proving that some ideas are still too ridiculous to garner support, that idea died--at least for the time being.

Last year in Alabama, in response to a budget crisis, the Republican governor broke ranks and tried to raise the total amount of taxes taken in by the state government. His proposal, which was backed by a large number of the churches in the state, would also have significantly shifted the tax burden from the poor (who are hurt the most by the state's 11% sales tax rate) to the rich and large corporations. National Republicans ran such an effective campaign against this proposal that the state's voters overwhelmingly rejected it--even the voters who would have benefited most from its passage. Being against "higher taxes" is, apparently, now as American as Mom and apple pie.

The re-election campaign for George W. Bush claims that John Kerry has voted for "higher taxes" 750 times in his political career. Justifying this claim, a Bush spokesman admitted that some of these votes were simply votes to reject a decrease in taxes, rather than actually increasing taxes. The spokesman then argued that Kerry's votes nevertheless represented a choice to make taxes higher than they could otherwise be. By this logic, of course, every vote for a tax bill that does not make tax rates equal to zero is a vote for "higher taxes."

Anti-tax think tanks and Republican politicians relentlessly argue that the poor pay almost no taxes. Actually, what they say is that the poor pay almost no income taxes, which is true; but the game is to make it appear that the poor pay almost no taxes of any kind. This is, of course, simply false. The working poor pay Social Security and Medicare taxes starting on the very first dollar of income, and everyone pays sales taxes, excise taxes, etc. The proportion of income paid in taxes for all but the very poorest taxpayers--and the very richest, who also pay less--is roughly the same across the income range in this country.

Do Americans pay "heavy taxes"? In one of the few disappointments in his book, Johnston repeats this staple of American mythology. The fact is, though, that Americans have always paid less in taxes than almost every other industrialized nation in the world.

In 2001, even before the two huge, regressive Bush tax cuts had taken effect, the overall level of taxes in this country (including all taxes paid to all levels of government) was just under 29%. This was roughly 6% lower than in Canada, 8% lower than in Germany, and 16% lower than in France. Japan had a rate 1.6% lower than in the U.S., but their economy was also in its twelfth consecutive year of stagnation.

The Real Action is in Protecting Massive Wealth from Taxation

In 1992, during the transition from the first Bush administration to the Clinton administration, conservative think tanks were busily churning out position papers warning against "soak the rich" taxation. As one analyst described it: "We know that the Democrats are going to raise income tax rates on the upper end; and we can live with that. But if they try to go after wealth, we'll fight them to the bitter end." Johnston shows that the battle has been decisively won by the wealthy.

Johnston catalogues the entire range of our dishonest discussions about taxes. He shows how corporate executives manipulate the tax system so that the government actually subsidizes things like private jet travel. He discusses the shocking campaign to make it harder for the IRS even to enforce the most basic tax laws.

Politicians who claim to be "tough on crime" and who favor "law and order" happily make it ever easier for high-income taxpayers to cheat on their taxes--while shifting scarce enforcement resources to police those among the working poor who receive the Earned Income Tax Credit.

Most importantly, though, Johnston debunks the myth that rich taxpayers are soaked by the U.S. tax system. The estate tax, derided as the "death tax" by Republican politicians, hardly makes a dent in the accumulation of wealth by the already wealthy. The manipulation of trusts and other legal vehicles guarantees that the vast proportion of income received by the super rich is not even taxed once, much less "double taxed," as the Bush Administration repeats endlessly.

The importance of the tax treatment of dynastic wealth is poorly understood, and Johnston does a remarkable job of clarifying what is really going on. He points out, for example, that many of the fortunes of the Robber Baron era have been shielded from taxes even through today; but they could become exposed to taxation if the "rule against perpetuities" (the bane of first-year law students everywhere) is allowed to operate.

The response? Repealing or modifying that rule, to allow massive accumulations of wealth to go untaxed forever.

Johnston's book, in short, is essential reading for anyone who wants to understand what is really happening in the American tax system. Through clear writing and honest, careful marshaling of facts, he shows that people really do have good reason to complain about taxes, but not for the reasons they usually think. The real problem is that the richest people in America are using the tax system to make themselves ever richer, at everyone else's expense.


Neil H. Buchanan, J.D., Ph. D. (Economics), teaches tax law at the Rutgers School of Law - Newark.

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