"Perfectly Legal" by David Cay Johnston

A Pulitzer-winning New York Times reporter argues that the rich have ruthlessly rigged the tax system against the rest of us. Aren't you shocked?


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Farhad Manjoo
February 10, 2004 2:00AM (UTC)

In 1913, the year the United States created the federal income tax, a small company near Chicago, CCH Inc., published a handy little volume documenting every tax regulation newly on the books. At 400 pages, the "Standard Federal Tax Reporter" wasn't exactly a brisk read, but CCH's publishing decision proved prescient. Federal taxes, it turned out, were an idea with permanence; the U.S. tax code, in all its future labyrinthine intricacies, would be a growth industry. In the 91 years since it was first published, CCH's "Tax Reporter," now the tax accountant's Bible, has expanded nearly exponentially by the divine right of Congress; the 2003 volume outlining every tax rule in the land drones on for 45 times the length of the Good Book -- almost 55,000 pages.

David Cay Johnston, the New York Times' chief correspondent in the tax world, is fascinated and reviled by the people who live their lives in the thicket of regulations outlined in these 55,000 pages. Since the mid-1990s, when he took up his post, Johnston has been covering (or, better, uncovering) the mostly shameless, though often brilliant, antics of the leading experts in tax arcana -- the nation's elite accountants and lawyers who seek novel methods for their clients to avoid, if not evade, taxes. Now, in "Perfectly Legal," his new book on taxes, Johnston paints a picture of a system that is, he writes, fundamentally "rigged to benefit the super rich." For people wealthy enough to hire experts well versed in the thousands of pages of tax rules, life in America can be fabulous, Johnston writes. But the rest of us are "being duped into supplementing the incomes and extravagant lifestyles of the rich and powerful."

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In his work for the Times, Johnston, who won a Pulitzer in 2001, has cultivated a reputation for being the kind of reporter unafraid to speak truth to power. He is diligent, persistent, and has a network of sources deep in government and in the corporate world. Every couple of months, one of his masterworks of reporting -- detailing some elaborate new corporate tax avoidance scheme, say, or revealing that the IRS audits more poor people than wealthy people -- will land on the front page, causing hundreds on Wall Street to reach for the Maalox. Johnston's work often alerts the government to the new schemes the rich are using to avoid paying taxes. In 2002, for instance, he discovered that a growing number of wealthy people were using loopholes in the laws governing the taxes on life insurance plans to pass tens or even hundreds of millions of dollars to their heirs, tax-free. Two weeks after Johnston reported the plan, the Bush administration shut it down.

Alas, "Perfectly Legal" is nothing like Johnston's measured, balanced newspaper reports. Instead, the book is a populist screed -- which, by itself, wouldn't kill the pleasure, except that this is a screed we've all heard more eloquently elsewhere. When it comes to writing on corporate and conservative efforts to harness the economic engine of America for their own ends, Paul Krugman, the Princeton economist and Times columnist, is pithier and less confounding than Johnston; for all his faults, Michael Moore's take on economic policy is at least (sometimes) funny. Johnston is erratic. "Perfectly Legal" is a puzzling book, at times serious and moralistic, at others sarcastic. Its main fault, though, is perhaps the most damning sin for any commercial book about the tax system -- it's just plain boring.

Johnston's chief narrative device is the list; though he embellishes his prose with a smattering of what newspaper reporters might dismissively call "color," his chapters tell no coherent story, and are merely enumerations of the sneaky tax tricks rich people try to pull. As a writer, Johnston is drawn to easy stereotypes. In "Perfectly Legal" a corporate executive is not just a man looking to make a lot of money, he's elitist to the core, a man who never shakes hands "with anyone who got grease on theirs." Blue-collar workers, meanwhile, are timid, obsequious, angelic creatures, the kind of people who wipe their hands clean when they get their "one big chance ... to meet the boss." The rich want money for Lexuses and yachts, the poor people want it for clothes and food. Those in the middle class -- or, as Johnston refers to them, "you" -- just want to make "ends meet." It is possible to write about money matters with more deftness, to capture in the text the kind of real-life complexities that account for 55,000 pages of tax rules; William Greider did so in "Secrets of the Temple," his magisterial account of the Federal Reserve Board under Paul Volcker, and Johnston clearly has the journalistic prowess to do something as ambitious on taxes. Instead, what Johnston intends with "Perfectly Legal" is a call to arms. "It is my hope," he writes in the introduction, "that the truths revealed in this book will serve as a wake-up call to everyone who believes as much as I do in the principles our country was founded on."

