September 10?
Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--And Cheat Everybody Else, David Cay Johnston (2003)

When I started this book report series, the idea was that I'd write about a book shortly after reading it, while it was fresh in my memory. As the year lengthens, I'm getting farther and farther from that ideal. Most of this review I wrote about a week ago, and I'm only now tidying it up to post. Even then it had been a week since I finished the book and more than a month since I read the first half of it. I didn't write any notes, and I didn't even make many mental notes, so it's possible I'm misrepresenting it now due to faulty memory.

Perfectly Legal got most of its publicity for showing how the "super rich" pay a much lower tax rate than the "rest of us". Since this included showing how Bush's recent tax cuts have furthered that trend, many opponents of the President tried to use the book for partisan advantage, but the tax system on the whole is really a bipartisan shame.

For many, the idea that the rich pay a lower rate is counter-intuitive. They know about the income tax brackets and figure that the marginal rate goes up as income goes up. They're half right. The effect of the income tax brackets is partially offset by the cap on the payroll tax. The effect is that the working poor have it pretty bad, then the rate dips down for the lower middle class. Moving through the vast middle class, tax rate does increase as income increases, though not quite as much as you'd think. This continues on into the area that many would probably consider "rich", which is why those high earners of the upper middle class (with annual income of about $200,000, say) get indignant at the implication that somehow they are the beneficiaries of the tax system; if their income is from wages, they aren't. It's really only when you get to level on past that where the effective tax rate really goes down. The advantage to the top 10% of earners is not nearly so much as the advantage to the top 1%, the advantage to the top 1% is not nearly so much as the advantage to the top 0.1%, and so on to the top, as the effective tax rate moves quasi-asymptotically toward zero.

It's important to note that what we're measuring here is tax rate, that is, the percentage of one's income paid as tax. Although there are a few cases where a rich person actually pays less total tax than a poor person in absolute terms, for the most part it's the rate that's being compared. For example, if a welfare mother with an annual income of $10,000 pays $1,500 in taxes, while a billionaire with an annual income of $50 million pays half a million in taxes, the point is not that the rich guy actually pays less. Clearly he doesn't. The point is that his tax burden is a much smaller percentage of his income.

Johnston mentions this enough times that he can't be accused of hiding it. Still, with his constant shorthand references to who "pays more" and "pays less", the point sometimes gets lost. Probably there are some out there who think that tax burden shouldn't be tied to income at all, that it's entirely appropriate for Hobo Joe and Bigwig Tycoon to pay the same amount. If that view is to be rebutted, Johnston leaves it for someone else to do. He simply takes it as a given that "equal" means equal percentage of income and proceeds from there.

It's churlish of me to complain about points where Johnston is lacking in clarity, given that his book abounds with real data and information about the tax system which one will never find in newspapers or television news, in spite of all their regurgitation of tax-related factoids produced by various partisan campaigns and government offices (factoids which are misleading at best and sometimes out-and-out lies, by the way). But it is my nature to nitpick, and so I shall.

Another place where Johnston's desire to sex up his story trumps his desire to inform is when he discusses changes in income levels over the past decades. He compares the average income of the top X% of earners in 1970 with the average income of the top X% of earners in 2000, and then he does likewise for the bottom X%. The data show that the figure rose for the top group and fell for the bottom group. With this, Johnston can't resist saying that the rich get richer and the poor get poorer. Well, sort of, but in fact it's not the same people. Over 30 years, plenty of individuals are going to die, and many others will have changed income brackets. To what extent are the top income-earners in 1970 the same individuals as the ones in 2000? We don't know; the question is never addressed.

It's not that there isn't a point here. Regardless of who they are, if distribution of wealth has become more imbalanced, that's a potential concern. It's just that instead of wrestling with that genuine but somewhat ambiguous concern, Johnston instead goes for the cheap shot and implies that one guy is continuing to rake in more and more bucks while some other guy is losing out. But for all we know, one of the low earners in 1970 is one of the high earners in 2000.

