Everything You Know About Taxes is Wrong

Pulitzer Prize-winning reporter David Cay Johnston talks about the retooling of the tax code to serve the very rich at the expense of the middle

So there is an interrelationship here and, you know, we are a society. You know this faux libertarianism? “I did it all by myself.” No you didn’t, the public educated you, the taxpayers built roads and highways and a court system and a structure of laws and then you, through your initiative, did very well for yourself within that context. But you didn’t do it all by yourself.

And the idea that you don’t have any moral obligation? In ancient Athens there was a flat tax, and when the Athenians had a flat tax, Athens was a tyranny. That’s where we get the word from. When the moral philosophers of Athens reasoned that those people who got the greatest economic benefit from living in Athens had the moral obligation to bear the greatest burden of maintaining the society that made them rich. That is, when they invented taxation based on ability to pay, they also invented democracy. The two ideas are totally intertwined. And we are not the United States of Me or the United States of You. We are the United States of America, we are a society.

CP: This same shift of the tax burden is occurring in Minnesota, too, and one effect critics are predicting is that the resulting budget crunch is simply shifting many costs onto the residents of central cities. Slashing public health spending, for instance, has propelled more uninsured people to public hospitals. Do people catch on to this eventually or do the architects of the shift just continue to get away with it?

"The de facto chief tax enforcement officer of the United States": Reporter David Cay Johnston
Bonk Johnson
"The de facto chief tax enforcement officer of the United States": Reporter David Cay Johnston

Johnston: I want to challenge the assumption behind your question. You know that there have been very good mapping studies done about the cost and benefits of, say, extending water lines from St. Paul to the suburbs, and they show how the inner city in effect subsidizes the outer rings. I think I read them 15 years ago. They were the first really good mapping studies using graphical mapping technologies and they were about, as I recall, St. Paul. They might have been about Minneapolis and St. Paul, but St. Paul anyhow. They showed without question that in the area of water and sewer the inner city residents were subsidizing the new suburbanites.

Economic shifts, whether they are people gathering in the central cities or moving to the suburbs, the exurbs, are driven by the rules the government sets, and people’s view of their self-interest under those rules. And so it is not writ in stone that inner cities have to be loaded up with poverty and taxes, and suburbs can have affluent people and lower taxes. It’s just the way we’ve organized the rules. Maybe that’s the most efficient way to organize the rules and maybe it’s really a very inefficient way to do it.

We have a tax system right now that rewards certain kinds of behavior and not others, and guess what? We get certain kinds of behavior and not others. For example, if you are the CEO of a multinational company if you’re not moving jobs off shore you ought to be fired because you are not doing what the government’s rules are telling you to do. Now, nobody announced that. No member of congress got up and said we have adopted laws and rules the net effect of which is you should be getting rid of American jobs and creating jobs offshore and taking profits offshore and disinvesting in America. But that is the net effect of what those rules amount to.

And that’s where journalism is important. In identifying what isn’t announced and in telling you what’s really going on. And some people call these ooze stories. Nobody announces them, they just sort of ooze.

CP: I have a hard time imagining local newspapers hiring tax beat reporters such as yourself.

Johnston: One of the reasons newspaper readership is declining is that newspapers are full of a lot of fluff, and one of the first things I say in lectures to journalists when we talk about taxes is look, if you cover a local government or school board or whatever, homeowners want to know first and foremost are my property taxes going up or down? And the government’s probably going to give you a thing saying, “The average value of a home in our district is $127,500 and that homeowner’s bill will go up or down by so much.” Which is meaningless to me if my home is 130 percent of that amount. So you turn it into what it is for $100,000, or for $10,000 or per $1,000 or in percentages, so you can grasp what should be happening to your tax bill.

Journalism needs a real back to basics movement, and a lot less of this cheap, canned material from Hollywood—which movie star is sleeping with which movie star.

CP: One of the most astounding chapters of your book described how middle-class taxpayers are making up the cost of Bush’s tax cuts via a little-known mechanism called the Alternative Minimum tax. Can you briefly explain this sleight-of-hand?

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