DYLAN: Well, hello to you, and welcome to Episode 9 of Radio Free Dylan. I am Dylan Ratigan and we have the pleasure today of talking taxes, and not just taxes but how special interests utilize the tax code in America as one of the primary favor trading venues for extracting wealth from the taxpayer as opposed to having a government that might work on behalf of the American people and use a tax code that would encourage investment, that would discourage reckless speculation and that might actually represent the real price of things that we get an artificially low price on like gasoline for instance, for which we pay very little relative to the actual cost to the planet and our country of getting a given gallon of gasoline out of the ground.

But far be it for me to sit here and explain to you just how manipulated and really destructive to our country the tax code has become when we have the benefit of David Cay Johnston. While at The New York Times, Johnston received a Pulitzer Prize for exposing tax loopholes and a culture of inequities. That was in 2001. His latest book is entitled Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense And Stick You with the Bill. It’s a national bestseller. It does what the title suggests, exposes the massive transfers of wealth from the poor and middle class and the affluent to the super rich in this country all by manipulating the tax code, and the way you manipulate the tax code is by of course sending a few dollars to your friendly neighborhood politician.

With that said, I present to you, ladies and gentlemen, David Cay Johnston. Mr. Johnston, is it as bad as the broad portrayal I just offered?

DAVID: Oh, it’s awful, Dylan. It is absolutely terrible. In fact, Tax Analyst, the nonprofit I write a column for with some economists and tax leaders has shown that we are spending a trillion dollars a year just with the federal government, subsidizing businesses and wealthy individuals. And do you know how much money the income tax brings in?

DYLAN: How much?

DAVID: A trillion dollars a year.

DYLAN: It’s a flat transfer.

DAVID: It’s a very complicated, subtle, and well-hidden transfer, but yeah.

DYLAN: So if you were to look at for instance the Deficit Commission and sort of the austerity debate that is about to kick up here in our country, and you were to look at -- I don’t care what your favorite things is from Social Security to defense to farm subsidies -- how absurd it is to begin a conversation about cutting our expenses without first having a conversation about the extraction that is going on using the American tax code?

DAVID: Well, it’s completely upside down. And of course, remember, the people who are on the deficit commission are part of what I call the political donor class or its beneficiaries. These are people who live in Washington, who spend most of their time if you’re a lawmaker, and Alan Simpson of course was for many years a senator, hearing wealthy people and the lobbyists representing them coming in and saying, “You know, Senator, we have discovered this little problem in the law, and if we could just have fairness.” And fairness for all those guys turns out to be a lot of money in their pocket that came out of yours.

DYLAN: You say that the story that the numbers tell is one of a strengthening economic base with income growing fastest at the bottom until 1981. You say we made an abrupt change in tax and economic policy at that point. Since then you say the base has fared poorly while huge economic gains piled up at the tippy top or at the very top along with much lower tax burdens for them. What was the change in ‘81 you’re referring to?

DAVID: Well, it’s when Reagan came into office and he, Reagan, whether you love him or hate him, was a great leader and he dramatically changed the direction of the country, and he put forth a whole series of policies -- regulatory policies, subtle changes in tax policy that many people have never seen or often never written about or appeared as only passing reference. [5:00]


That have had a dramatic affect and my contention in my books and I cite all sorts of data and reports to back this up is that what we’ve developed is a socialist redistribution scheme up. That it is a trickledown economics. A phrase that was designed by opponents of Mr. Reagan to denigrate him, it’s Niagara up.

DYLAN: And if you were to look at the evidence of that in our society?

DAVID: Well, let me give you a couple of examples of this, okay? 1980 to 2007, the average income of the bottom 90% of Americans was unchanged when you adjust for inflation. On the other hand, at the very top, the top 1/100th of 1% of Americans -- now, that’s a small group of people, 30,000 people. If they all showed up at Yankees stadium. You wouldn’t think it was a big crowd because it seats what, 45,000-50,000 people.

DYLAN: Sure.

DAVID: That small group of people back then was getting one penny out of every dollar of income in the country. They’re now getting about 5 cents, almost 6 cents out of every dollar. And their incomes have exploded. They’ve gone up $21 million to an average of about $27 million each. The top 400 taxpayers in America in 1961 got a quarter of a penny of every dollar of income in this country. They now get well north of a penny almost 2 cents. 400 taxpayers get that much money, and the average tax rate paid by those 400 taxpayers is a third lower than a single person who makes $500 a week which is the median wage in this country. Half of all workers make less than $500 a week.

DYLAN: And is this all income tax? In other words, was the mechanism for the wealth transfer a function of restructuring on income taxes or is it something more complex than that?

DAVID: It is incredibly more complex. Part of it is income taxes. Part of it is social security taxes where since 1983 everyone has paid a total of more than $2 trillion more into the system than have come out in benefits. And now they’re talking about let’s cut your benefits in the future even though we paid in advance for them.

But let me give you a real clear example. There are so many tax favors for the oil industry. And think about this. There’s no need for the government to stimulate demand for oil, right?

