A racket for the top income-tax bracket

Perfectly Legal

The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else

David Cay Johnston

Portfolio: 338 pp., $25.95

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David Cay Johnston’s look at the U.S. tax system is one long cry of indignation. “Perfectly Legal” reads like a muckraker’s indictment of 100 years ago delivered in the fact-laden style of contemporary newspaper prose.

Johnston is the tax reporter for the New York Times. His book, subtitled “The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else,” is built on stories he has covered -- and uncovered -- since he joined that paper in 1995 after a long career with other newspapers, including this one.

His principal thesis is simple: What he calls the “political donor class” has bought and rigged the tax code to favor those at the very tip-top of the income pyramid at the expense of not just the poor but those earning $50,000 to $500,000 a year.

He quotes Ralph Reed, former executive director of the Christian Coalition, in a letter written in 2000 seeking a $380,000 fee for helping Enron win favors in Washington: “In public policy, it matters less who has the best arguments and more who gets heard -- and by whom.” And Johnston lays out who gets heard and by whom: the super rich, by Congress and successive presidential administrations.

The U.S. tax system worked reasonably well for a national, industrial, wage-based economy, Johnston says. But now that we have a global, services-oriented, asset-driven economy, it needs overhaul, especially given changes over the years in who is taxed and how much.

“The clear trend over the last two decades has been to cut taxes on the rich, and to raise taxes on the middle class and the upper middle class to make up part of the difference,” Johnston writes. “This was done largely by collecting excess Social Security taxes decades in advance of when benefits would be paid. This trend is growing as the Alternative Minimum Tax hits middle class families.”

Johnston is especially critical of the Alternative Minimum Tax, set up in the late 1960s to ensure that wealthy Americans paid some income tax by reducing exemptions and deductions. But income thresholds have not been adjusted for inflation, so the tax today falls increasingly on the upper-middle class and middle class. He cites Treasury Department figures showing that 1.3 million taxpayers, or 1%, paid it in 2000, but 17.9 million families will do so by 2010. He adds that the Bush tax cuts may double that number to 35.6 million households.

Moreover, he argues, Social Security taxes on earned income collect more than is needed to pay today’s recipients and thus rob regular wage earners of money they could be saving. At the same time tax cuts for the very rich have expanded their capacity to save. The result, he says, has been a growing disparity of wealth between the very rich and all others.

In high dudgeon Johnston details several ways the present situation came about: the enormous growth in compensation for top corporate officers and their many special breaks, such as travel on company airplanes; the campaign to eliminate the estate tax, which its opponents have cleverly labeled the death tax; the development of foreign tax havens, such as Bermuda, for U.S. companies; the proliferation of tax shelters too complicated to be had by anyone but the very rich and well-connected; attacks on the Internal Revenue Service as intrusive, when it was merely trying to enforce tax fairness; and the erosion of pension plans for all but the best-paid executives.

Johnston’s facts are sound. His principles, as far as they go, are clear. He believes in a progressive income tax structure, in which the more money you take in, the higher the income tax rate you pay. He seems to believe that disparities in treatment are permissible as long as they redound to the general good.

He argues, sensibly, that tax policy should be made in the open, not in obscure congressional meetings open only to those in the know and understandable only by them.

In this presidential election year it will be noticed that the political party now in control of the White House and Congress, the Republican Party, gets most of the blame in Johnston’s book -- but by no means all. The “political donor class” he excoriates knows well how to work both sides of the aisle.