But all of this stuff only takes up a couple of chapters in the book. The larger part -- and for me the more interesting part -- is not about tax rates at all; it's about loopholes, shelters, and scams that people use to avoid paying taxes at all. I'm pretty wonky about this. In spite of having virtually no finances of my own, as well as a mediocre record of managing what meager holdings I do have, on a less personal level I'm fascinated by all the clever little tricks one can do with money.

About half the book reads like a survey of the tax-evasion industry, with a rundown of the various tax-reduction "products" available to corporations. Yes, it's an industry. Any large corporation has a tax department, and for many of them it's the most profitable department. Corporations routinely report to their shareholders one figure for actual earnings and another for taxable income, and if the discrepancy between the two is wide, they boast about it, because it proves their financial success -- their success at tax evasion.

This brings to mind another point that I don't think Johnston was clear enough on. He's very cavalier in the way he uses the word "cheat". Maybe it's just my overly legalistic mind, but to me there's a big difference between declining to pay what you legally owe and shuffling your money around so that by law you owe less. For example, suppose that a corporation sets up a shell company in Bermuda then has the Bermuda company buy the corporation's intellectual property and charge it exorbitant royalties for the right to use its own trademarked name. That corporation now has a clever way of funneling income to the shell company where it won't be taxed. In contrast, suppose a corporation simply lies about its income and expenses when submitting its tax return -- not just random lying, but strategic lying based on cost-benefit analysis of what the odds are that the IRS will notice and what the penalties will be if they do. As far as I'm concerned, both are sleazy, but the former is legal and the latter is not. To Johnston, both are "cheating".

The distinction is not just a matter of morality; it's a matter of what needs to be fixed. If corporations are taking advantage of flimsy laws in order to avoid paying taxes, then the problem is bad law, and the solution is to reform the tax code to patch up the loopholes. If corporations are lying on their tax forms, then the problem is fraud, and the solution is for the IRS to catch these people and punish them, whether it's with steep fines or jail time for executives. Of course, part of the problem is that it's de facto IRS policy not to prosecute tax evaders, and those corporations who make a large part of their profits from tax evasion (ie, most of them) diligently lobby Congress to keep it that way.

No one is lobbying for the other side.

About a month ago on rec.music.opera, a handful of us got into an interesting little off-topic debate about tax law (mostly the alternative minimum tax, which gets a chapter in the book, though I'm not discussing it here). After a few days, someone else piped up to complain that the topic was dreadfully dull and all normal people are bored to death by it, so he wished we would just shut the hell up. Probably he's right. Probably most people have no attention span for discussions of tax law. That's why the tax law is such a disaster, and why the people who are in the business of exploiting it are so successful in screwing over the rest of us. If the general public had any idea how bad it is, they'd never stand for it, but it's just not newsworthy.

(Update: Since I wrote that paragraph, Congress has passed its latest tax package, sometimes called a "tax cut". This one has no real rate cuts, just a cornucopia of corporate welfare implemented as targeted tax breaks. As usual, the official line is that government is stepping in to make our industries more competitive. Reagan has only been dead a few months, and he's already turning in his grave.)

For those who, like REG, want to know what I'm reading next:

Of the books mentioned before, Peter Singer's The President of Good & Evil I've long since finished. Dawkins' Selfish Gene I couldn't renew because someone else had a hold on it, so when it became due I returned it, along with Eldredge's Why We Do It which is a response to it. I'm about halfway done with Pinker's Language Instinct, which is more about grammar than evolution. The last chapter I read had a lot about phonetics which reminds me of a post I started several months ago but never finished -- it's the same one that examines what's wrong with public education, which I keep promising to Darcy. I'm also about halfway into Kay's Culture and Prosperity, but both of these got put aside about a week ago.

I recently picked up M.E. Yapp's The Near East Since the First World War. This is a sequel to Yapp's earlier book on the 19th century Near East, which is waiting for me at the library along with a history of 19th century Egypt. Yapp is a favorite of mine, and I've alluded to his books here before (though the 20th century one I never read all the way through). Various discussions on the Sciolist have brought the subject back to my front burner. Both of the Yapp books are textbookish; I'm not sure I'd really recommend them to the casual reader.

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