So will "Perfectly Legal" wake anybody up? Parts of it may, but it's hard to imagine this book prompting a reformation in tax policy. One problem is that to casual students of economic affairs -- who are the only people likely to read this book -- much of what Johnston discloses is already known. He does a couple of lengthy takeouts on the wealth gap (the fact that the rich keep getting "fabulously richer," and that, in the past three decades, the average middle-class wage has increased by a paltry $90 a year), but these feel like recycled Krugman lines. Johnston's prose is laden with statistics, and though some of those stats are astonishing (for example, the richest 13,000 households in the country own about 5.1 percent of the nation's wealth), there is a dearth of explanation for how, and why, things got to be this way.

Johnston is best when he focuses on some of the least known and most egregious perks for the wealthy hidden in the tax code. There is an engaging section on the loopholes business executives use to get great deals on corporate jets. "Under the rules set by Congress," Johnston writes, "flying in the luxury of the company's Boeing 737 Business Jet is often cheaper than the middle seat in coach on a commercial airliner." Under the tax rules, executives pay nothing to use a company's corporate jet, even if they use it for pleasure (which Johnston says is not an uncommon practice). Instead, the executive pays only income taxes on the cost of the trip -- something like $500 for a flight from New York to Paris, for example. But such a trip would cost a company's shareholders at least $30,000, and since those shareholders get to deduct these expenses from their tax returns, "all taxpayers pick up 35 percent of the true costs," Johnston writes. Taxpayers, then, pay at least 10 times as much for the executive's personal trip as he does himself.

Johnston reports that when Congress devised these rules in the 1980s, some lawmakers warned that executives would abuse them. But powerful Republicans, including Bob Dole, argued that "flying in a corporate jet was less fancy than flying in first class," Johnston writes. On the floor of the Senate, Steven Douglass Symms, Idaho's Republican senator, proclaimed that business jets were pretty ghetto: "We talk about the lavish comfort of flying in corporate jets," Symms said, "however, I think sometimes we should remember that some of these corporate jets, such as one I am familiar with in Idaho that a food processing company owns, will barely seat eight people."

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It's astounding that lawmakers have so blatantly defended the privileges of the wealthy; it's more astounding, though, that the public barely reacts to such news -- and that, indeed, the federal government is now run by Republicans whose entire domestic agenda consists only of wet kisses to the wealthy. Why have average Americans stood idly by while the rich got enormously richer? This question pops up throughout "Perfectly Legal," and Johnston provides only a throwaway answer. The news media, he says, haven't reported on how rich America's wealthy people really are, and how they use their power and influence to shape public policy. Now, Johnston, if you recall, is a reporter at the New York Times -- if the media's really partly at fault for rising inequality, is he willing to shoulder some of the blame?

To be fair, Johnston is probably right that the media has something to do with this, but I suspect he's got the link backward: The problem is not that the press lacks the hunger to go after the rich (as Johnston's work proves, the press does a pretty good job of reporting on rich people's excesses). The problem is the people; we lack the drive to go after the rich, and that accounts for the current media and political atmosphere. This is a pretty straightforward observation -- when was the last time a presidential candidate ran successfully on a populist platform? (Al Gore doesn't count) -- but Johnston barely addresses it.

The problem, I suspect, is the 55,000 pages. Taxes are -- perhaps necessarily -- a complicated business, and politicians can skillfully hide huge breaks to the rich in tax packages that appear to provide much-needed help to the poor and the middle class. George W. Bush, of course, has elevated this deception to a high art. His last tax cut, which provided hundreds of billions for the wealthy, also almost fully erased the income tax bill for a family of four. You can try to tell the electorate that it's being screwed, but you'll do so at your peril.

Johnston touches on the difficulty of explaining taxes to the masses. In his chapter on the estate tax, he does note that even though the tax applies only to the extremely rich, a majority of Americans supported its repeal, many under the false assumption that they'd have to pay it when they died. (Support for the abolition increased when Republicans, on the advice of pollster Frank Luntz, began calling it the "death tax.") This is an amazing statistic; it explains why even some members of the Congressional Black Caucus, who represent almost nobody who would ever have to pay the estate tax, supported its repeal.

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Johnston says that simplifying the tax code is the only way out of this mess. Complexity "benefits the rich," he writes, "the well advised and the well connected." He's right, and overhauling taxes would be a nice idea (one that, incidentally, many conservatives have been advocating for a long time). But there are huge vested interests in the current system, and unless there's a political will to take on taxes, wholesale reform is never going to happen.

What we need, really, is a gifted populist politician who can cut through the thousands of pages of tax rules to let people know that the game is rigged. And, who knows, maybe we'll get one of those in the next election. Sen. John Edwards, who can't go a minute without noting that his father was a mill worker, has been getting good marks for his "two Americas" stump speech, and Howard Dean, who has raised millions from small-time contributors, is certainly well positioned to make the flawed tax system a primary part of a race against Bush. Even front-runner John Kerry, millionaire husband to a ketchup-fortune widow, could at least potentially fight Bush on this issue.

Whether the public will respond by demanding to soak the rich, though, is anybody's guess.

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Farhad Manjoo

Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society.

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