Today is the 100th anniversary of the federal income tax, which was signed into law by President Woodrow Wilson on October 3, 1913.
To mark the occasion, Moyers & Company caught up with David Cay Johnston, who has probably forgotten more about our tax code than most economic experts ever knew. Johnston won a Pulitzer Prize in 2001 for his comprehensive reporting on taxes and tax avoidance in The New York Times, and then authored a best-selling book on the subject, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich – and Cheat Everybody Else.
Below is a lightly edited transcript of our discussion.
Joshua Holland: When we got into World War II, individuals and families paid 38 percent of federal income taxes and corporations picked up the other 62 percent. Last year, individuals and families paid 82 percent of federal income taxes and corporations paid just 18 percent. How did this happen?
David Cay Johnston: All modern societies require a large public sector to provide the goods and services on which the private sector depends. So you need commonwealth services – education, basic research, statistical gathering and civil law enforcement – a whole host of activity than can only be provided through the public sector.
Now, corporations have a concentrated interest in the taxes they pay and the capacity to lobby for changes and make campaign donations to rent, or in some cases buy politicians’ votes. Over a long period of time, they saw to it that we change these tax laws and shifted this burden.
We also dramatically increased the size of the federal government during the period from before World War II until now and some of the additional money you’re seeing is the result of increased Social Security taxes and Medicare taxes — some programs that benefit people generally, and that I think we should look at as efficient buying at the wholesale level, rather than retail.
Holland: Unpack that for me, David.
Johnston: Sure. Corporations in the days before World War II were essentially domestic operations, with a few exceptions. And we now have a global economy. And in the global economy, corporations all around the world are going to push to get the lowest tax — or no tax at all in some places — and then use that to pressure the US government to ease their tax burdens.
They’ve also, by the way, put in place innumerable little rules changes involving accounting and depreciation — that is writing down the value of equipment as it’s being used up — and other things, to reduce their bills.
Holland: And does this help explain why we have a very low tax burden overall, relative to other wealthy countries, but a lot of Americans feel that they’re being taxed to death?
Johnston: Well, one of the reasons some Americans feel they’re being taxed to death is that if you add up our taxes, which are low compared to other modern countries, and then you add in private expenditures for things the tax system pays for in other countries — a lot of our health care costs, higher education costs, admissions and fees and tickets and licenses for a lot of things — lo and behold, we end up being a relatively high-tax country. But it depends on how you analyze the data.
And let me give you one killer figure: We spend so much money on our health care in this country — or as I prefer to think of it, sick care in this country — that for every dollar that the other 33 modern economies spend for universal coverage, we spend $2.64. And this is done using something called “purchasing parity dollars,” so they’re truly comparable. So we spend $2.64 per person and still have almost 50 million people with no coverage and 30 million with limited coverage, and these other countries spend far less with universal coverage.
Here’s how much that costs: In the year 2010, if we had had the French health care system, which is one of the most expensive in the world, it would have provided universal coverage and it also would have saved us so much money that we could have eliminated the individual income tax that year and all else would have been equal. Our excess health care costs above those of the French were a little over 6 percent of the economy and the income tax in 2010 brought in about 6 percent of the economy.
Holland: And Dean Baker at the Center for Economic Policy and Research points out that if we paid the same for health care per person as all of the countries with longer life expectancies, we would be at a balanced budget today and looking at surpluses in the future.
Johnston: We can continue to have this enormous military operation — one that I have been very critical of — we can continue to have that if we just fix the health care problem. So imagine what happens if we get our health care costs in line by doing what every one of our economic competitors has figured out is the cheapest thing to do: universal health care with little or no out-of-pocket expense. And if we then cut back on this enormous military, where we spend 42 percent of all the military spending in the world, we would be able to lower taxes, run surpluses, fund higher education and research that will make us wealthier in the future. It’s just two things we need to address — just two.
Holland: Let’s go back to taxes. In your book, Perfectly Legal, which everybody should read, you showed that it’s not just the top one percent that are taking in so much more income than they did a generation ago, and paying less taxes on that income, but you really have to look at the top tenth of a percent or even the top one hundredth of one percent. Tell us about that.
