Tuesday, August 16, 2005

David Cay Johnston on Air America Radio

(Originally written in November of 2004)

David Cay Johnston is a Pulitzer-prize-winning tax reporter for The New York Times and the author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich and Cheat Everybody Else. On November 10, 2004, he sat down for a conversation with Al Franken and Katherine Lanpher on Air America Radio. Highlights follow.

Johnston wrote Perfectly Legal to turn the complicated subject of taxes into English. And despite the title, his book has received critical acclaim from both the left and the right.

The discussion began with comments about the tax returns of Dick Cheney and Teresa Heinz Kerry. Excluding their tax-free income from bonds, they paid approximately 19% in taxes. Including their tax-free income from bonds, they paid roughly 12% — a lower rate than most of us pay.

Johnston: But let me point out that there’s another story in both of those tax returns. Teresa Heinz Kerry’s taxes were double what they would have been because of the alternative minimum tax, because it took away a lot of her Bush tax cuts. And Cheney had about two-thirds of his Bush tax cuts taken away. That is, it increased his tax bill by about a third. And starting with the tax returns people file next April, millions and millions of Americans — about 80 million Americans, that’s most of the families in America with children — are going to discover they’re going to lose all or part of their Bush tax cuts to the alternative minimum tax.

---------- Tax Reform
Johnston: Well, the President has not specified how he wants to change the system; but he has laid out the principles he’s going to follow. And the principles make it real clear what he wants to do…He said he wants to reduce taxes on investments, savings, and risk-takers — by which he means entrepreneurs and business owners. Now, if you’re going to reduce taxes on those groups — and he says he want to be revenue neutral — then that means he has to somehow raise taxes on wage-earners. And that has been the pattern of what’s been going on all the way now for 25 years, is shifting the burden of taxes onto the wage earners.

---------- The Debt
Johnston: The government has been borrowing money like crazy. The federal debt is growing, including the borrowing from social security, at over 50 billion dollars a month. And that’s without fully counting the costs of the war in Iraq and wherever else we end up in a war.

Franken: Fifty billion a month?

Johnston: …billion a month. That’s 600 billion a year, more than that.

Franken: Now, when they say that it’s 425 [billion]…

Johnston: They’re not counting the borrowing from Social Security.

Lanpher: Why aren’t they doing that?

Johnston: Because they want to make the number as small as possible…But the government is borrowing this money. Well, that’s just a tax deferral into the future. You’re going to have to pay that tax. Right now, this year, about 20 cents of every dollar you pay in federal income taxes is going to interest on the national debt.

Franken: Yeah, but, you know what? That’ll really be more paid by my children and grand-children, won’t it?

Johnston: Well, if we didn’t have a debt, pal, you could have a 20% tax cut and everything would be even. And by the time it gets to your grandchildren, it’s going to be enormous. That’s going to be the principal job of the federal government, is collecting interest from people on wages and transferring it to people who have capital.

Franken: That sounds fair. That’s sounds good.

Johnston: If you have capital, yes, it sounds very fair.

---------- The Flat Tax
Johnston: The fellow who thought up the flat tax, an eminent economist, Bob Hall, originally planned it as a progressive tax with multiple rates.

Franken: Yeah. In other words — and I think that’s fine.

Johnston: The flat tax isn’t what you or most people think it is, Al…The flat tax is the Steve-Forbes-never-has-to-pay-taxes-again proposal…Here’s what happens. On your wages, you will be taxed. There’ll be a big exemption, so much for you and your spouse and your children. And then you’ll pay whatever rate or rates above that, with no deductions for your house, charitable gifts, or anything else.

Franken: Okay, that’s what makes it simple, is that there’s no deductions.

Johnston: That’s correct.

Franken: But…

Johnston: But, on the business side, here’s how it works. If you’re in business and you own the business — not securities, but you own the business, like Steve Forbes owns his business — you get to write off the entire value of the business the first day the law takes effect. So, Steve Forbes, let’s imagine, assume, he spends ten million dollars a year on his lifestyle — he’s totally profligate. And then he deducts the value of his business, a billion dollars. So he reports to the government his financial position — minus $990,000,000. Tax owed — zero. The next year, he gets to adjust that for inflation; it’ll go back up over a billion dollars; he spends ten million. He’ll never pay taxes — ever.

Franken: Wait, wait, whoa, whoa, whoa. You deduct the value of your business?

Johnston: That’s right. You get to expense your entire business and you will never pay taxes again…For those who have already got their fortunes, this is a great tax because you won’t have to pay again. For those people who are trying to create new wealth — which is the mantra you hear constantly now, we need to reduce taxes to create new wealth — you’re going to be stuck with a tax bill. It will be a huge hurdle, if you want to build wealth, to getting there…It’s been sold to be something it’s not. It is a tax exemption bill for those people who have more assets than they’ll spend in their lifetime.

Franken: What is the rationale behind that?

Johnston: Oh, Al, did you know that we double-tax investment income? And that’s unfair. Of course, we double-tax your wage income because you pay a federal income tax and a state income tax and a social security tax and a medicare tax and a sales tax and a gasoline tax…So, it’s okay if it’s wage income to have four, five, or six taxes on the same dollar. But if it’s capital income, see that’s different; that’s wrong.

---------- Enforcement
Johnston: If you are a millionaire investor in a partnership [or] a working poor person, the situation is the poor person is eight times more likely to be audited than the rich one. And the I.R.S. acknowledges that they are aware of huge numbers of tax cheats. And in Perfectly Legal, I name a lot of them, including two billionaires in New York City who’ve admitted under oath that they’ve never filed a tax return.

---------- First Principles
Johnston: One of the most important things to remember in the tax debate is that taxation based on ability to pay, the progressive income tax that we have, is a moral principle. It is the founding principle of western civilization. When Athens had a flat tax, it was a tyranny. When the Athenians came up with a moral principle — those who are the greatest economic beneficiaries of a society have the greatest burden to support that society through their taxes --- they invented democracy.

Franken: But they believe, and this is what bugs me no end, they believe that people who are rich are the most productive people…

Johnston: Those people who have capital, it’s argued, should pay less in taxes; and those people who work should pay more…Adam Smith, the father of capitalism, said that those people with the most money should have the heaviest burden of taxes.

---------- The Current Economy
Johnston: President Bush, who came into an economy where the stock market had collapsed --- the recession was on it’s way, it started right after he took office and you have to play the deck of cards you get — said that his economic program was we will create jobs if we cut taxes. Well, we have fewer jobs today than we did when he took office, and the population has grown. So we’re really down about 7 million jobs. And the average incomes of Americans have fallen. The I.R.S. data shows that from 2000 to 2002, the middle class, people who make $25,000 to $100,000 a year, in real terms their incomes all fell at least 4.5%.

---------- Conclusions
Johnston: Fundamentally, what Congress has been doing is shifting the burden of taxes not just off rich individuals onto wage earners but off of big, multi-national corporations onto family-owned businesses, despite all the rhetoric. That’s a real, fundamental problem…

Lanpher: All right, we’re down to about ten or fifteen seconds with you, David Cay Johnston. What are we supposed to keep our eyes peeled for in the weeks ahead?

Johnston: Watch out very carefully. Revenue neutral while reducing taxes on capital and risk-takers, meaning business owners, means higher taxes on you if you are a wage earner.