What Tax Profs Are Reading . . . Newman on Perfectly Legal

Tuesday, April 20, 2004

Joel Newman (Wake Forest) kicks off a new feature of TaxProf Blog: What Tax Profs Are Reading. The goal is to share with the broader tax community reviews of both tax-related and nontax-related books recently read by tax professors. We invite tax professors to submit reviews of books they are reading.

Here is Prof. Newman's take on Perfectly Legal by New York Times tax reporter David Cay Johnston:

Life isn’t fair. We don’t all have an equal chance to win a footrace; people who can run the fastest tend to win. We all know that, and most of us accept it, provided that the process is fair. For example, it helps if all the racers are required to begin at the same starting line.

In his new book, Perfectly Legal, David Cay Johnston says that the game is rigged, and that our tax laws are at least partly to blame. The rich are getting richer and the poor are getting poorer. Recent tax changes lighten the load on the richest Americans, and pay for the shortfall by increasing the social security tax, which largely falls upon the middle class.

IRS enforcement trends don’t help. It has always been easier for the IRS to track wages—the income of the lower and middle classes, than to track the non-wage income earned by the richest Americans. Congress only made things worse by handcuffing the IRS, and cutting its budget to boot. Ironically, the only people who are experiencing increased IRS audit rates are the low-income taxpayers who try to navigate the complex and badly drafted Earned Income Tax Credit. Surely, even the IRS knows that that’s not where the money is.

Who is to blame? Much of the problem is structural. Law reflects its environment. One would surely expect US tax law, which reflects one of the largest, sophisticated, and complex economies the world has ever known, to be complex.

Further, our democratic process is unwieldy at best. Members of Congress do what they need to do to get reelected. It is rarely worth their time to get heavily involved in understanding, no less reforming, the tax laws, when the most likely result of their efforts would be to make them far more enemies than friends.

What’s more, the richest among us get to hire the best tax advisors. Moreover, only the rich are flexible enough to take their advice. Poor people have no choice about how to spend their money—they have barely enough as it is. Only the rich can shift their money around from one investment to another, to maximize tax savings. Of course our tax laws are most easily manipulated by the rich. Why should they be any different from our other laws?

To his credit, Johnston blames both Democrats and Republicans. Both share in the lack of understanding and guts which makes all of this possible. However, the Republicans, who have been in power most recently, are clearly responsible for the most recent debacles. It is they who rail against the federal estate taxes (which they call the “death tax” after consultation with their ad men and focus groups), after making claims against it which, as Johnston shows, absolutely cannot stand up.

Remember, a race can’t be fair unless everyone starts at the same place. Even with the estate tax in place, rich parents can give their children an enormous leg up on the competition in the next generation. Do we really want to eliminate the estate tax and make that potential competitive advantage even bigger?

David Cay Johnston is the best newspaper reporter on the tax beat. His book is entertaining and instructive. He does a marvelous job of simplifying complex things, including reincorporation in Bermuda, the out-of-control alternative minimum tax, and the excesses of corporate jets. On that last issue, if both the liberal Howard Metzenbaum and the conservative Jesse Helms agree that we have a problem, then we definitely have a problem. Also, he humanizes the story by focusing on the real people involved, from the IRS Commissioner to some of our best tax lawyers, to some of our most interesting taxpayers.

Johnston says that our tax code needs more than mere tinkering; it needs major overhaul. But which overhaul, and how? Perhaps we should shift the emphasis from taxing income to taxing consumption. Surely, we should reconsider how we tax international transactions. There is no doubt that we need to strengthen, and fund, the IRS, so that it can do its job fairly.

Whatever changes we make, however, we must make them openly. Our tax laws are hugely important. The people of the United States need to understand them well enough to participate in a national conversation about what they do, and how they might be changed. Perfectly Legal is a wonderful first step toward that understanding.