Johnston: Well, the plutocrat class — that’s the top 16,000 households in this country — are where all the gains have been going since the end of the recession. Thirty-seven cents out of every dollar of increased income between 2009 and 2012 went to these 16,000 households — in a country of 314 million people.
So here’s what the newest data show based on tax returns: The average income of the bottom 90 percent of us has fallen 20 percent below where it was in the year 2000 — it fell from about $36,000 to $30,000. It has fallen back to the level of 1966, when Mustangs were new, Lyndon Johnson was president and we were prosecuting a war in Vietnam. 1966.
And what happened to the 1 percent of the 1 percent? Well, their income was about $5 million dollars a year back then on average and now it’s $23 million dollars a year on average.
Now it’s important to add a point: This is how it’s measured by the tax system. Very, very wealthy people — Warren Buffett, hedge fund managers, Mitt Romney when he ran a private equity fund — are not required to report most of their economic gains and legally they can literally live tax-free or nearly tax-free by borrowing against their assets. You can borrow these days, if you’re very wealthy, against your assets for less than 2 percent interest and the lowest tax rate you could pay is 15 percent. So no wealthy person with any sense of good economics will pay taxes if they can borrow against their assets. Now you and I can’t do that because our assets aren’t worth that much, but if you’re a billionaire and you borrow, let’s say, $10 million dollars a year to live on, you pay $200,000 interest, but your fortune through investing grows by $50 million. At the end of the year you pay no taxes, your wealth is up almost $40 million dollars and your cost was just the interest of $200,000.
Holland: Amazing. How much have changes to the tax code had to do with the sky-high level of inequality we see today?
Johnston: Oh, I believe that the Reagan-inspired changes in the tax code are absolutely fundamental to this enormous growth of inequality. When I went to The New York Times in 1995 and I started writing about inequality, there were a lot of people who thought I was some far-out radical. They got lots of calls and letters and complaints, and I just kept telling the editors, “Just watch the data — it’s going to show this will get worse.” And the reason is if you listened to what Reagan and his supporters said in the 1980 election, it was clear that it would lead to greater inequality. Here’s the way to think about it: The bottom 90 percent of us are actually paying slightly higher federal taxes than we did, as a share of our income, back in 1961. But the top 400 taxpayers in the country are paying 60 percent less and their incomes have grown so much that they’re making 35 times as much after-tax income because of higher incomes and lower taxes.
Now imagine you’re able to save money, and let’s say you make enough money to save $1,000 a year. If we cut your tax rate, which was $1,000 dollars, in half to $500, now you can save $1,500 dollars a year. Pretty soon, you’ve got a snowball that’s getting bigger and bigger.
Well, people at the very top have had their taxes cut 60 percent and they can’t spend all the money they’re making anyway. Nobody can consume a billion dollars a year unless they gamble it away. You can’t even consume that much in drugs — it will kill you for sure. You can’t consume that much entertaining mistresses — I don’t care if you’re a 21-year-old athlete in great shape — the body won’t allow it. The only way you can consume that much money is by gambling.
And so even — if you’re a billionaire — even with a jet and mansions and artwork, you can’t consume that kind of money. So what happens is this snowball grows at avalanche rates and that’s why we’re seeing this enormous build-up at the top.
And unfortunately, we’ve created a society now where we measure people not the way Martin Luther King said we should in his 1963 speech — “I have a dream that one day my four children will be judged not by the color of their skin, but the content of their character” — we judge people now by the presumed content of their wallets. We have replaced character with commas — it takes two to be a millionaire, three to be a billionaire, and that’s the measure we’re applying to people.
And people who have three commas, well, that’s not enough, there’s never enough. Money is like — as Richard Pryor once said about cocaine — too much is never enough. And so you have this sense of entitlement at the very top that you’re entitled to all of this money even though it’s not doing anything productive — it isn’t improving the quality of your life and it is actively damaging the lives of your fellow Americans.