DYLAN: Sure.

DAVID: We all drive cars. There’s plenty of demands. There’s a robust market.

DYLAN: If anything, I think we would want to discourage demand for oil, considering how destructive it is not only to our planet but how the money from it is used to finance hostility and violence against Middle Eastern countries themselves, and others.

DAVID: Absolutely.

DYLAN: Sure.

DAVID: And prop-up dictatorship can lead to people not liking us. Well, if you invested in two companies that each in the market earned a 10% return but one of them was an independent oil and gas company, your return as an investor wouldn’t be 10%. It would be 14.2. That’s a 42% greater return and every single penny of that greater return comes out of the pockets of the taxpayers.

DYLAN: How much of the ability, the political ability to manipulate the tax code to allow this massive multitrillion dollar wealth transfer, even from the sort of working rich if you will, people who…

DAVID: People like you and me?

DYLAN: Who are successful, sure, but pay 70%, 80%, 60% of all their income gets harvested and used to fund bank, gambling, and war and all the rest of it. How much of the political capacity to get away with this is a function of really the brilliant manipulation of the American dream as you too could be a billionaire? Like pick your favorite billionaire, and if you f*** with those billionaires that you may be f**king with yourself in the future and so you better not get in there and meddle with the billionaires’ tax scenario because -- God help you the day you become a billionaire with your big idea, you don’t want that to be you and nothing could be more un-American than taking away the fantasy of being an untaxed billionaire?

DAVID: Right. Well, that is at the very core of this. I mean I can’t tell you how many people in the last 15 years has said to me, “If my boss doesn’t get a tax cut, I’m going to lose my job.” In fact, and I know this is counterintuitive, higher tax rates encourage economic growth and jobs, and the reason if you think about it's very simple. Imagine you own a business -- and I own a business by the way with 25 workers who are part of a business. [10:02]

DYLAN: Yeah, as do I. Not with with 25 workers, but I know what you're talking about.

DAVID: And well, I just stole a tiny piece.

DYLAN: Yeah.

DAVID: But I’m chairman of the board. And if we take money out of our business, significant amounts of money, we’re essentially destroying future jobs because there’s less capital in the business. But, so, if the cost of withdrawing money is a 70% tax rate, that’s what we had when Ronald Reagan came into office, you’re going to say, “Wait a minute. If I take a million dollars out of it and give the government 700,000, I think I’ll leave it in the business and keep growing my business.” But if the tax cost is what it is today, 15%, you’re likely to say, “You know that beautiful painting I want to buy?” and go buy it, and that’s an unproductive asset. So you’re taking money out of productive equity.

DYLAN: Sure.

DAVID: But there’s another aspect to this, Dylan.

DYLAN: Well, hang on. Let’s stop there for one second because that seems like a brilliant place. So if we are indeed a capitalist country where we believe capital is our most precious asset, and I’m not just talking about money obviously but about the talent, the time, the educational resources, the natural resources, the collaborative resources that result from the coming together of creative and technical and labor professionals, have we effectively failed to use the tax code to incentivize capitalism?

In other words, instead of incentivizing, using capital to solve problems, leave it in a productive state, leave it in an investment state, we’ve actually incentivized the removal of that capital even for purposes of personal consumption because we’ve made -- as you pointed out a low tax event -- or if we’ve incentivized the outright removal of the money from our own country in the investment of that money in other countries? And do you believe that the politicians who have facilitated the tax code that doesn’t encourage productive capitalism, productive investment but extraction and removal for consumption have done so knowingly or have done so inadvertently, piecemeal, just trying to keep their jobs?

DAVID: Well first of all, I think that having interviewed over 100 members of Congress over the years, most of them don’t know anything beyond what they’ve been told as talking points. Their depth of knowledge is incredibly shallow. And it isn’t just withdrawing it to go overseas, which I’ve written a lot about, but it’s also withdrawing it from production to put it into financial activities, which now account for about 40% of the profits in this country. And that leads to a very important point. You know these hedge fund managers who are making enormous gains out there?

DYLAN: I do.

DAVID: They do it with borrowed money. I’ve proven that in at least one case the borrowing rate wasn’t the official 30 to 1. It was 250 to 1 and another it was 100 to 1. And hedge fund managers get paid for their performance. It’s called carried interest and we’ve all heard the newspapers say, “Well, should they pay the 15% they’re paying or the 35% the Democrats want them to pay?”

Their current tax rate is zero. If you are a hedge fund manager, you are allowed to make your profits today and you can defer your taxes on them for years and decades; and in the meantime, instead of collecting taxes, the government is borrowing money to make up for the taxes it expects to get in 2040 from these hedge fund managers, while you and I have to pay our taxes every year and we’re allowed to save if you’re over 50 $22,000, and if you’re under 50 $16,000 without paying taxes.

DYLAN: I want to take a break and come back and talk to you about how we begin the process of not only making it easier for more people to understand what you understand all too well, David, but what you would view as some of the signs and values that should be used when dealing with the tax code.

