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Our Indefensible Tax System

A Pulitzer Prize-winning reporter explains how our tax code helps the superrich at the expense of everyone else.

| Tue Apr. 11, 2006 2:00 AM EDT

David Cay Johnston is one of the few people in the United States who's exposing the American tax code for what it is: backwards socialism. As a Pulitzer Prize-winning tax reporter for the New York Times, Johnston has, over the past nine years, uncovered the inner workings of a system that coddles, aids, and abets the rich in their various attempts to get out of paying taxes, forcing the upper-middle, middle, and working classes to pay for government on their own.

As Johnston showed in his book, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—And Cheat Everybody Else, few people have really closely examined the intricate loopholes, devices, dodges, and shelters that allow corporations and superrich individuals to pay shockingly little in taxes. Sometimes even the IRS can't decipher the most complex tax-dodging schemes, and few journalists have the knowledge needed to cover the tax beat adequately.

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As a result, most Americans remain unaware of the ways in which the wealthy cheat the system. And often, even when the public—and Congress—does become aware, nothing happens. Corporations and the superrich can continue to use tax dodges long after they're made illegal because tax law enforcement is so badly underfunded. Congress routinely cuts funding for tax auditors to save money, although as Johnston explains, the result is that the government often loses more revenue in uncollected taxes than it saves by firing IRS employees.

Johnston's book clearly shows that if Americans want a genuinely progressive tax system, one in which people pay what they can afford for the benefit of society, the current setup simply cannot continue. Johnston recently sat down with Mother Jones to explain why.

Mother Jones: You write in your book that we have what amounts to a flat tax in this country—that the rich pay the same percentage of their income in taxes as the poor do. People would be very surprised to hear that. How do you figure?

David Cay Johnston: Politicians like to talk about the income tax when they talk about overtaxing the rich, but the income tax is just one part of the total tax system. There are sales taxes, Medicare taxes, social security taxes, unemployment taxes, gasoline taxes, excise taxes—and when you add up all of those taxes [many of which are quite regressive], and then you look at how they affect the rich and the poor, you essentially end up with a system in which the best off 20 percent of Americans pay one percentage point more of their income than the worst off 20 percent of Americans.

MJ: Explain how people defer taxes. Your book shows that deferrals are one of the key ways in which the very wealthy avoid taxes.

DCJ: We have two tax systems in America. One is for wage earners. The government takes money from them out of each paycheck—so it knows exactly how much they make, and as a result, those workers can't really cheat to any significant degree. But the other tax system is for capital. Those with capital get to tell the government what they want to tell the government. They may get audited, but if their tax returns are of any size or complexity the government doesn't have enough of the smart auditors needed to figure out what's really going on. And there are all these special rules that allow you to do things like take in money today and pay taxes on it thirty years from now. That's a deferral and it's very common.

MJ: You mention in the book that Congress has handcuffed the IRS to keep it from investigating tax loopholes used by what you call the "political donor class." But you also mention that the IRS misappropriates its resources, frequently auditing people, often the poor, who try to stretch their tax deductions by some small amount.

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