Holland: My grandmother is obsessed with the question of why people who have billions want more. She can’t understand it.
Johnston: It’s very easy to understand — it’s a status thing. So you’re rich enough to own a one-eighth interest in a little Honda jet, but the guy down the road, he has his own Honda jet, and the guy down the road from him, he has a Gulfstream, and the guy down the road from him, he owns a jumbo jet, and the guy down the road from him, Sheldon Adelson, the guy who kept Newt Gingrich’s campaign alive, owns two personal 747s, one of which is equipped for skateboarding in the sky by his youngest heirs. Oh, I’m sorry, you think you’re well off because you own a jet? The guy down the street’s got two 747s, and by the way, I understand that there’s a private order in place for an Airbus 380. Gee, my yacht is only 350 feet, then you announce that you’re building the world’s biggest yacht and somebody then says, “No, I’m building a 410-foot yacht.” This is meaningless consumption in terms of making the world economy any better, but for egos, oh it’s, “Mine’s bigger than yours.”
Holland: Speaking of Mitt Romney, he famously said that there were 47 percent of American families that pay no income taxes, the federal income tax is fairly progressive, but it raises the same amount of revenues as the much more regressive payroll taxes, more or less, about 40 percent of the government’s income. Similarly, at the state and local level, the poor pay a much higher share of their income in taxes than the rich. The poorest 20 percent of the population pay over 11 percent of their incomes in state and local taxes, while the top 1 percent pays half that rate. Why do people focus on this one tax, the federal income tax, which generates about 40 percent of the federal government’s income?
Johnston: Well, because the anti-tax crowd for a hundred years has been trying to get rid of progressive income taxes and they have distorted and lied and we have what is politely called a low-information voter named Mitt Romney who made it demonstratively clear during the campaign that he had no idea what’s actually going on in the country.
By the way, do you know why 47 percent of Americans in one year — it’s no longer true, it’s going to drop back to the high 30s — but do you know why so many Americans do not pay federal income taxes?
Holland: Tell me.
Johnston: The lead reason for the increase is the Republican policy put in place in the ’90s of the child tax credit. So a married couple with two children does not pay any federal income taxes until they make at least $44,000 a year. And with a little bit of tax planning and a 401(k) plan and some other things, you could make $70,000 and pay no federal income tax. So the Republicans create this situation where middle-income families with children pay no income tax and then they complain about it. And nobody but me has called them on this.
Holland: I have!
Johnston: Okay, well, let me rephrase that. Only a handful of us have called them on this. You certainly are not hearing it on the network news and the front pages of the major newspapers.
Holland: No, you’re not.
David, final question. According to the Tax Justice Network, “$32 trillion has been hidden in small island banking hubs which host a bevy of trust funds, shell corporations and other tax havens.” That’s not just American dollars — it’s a global figure.
How much tax revenue are we losing here and what would our budget picture look like if this weren’t the case?
Johnston: The bottom line: we are not serious about high-end tax cheating in America. That’s one of the major problems. If you’re an ordinary worker, we take your taxes out of your paycheck before you get the money, which means that Congress doesn’t trust you. But if you’re a business owner, an investor, a landlord, then Congress trusts you to report your income, subject to audit, which is highly unlikely. And if you’re smart, your books are so complicated and the audit budgets are so small that unless you were blatant and stupid, you won’t get caught.
We had the case a few years ago of a fellow who public records at the Securities and Exchange Commission showed had made $2-plus billion and filed no income tax return, and the IRS was unaware of him.
We could solve our budget problems with the two things that I mentioned: getting a health care system that’s modern and efficient and reduces cost by about six percentage points of the economy while covering everybody; and two, just scaling back a little bit on the military that we operate as if we were going to go to war with Russia, the old Soviet Union, which we’re not.
And if we then made it a priority to make sure that the tax laws apply equally to everybody — we could probably cut everybody’s tax rates if we did that. But there’s no stomach on Capitol Hill for going after rich tax cheats who are sophisticated and smart, and so they get away with it.