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 David Cay Johnston, a Pulitzer Prize-winning New York Times reporter, has produced an interesting volume on the inequities and perversities of the U.S. tax code that will shock some and infuriate othersbut thats the idea. His familiarity with the tax code and inventive schemes to abuse it flows from his long experience as the Times tax reporter. Far from a handbook for tax cheats, the book is a call to action for honest taxpayers to demand reforms that will close corporate loopholes, preclude sheltering techniques available principally to the very well-to-do, and relieve the growing tax burden on the middle class.
Johnston invokes an idea that might seem quaint in a cynical agethat paying taxes (however much we may not enjoy it) should be a willing expression of patriotism, a voluntary contribution to the maintenance of a well-organized and prosperous society from which we all benefit.
This premise is unassailable, and in fact forms the basis for the purportedly progressive structure of the federal income tax, which in principle should place a higher burden on those with the greatest ability to pay (i.e., those who benefit most from the stable and prosperous environment their taxes help support). The prosperous however, according to Johnston, given their disproportionate access to policymakers, have caused the federal tax code to be mutilated through successive rounds of amendment and reform that enable some corporations and individuals to diminish their tax liabilities or escape them completelyin ways that are perfectly legal. For corporate entities, the techniques range from defection to Caribbean tax havens like Bermuda to bookkeeping schemes that exaggerate losses sustained through foreign subsidiaries. Of course, taxes paid to foreign governments are almost always deductible from taxes owed to the federal government, and trust funds remain a favorite means of tax-free intergenerational transfer of personal fortunes. Theres no need to reveal here the full menu of tax-evading goodies described by Johnston in the book.
Perfectly Legal reserves its greatest indignation for those features of the tax system and federal tax enforcement that afflict most harshly the poor, the working class and the middle class. These include, respectively, over-zealous policing of returns that claim the Earned Income Tax Credit, the regressive incidence of the payroll tax (which has more than doubled since 1983) and the increasing incidence of the Alternative Minimum Tax, which, unlike tax brackets, is not indexed to inflation. Adopted by Congress in the 1970s to ensure that wealthy Americans (at the time, those earning about $1,000,000 a year) who claimed multiple deductions could not escape paying their fair share, the AMT is now being paid by about ten percent of taxpayers earning $100,000 per year, a share that will swell to 73 percent by the end of the decade. It is for this insidious characteristic that Johnston dubs the AMT the stealth tax.
Even as loopholes have increased and the accounting industrys prowess for inventing tax shelters has been refined, the ability of the IRS to audit returns has been systematically undermined by stingy congressional appropriations for enforcement, salaries that are inadequate to attract dedicated talent, and pressure from top administrators to go easy on corporations and wealthy taxpayers and instead harass the poor, working class and middle class taxpayers who are less equipped to defend themselves.
In his concluding chapter Johnston encourages readers to talk about taxes with family members and friends, sharing whenever possible their indignation, but especially to organize and pressure their elected officials in Congress to reform a tax code that is shifting an increasing burden of overall taxes downward, to the extent that our progressive system, when payroll taxes are included, is essentially a flat tax of roughly 18 percent, which lets wealthier Americans off light while crushing the poor and working class.
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