It's The Economy,....!

PERFECTLY LEGAL :The Covert Campaign to Rig Our Tax System to benefit the Super Rich - and Cheat....

by David Cay Johnston
01-Feb-04
published by New York Times

REVIEW
Nothing Is Certain but Death
By JAMES K. GALBRAITH
Published: February 1, 2004, Sunday

PERFECTLY LEGAL
The Covert Campaign to Rig Our Tax System
to Benefit the Super Rich -- and Cheat Everybody Else.
By David Cay Johnston.
338 pp. New York: Portfolio. $25.95.

READERS of this important book may be misled by the routine material up front. Here David Cay Johnston recounts two oft-told tales: the rich getting richer and the rich escaping tax. Thus he tells how from 1970 to 2000 the income share of just 13,400 households / the richest hundredth of 1 percent -- rose from 1 percent to 5 percent of all income, and from 100 to 560 times the national average. And he tells how one of those households, that of William and Melinda Gates, ''devised a way . . . to reap $200 million in profits on Microsoft stock without paying the $56 million of capital gains taxes that federal law required.''

Yet really, what's so shocking? In the late 1990's, the United States ran an experiment unseen since 1926: a drive to full employment based solely on private capital investment. Under capitalism, private capital is invariably held by a minority, so such prosperity must mean a rise in the wealth of the rich. The United States is not a people's republic. And it was those gains precisely that financed the surge in business investment, producing full employment and actual rising wages and income for working American families for the first time in 30 years.

The tax take also rose, by 2 percent of total income between 1995 and 2000. The federal budget went into surplus. For a moment states like California, riding a bubble in options realizations and capital gains, also had more revenue than they could use. The prelude to recession was a rising tax burden, paid from the bite on exploding upper incomes. It should have been offset by rising public spending, to meet national needs, fight poverty and prevent the slump of 2001. But with blind faith in the New Economy, that didn't happen until terrorism and war split open the public purse.

As Johnston knows, the real scandal of our federal tax system isn't so much what the rich didn't pay. It's what the rest of us now have to -- particularly the middle and upper middle classes, with incomes from $50,000 to $500,000. This is the group Bush is squeezing, to benefit what Johnston aptly calls the ''political donor class.'' This truly shocking story emerges later on in ''Perfectly Legal.''

First we have the repeal of the estate tax, which shifts the tax burden downscale and from the dead to the living. Johnston, a business and financial reporter for The New York Times, explains how this tax, affecting only a handful of the very, very rich, fell victim to the arts of propaganda: ''The term death tax is a superb example of marketing triumphing over reasoned debate. So thoroughly has the phrase been infused into Washington that many journalists . . . employ this term of advocacy instead of the neutral, and correct term, estate tax, without rebuke by their superiors.'' He notes that the pollster Frank Luntz, the carnival barker of this operation, would have advised the Democrats to call it the ''billionaire's tax.'' No such luck.

Next there is the Alternative Minimum Tax, the ''stealth tax,'' designed for the very rich but now set to overrun Middle America. In 2000 this tax hit just 1.3 million households; Treasury estimates held that it would affect 17.9 million by 2010. But the Bush tax cuts doubled this number to 35.6 million by design: ''Between 2003 and 2012 the Bush tax cuts will force an increase of $560 billion in taxes to be paid under the alternative minimum tax. . . . It is a subsidy of the super rich paid for by the middle class and the upper middle class.'' And it is a horror -- attorney's fees in legal settlements or medical expenses can't be deducted (to the same degree), or even the costs of having many children. Still the very rich escape. Promises that this train wreck will be averted are not credible, in Johnston's view. The tax was a betrayal, and the Bush people who committed it knew exactly what they were doing.

Then there is the payroll tax, a travesty ever since 1983, when Alan Greenspan sold the public on the myth of paying for Social Security in advance. And the difference between the amount brought in through the payroll tax and the amount needed to pay benefits underwrote Reagan's tax cuts for the rich, while the government stuffed a ''Trust Fund'' with I.O.U.'s. But with what? Paying them off will require either more borrowing or a rise in taxes -- exactly as if the trust fund did not exist. Meanwhile, the $1.7 trillion in excess payroll taxes already paid would be enough to completely pay off all consumer debt in 2001. And we are told that there is a ''crisis'' because the Trust Fund will eventually ''run dry.'' In+fact,+there's+no+need to cut the benefits for which soon-to-be-retired workers have been overcharged for decades, or to raise payroll taxes even more on the next generation. The only issue is whether wealthy Americans will pay any part of the bill.

Finally, Johnston surveys the decrepit, undercomputerized, legislatively crippled, mismanaged and harassed Internal Revenue Service, shanghaied in recent years to pursue supposed low-income abusers of the earned-income tax credit while the returns of the criminal rich escape audit and their money slips to havens overseas. The I.R.S. is a police agency under extreme pressure to treat big perpetrators with kid gloves. This material is, all in all, perhaps the most shocking stuff, particularly when one notes names like Harken Energy and Halliburton among the defectors.

What should be done? Perhaps daunted by deep knowledge of how the cheats work, Johnston is cautious. He considers, and then rejects, shifting to a consumption tax like the flat tax. Sensibly, he leans toward a leaner, meaner income tax, with higher top rates, few deferrals, a broad definition of income and reform of the alternative minimum tax. Add a stiff estate and gift tax to recover from the largest fortunes at death, treat capital gains and dividends as ordinary income, then cut or offset the payroll tax and you would have the elements of a fairer system.

Interestingly, the progressive tax bill of 2003, introduced by Representatives Dennis J. Kucinich, Barbara Lee and Bernard Sanders, comes close to these goals. It would claw back $107 billion from Bush's cuts and provide $88 billion in relief to working Americans, mainly through an attractive simplified family credit. Happily a few leaders remain, in these venal days, who are prepared to think boldly about our tax problem.

James K. Galbraith is an economist at the Lyndon B. Johnson School of Public Affairs at the University of Texas and senior scholar of the Levy Economics Institute.

 

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