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

CP: This gets at an interesting point: Tax cuts are a terrific excuse for starving social services and other so-called bureaucracies out of existence.

Johnston: There’s a theory called starve the beast, that the only way to change the government is to cut off the revenue for it. Edmund Burke, in his 1793 letter, which is the founding document of the modern conservative movement, famously said the revenue of the state is the state. If you want to get rid of programs that you regard as inappropriate—social security, Medicaid, Medicare, public education, public health, arts, humanities, and probably for that group corporate welfare and agricultural subsidies—then one way to do that is to strip the government of revenues.

You’re not going to outright kill the fundamental law enforcement agencies of the federal government; the FBI, the Securities and Exchange Commission, who are the Wall Street cops, the IRS, who are the tax cops, etc. etc., but you can hollow them out until they are insignificant and they have almost no ability to police the political donor class. And lo and behold, as the SEC has become smaller and smaller relative to the size of publicly traded companies, what have you seen but an explosion of corporate corruption?

There have been some famous big trials, but you think that they are catching and arresting every one of these guys? No, they’re catching a handful of examples. There’s a theory to this. It’s called general deterrence. You arrest a handful of people and make a big show of it and it’s supposed to deter everyone else’s behavior. Well, that might be a perfectly rational policy as it applies to things like the middle-class taxpayer; if you’re a middle-class taxpayer and you think there’s a good chance the government might prosecute you, you’re more likely to file an honest tax return. But if you’re a financial sociopath who’s worked his way up to being CEO of a major company it’s not going to deter you.

I heard President Clinton at the Democratic National Convention saying, If you agree with these people you ought to vote for them. If you don’t agree with them, you’ve got to recognize they really believe this stuff. A really fundamental important point to understand is that these people are not intellectually corrupt. I think that’s a major mistake people make in looking at this. And it plays into this division that we have going on about whether you’re red or blue or liberal or conservative. I mean, I can show you reviews of my book that say that I am a populist, that I am a classic conservative, that I am a progressive, that I am a liberal Democrat. I’m glad to see that, that’s good. I’m not an ideologue. If anything I am a professional skeptic.

CP: I’ve spent a lot of time recently contemplating how cleverly Bush was to frame his agenda as the creation of an “Ownership Society.” Our popular culture is so steeped in this nomenclature: I constantly hear people say everyone should take ownership of their own problems.

Johnston: The fact is, there is not enough wealth in America for everyone to live off of owning assets, most of us have to work. One of the things I hope you make clear is that I want to see an America in which more people are wealthy, in which there are more millionaires, there are more billionaires, and there are more thousandaires. I think that we can be a wealthier society. But the rules that we have created are funneling all of the gains to a very narrow group of people. It is not just through their hard work. A lot of them got there by luck, by corruption, or by simply writing the government’s rules.

According to the latest version of “The State of Working America,” 2004-2005, which you can get from the Economic Policy Institute in Washington, D.C., average hourly wages in 1973 for men with less than a high school education, have fallen from $13.83 in 1973, this is adjusted for inflation, to $11.04 in 2004. Now, that’s a decline of $2.79, which is about 20 percent. You can do it with a calculator and figure it out. If you have a high school education, $16.39 fell to $15.07. That’s about 9.5 percent. Some college $16.76 to $17.03—so they’ve gone up about .40, or 3 percent. College degree: $22.62 to $26.63. That’s about a 20 percent increase. Advanced degrees: $25.12 an hour to $33.13 an hour. So people with advanced degrees after 30 years are only making one third more.

All of those numbers scream: where is all the increase going? It’s going to capital and to the very top. And there are now some analyses of the official Chinese government statistics which, I know you’ll be shocked to hear are biased to make things look better than they are, and what they show is that when you add up the net gains after all of the foreign investment in China—you know by American companies and Germans and everybody else, the Japanese—and you deduct the losses, because for instance when you open a Wal-Mart in China and 400 little two-bit family businesses go out of business, that were neighborhood merchants selling you things, there’s a gain and there’s a loss, right? When you add up the net gains and losses as listed in the official Chinese statistics, more than 100 percent of the benefits are going to the managerial and ownership classes. It has not raised the overall standard of living in China. Isn’t that astonishing?

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