July 07, 2005
Thursday

For a sense of the strange macroeconomic priorities in vogue in America these days, one need look no further than the unfolding congressional budget process.

Though the final numbers are yet to be codified, the thrust is unmistakable. In May, the House and Senate Republican conferees agreed to a budget resolution that cuts funding for education, veterans' health care, environmental protection, housing and other domestic programs by $212 billion over five years, according to an analysis by the watchdog Center for Budget and Policy Priorities.

Though one can frequently hear the deficit-based "money is tight" argument marshaled in favor of, say, cutting $600 million for food stamps, such rhetoric does not appear to extend to the $106 billion in tax cuts included in the resolution.

Those tax cuts, which are achieved through extending capital gains and dividend tax cuts, will disproportionately benefit the very wealthiest Americans.

How to explain such priorities? For at least part of the answer, here is one piece of required reading: David Cay Johnston's recent book, "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich, and Cheat Everyone Else" - a lively and disturbing breakdown of the growing unfairness of our tax system and the wealthy loophole exploiters that make it so.

In Johnston's narrative, the current proposed round of tax cuts for the rich and welfare cuts to the poor is only the latest step in a longstanding campaign to shift more and more of the tax burden to those least able to afford it, a campaign that demands far more attention than it has received.

"The tax system is becoming a tool to turn the American dream of prosperity and reward for hard work into an impossible goal for tens of millions of Americans and into a nightmare for many others," writes Johnston, who, after 10 years as The New York Times's tax reporter, knows his stuff cold.

Part of the campaign, however, has actually not been that covert. There were the $1.35 billion Bush tax cuts, which overwhelmingly benefit the top 1 percent. Then there is the unceasing effort by Republican leaders to repeal the estate tax, which affects only the wealthiest 2 percent.

But the largely untold story, and the one that Johnston sheds important light on, is the endless variety of tax trickery that high-priced lawyers and accountants and bankers have cooked up for very richest among us - things like reverse split-dollar family life insurance and manipulated charitable trusts and secretive offshore accounts that make tax liabilities vanish like a pina colada in the hot Bermuda sun.

Then there are big corporations, which now pay roughly half of the statutory rate of 35 percent through such clever techniques as setting up complex webs of subsidiaries around the world, mostly in tax havens, to move around assets and cut tax rates.

Sometimes, the company simply reincorporates in a tax haven for the biggest tax-savings bonanza of all. A recent MIT study found that corporate tax shelters cost the government $54 billion a year.

And at the center of the storm are the tax-shelter promoters, the wily accountants, lawyers and bankers who scour the tax code for strategies to sell for a small fortune that only the very rich can afford to pay. "Ernst & Young has been known to charge people a fee of $1 million just to look at a tax shelter proposal," Johnston writes. "One Ernst & Young shelter cost $5 million to wipe out $20 million in tax obligations."

Nor are these professionals shy about marketing their "products." Add it all up, and the disturbing conclusion is that at a time when income disparities are growing more and more acute (levels of income inequality in America are at levels not seen since 1929), the progressive aspects of the tax code have effectively been excised: The top fifth of taxpayers now pay 19 percent of their incomes in taxes, while the bottom fifth pay 18 percent.

So what is to be done? Well, first of all, the Internal Revenue Service emerges from Johnston's book in need of a major makeover. Between the out-of-date technology, recent "reforms" that have tied the agency's hands, the hopelessly inadequate staffing levels, and the often not-so-subtle pressures that discourage enterprising agents from going after the "political donor class," the IRS comes across as a helpless chicken, pecking away at poor people who don't know how to properly fill out their earned income tax credit forms - so that the agents can meet their quotas - while the big-time tax cheats run free, gaming the system at will.

On the big scale, however, the leaders of our country, in their infinite wisdom, must realize that that the yawning gaps between rich and poor are hopelessly destructive to the long-term prosperity, and that the tax code must be refashioned to combat this problem, instead of exacerbating it.

Though we can't expect them to immediately change their cloistered perspective, getting them a copy of Perfectly Legal would be a good start.

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