Magazine

The Great Tax Rip-Off


PERFECTLY LEGAL

The Covert Campaign

To Rig Our Tax System

To Benefit the Super Rich

-- And Cheat Everybody Else

By David Cay Johnston; Portfolio; 338 pp; $25.95

Once upon a time, Washington collected the taxes it needed to pay for the services it provided. Not anymore. Today, the feds gather $400 billion a year less than they spend. And pols have turned revenue bills into endless opportunities for the well-connected to dodge their obligation to support government programs.

In such an environment, David Cay Johnston has one of the best jobs in journalism. For seven years, he has supplied The New York Times with tales of tax scams and schemes. And thanks to President Bush, Congress, a toothless Internal Revenue Service, and a bevy of clever lawyers and accountants, Johnston has a bottomless supply of stories. It is the journalistic gift that keeps on giving.

In Perfectly Legal, Johnston collects some of his greatest hits from the Times and lays out in great detail how the tax laws have become a cesspool of special-interest benefits. But it isn't enough simply to expose these sweetheart deals. So Johnston spices up his book with analyses of how the rich are getting richer and blends in a heavy dose of populist outrage. The book's subtitle says it all: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else. In the end, the author brings together a wealth of information. But he never quite gets a handle on the politics of taxation.

Johnston's thesis is simple: The rich are different from you and me. We pay taxes; they often don't. And the less they pay, the more it eventually costs us. Here is Johnston on the recent round of tax cuts: "The Bush Administration knowingly chose to squeeze the middle class...to give unhindered tax relief to the people with the very highest incomes." And here he is on a business tax shelter: "Big corporations are shedding their tax burden and shifting it on to you." The rhetoric is hot but too simplistic.

Johnston is right that the tax code is utterly corrupt. When I started covering this stuff in the 1970s, a few special-interest breaks always got slipped into bigger tax bills. But now it's hard to find anything but such goodies. The energy bill that Congress is writing is promoted as a broad reform that will both free the U.S. from the need for foreign oil and prevent blackouts. In fact, it is little more than a tax gift for the producers of oil, coal, and gas. It's the same with efforts to fix the way the U.S. taxes multinational corporations. Reform is needed, but the legislation is becoming a feeding frenzy of tax giveaways.

Johnston does a wonderful job of burrowing into today's laws. Want to know how business execs get nearly free personal trips on their corporate jets? Johnston is your man. The trick is that while the executives are supposed to pay taxes on the value of those flights, the law lets companies artificially mark down their true cost. So the bill to fly from Los Angeles to New York on a plush corporate jet turns out to be a mere $260. Johnston has revealing chapters on how companies save billions in taxes by fleeing the U.S. for the Caribbean and on the abominable alternative minimum tax. That's the largely unknown levy that requires individuals to recalculate their tax liability without most deductions. Unless revised, it will wipe out the benefits of the Bush tax cuts for tens of millions of middle-class people.

But Johnston never quite nails the politics. Nor does he offer much of an alternative to the current system. Consider the estate tax that Congress has voted to repeal in 2010. This happened, Johnston asserts, after a K Street lobbying campaign and a clever move by GOP public-relations operatives to turn the benign "estate tax" into the ominous "death tax." And Johnston recounts how Bush repeatedly cited family farmers who had to sell their property to pay the onerous levy. The touching tale played to the myth of the yeoman farmer. There was just one problem: No one could ever find a single family that was forced to sell a farm to pay estate taxes under the law on the books pre-2001. It was the WMD of taxes.

There is something else going on here, however. It wasn't that Bush tricked voters into accepting the repeal: For years, polls have shown that 70% of Americans want to get rid of the estate tax, no matter what name it's called by and no matter that they have little likelihood of paying it themselves -- as only 2% of families are hit by the levy. Ordinary people don't care what others pay, but they'll oppose any tax that they imagine could ever hurt them.

The tax code needs a major dose of reform. And Johnston performs a useful service by describing some aspects of today's broken-down system. But for real change to take hold, it will take more than stories of fat-cat tax chiselers. Ordinary people will also have to see that a new, simpler tax code will mean a better deal for them. And so far, neither the pols nor the polemicists have come close to making that case. By Howard Gleckman


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