Perfectly Legal

David Cay Johnston, “Perfectly Legal” (The Covert campaign To Rig Our Tax System To Benefit the Super Rich—And Cheat Everybody Else), The Penguin Press, 2003, Pages 317

Lately I have found some books that document behavior so disgusting that it is hard to read the entire book. For instance, for the past eight months I have been trying to get through a book about the CIA--“Legacy of Ashes.” I just get more and more disgusted until I finally put it down. I do not know if I will ever finish it. Perfectly Legal is another such book but I fought through and finished it. I often just wanted to throw it against the wall; it is that upsetting. It was written five years ago and as far as I know none of the items described have been dealt with by Congress. After finishing this book I found that the author has written a more recent book, “Free Lunch” C2007 which I will read when time permits. I have two other books on Inter-Library loan that I have to pick up today.

Johnston, the author of Perfectly Legal, won a Pulitzer Prize in 2001 for his investigative reporting in The New York Times and has been a Pulitzer finalist three other times since 2000. As of April 2008 he no longer works for the Times but is writing free-lance.

He points out that since the mid-1970s, there has been a dramatic shift in America. Tax policies and their enforcement have become a disaster, thanks to lobbying by a portion of the top 1 percent wealthiest Americans. The public is largely unaware of this trend and Washington seems to allow it as many of them get huge political donations from this wealthy segment. The corporate income tax, the estate tax, and the gift tax have been largely ignored by the media. But the cumulative results are remarkable: today someone who earns a yearly salary of $60,000 pays a larger percentage of his income in taxes than the four hundred richest Americans.
There is a widening wealth gap that threatens the stability of the country and this is particularly insidious in its potential to undermine the entire tax collecting process in this country. Johnston relates compelling tales of real people across all areas of society, he reveals the truth behind:
• "middle class" tax cuts and exactly whom they really benefit
• how workers are being cheated out of their retirement plans while disgraced CEOs walk away with millions
• how some corporations avoid paying any federal income tax
• how the AMT tax law meant to prevent cheating by the top 2 percent of Americans no longer affects most of them, but has morphed into a stealth tax on single mothers making just $28,000
• the IRS is required by Congress to make it seven times more likely that the working poor be audited by the IRS than everyone else
• the IRS has become so weak that even when it was handed complete banking records detailing massive cheating by 1,600 people, it prosecuted only 4 percent of them
• IRS agents are afraid to go after the political donor class. They fear for their jobs and pensions.
Some examples:
Roberto Goizueta, CEO of Coca-Cola, built a billion –dollar personal fortune without paying a dime in taxes on it.

Ingersoll-Rand pays $26,000 a year to maintain a Bermuda post office box as its legal headquarters. This allows them to escape $40 million in corporate taxes.

The IRS unjustly came after a cleaning woman in East Los Angeles who earns $7,000 per year, but ignored the fact that a billionaire art dealer has never filed a tax return in 30 years.
Notes:

Pg. 36: The average income of all households in 2000 was $42,700, while the 13,400 households at the very top had an average income of $24 million each or 560 times the average. It was not always this way. In 1970 the very top group had about 100 times the average. The only significant income gains over three decades went to a very narrow slice at the tip. After adjusting for inflation, for each dollar of income in 1970 the top 13,400 households had four additional dollars plus a dime to spend in 2000, while the average household in the bottom 99 percent had only eight cents more per dollar.

Pg. 42: Lawmakers seldom read bills, many which came to the floor of the House or Senate without a single public hearing. Many of these bills are written with the help of the public donor class. Most lawmakers would probably be astonished to learn that the passed laws that took away the most powerful incentive for accountants to behave with integrity, a change that was behind the accounting scandals at Enron, Global Crossing, Adelphia, Tyco, Waste Management, and many others. This was encouraged by ending a single legal principle—the policy that each partner in an accounting or law firm was liable for the acts of every other partner. The significance of how this rule eliminated a powerful self-policing mechanism was written about in academic journals and debated by the most thoughtful in the corporate profession, but was unknown to the public because it was ignored in the news media. Significantly, that change represented a triumph of political influence interfering with the market.

Pg. 95: The alternative minimum tax (AMT) sneaks up on people. Most people are unlikely to be aware of the AMT because most tax returns are prepared using computer programs, th software silently calculating the stealth tax in the background. Unless a paid tax preparer points it out, or one looks at line 45 of the Form 1040, the levy appears to be just wrapped into the overall tax bill.

Pg. 104: By 2000 those making more than $1 million were paying just 28.3 percent of the AMT even though they were the only group who should have paid anything under the original plan. Those making $100,000 to $500,000 paid more than half of the alternative tax. Ant that year 12,000 people making less than $30,000, some of them single mothers, were forced to pay the alternative tax.

Pg. 232: The tax savings from ostensibly moving a corporation’ headquarters offshore are immense (all you need is a mailbox and someone to answer a phone). Tyco estimated that it saved an average of $450 million each year after 1997, when it arranged to make Bermuda its tax headquarters while keeping its executive offices in the United States.