We’ll take a break and we’re back with David Cay Johnston, author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense And Stick You with the Bill. We’re back here right after this.

[BREAK] [14:00]

We’re back with David Cay Johnston, again Pulitzer Prize winning reporter for The New York Times, on the specific issue of tax loopholes and inequities, his book exposing the massive transfers of wealth, not just from the poor and middle class but from the poor, the middle class, and the working affluent in this country, to the super rich who are the favored class of the American political structure.

Another thing that you wrote, David, that I want everybody to hear before we get into some of the ways that we can deal with the solutions to these problems, you write this: “This orgy of money exhibitionism has created a society in which commas -- it takes three to become a billionaire -- count more than character. We’ve gone so far down this path that we bailed out bankers, allowed them to keep the untaxed wealth in their deferral accounts,” that’s what you’re just talking about, “and with few exceptions retain shareholder value while wiping out investors in General Motors and Chrysler as a condition of their bailouts. And while autoworkers had to take severe pay cuts, bonus time on Wall Street is at new records.” What do we do about it?

DAVID: Well, I think that what we have to recognize is that government is the biggest single force in our economy and the world economy. You know, taxes are the biggest business in the world. They’re 40% of the world economy. So it matters a great deal what we spend our tax dollars on, and that matters a lot more than this argument about rates which is one that benefits very wealthy people.

What do we spend our tax money on? I’ve actually shown in my column in Tax Notes that by raising taxes, you can have more money in your pocket if you buy something through the tax system for a lower price than you would buy it individually. And we need to start recognizing that the purpose of this country is not to create billionaires. The preamble to our constitution sets forth six noble reasons to create this country: justice, peace, common defense and general welfare, and liberty most of all, and we need to recognize that’s the purpose here. It is not to subsidize those people who are driven to make a lot of money.

Now, there’s nothing wrong with making a lot of money, but make it in a market. Don’t make it through these subtle backdoor deals that in Free Lunch I identify individual companies and entire industries whose profits all come from the taxpayers through these hidden mechanisms.

DYLAN: If you were to look at the problem of the Bush tax cut debate, one thing that frustrates me on my show, David, is that anytime that I want to enjoin a tax conversation, which by the way is not the sort of thing that gets network executives excited that you’re about to have the highest rated show on the network that day when you want to come out with a big tax conversation -- but we’ll save that for another day. The frustration that I have with the Bush tax cuts is I feel like as soon as we bring up the tax conversation if you will, that immediately it goes to the Bush tax cuts and the question is “Why, are you for the Bush tax cuts or you against the Bush tax cuts?” as if the tax conversation in this country is basically a function of whether you are for these tax cuts for the super rich or not.

What frustrates me about that is that because the Bush tax cuts are the polarity around which the tax conversation happens in the political class and in the chattering media class, it is actually very difficult to move beyond that polarity to the real tax conversation which is why are we making all these special accommodations in the tax code? What are they doing for the state to get that and what would be a more rational way to think about the tax code? Is it a consumption tax as opposed to an income tax? Is it a flat tax? What is the actual relationship with taxation that is the most efficient for the function of capitalism when capitalism is predicated on not who can be a billionaire by screwing around with the system but with capitalism being predicated on who can acquire the use of capital, however small the amount is, use it to solve problems for other people, charge them money in an appropriate value for the problem that they’re solving?

And if you solve it for a lot of people and you liberate a lot of people, well then you get to be Steve Jobs or Bill Gates; and if you solve it for a few people, well then you get to be the guy who owned the local shoe store in my hometown of Saranac Lake. But both of those people saw an opportunity and a problem and attempted to solve it and none of it was predicated on manipulating the tax code specifically as the financial industry does simply to have more money. How do we get past the polarity of the Bush tax cuts to the more meaningful tax conversation that somebody like yourself would drive us to?

DAVID: Well, I think we need to recognize a couple of principles, and let me tell you perhaps the most important one of all. Democracy, invented by the Greeks, is the child of the invention of a moral theory. That moral theory is progressive taxation, that in man's natural state in a jungle, no one has any wealth. The thugs and the tiger take whatever they want. And so when you have a civilization and you’re able to create wealth, the Greeks said, “Well, everyone is equal.” [20:00]


And the more income, the more wealth you have, however you got it, the greater the share that you must pay back to the society that made this possible so that society can endure. And we need to have a discussion then that’s focused on the fact that you can only get wealthy because of the American society and that we need to be thinking about making our country endure. Our tax policy right now, I’m talking about the Bush tax policy, is talking about "me, now." It’s not about the country and the society so that it can prosper over the long haul and be stable.

Secondly, we need to recognize that you do want to in fact have lower taxes on capital, but we in many cases have negative tax rates on capital. That doesn’t make any sense at all and we want to level the playing field. The other area that’s crucial to this is all of these regulations, the reason government produces so many regulations is not for you and me. These are regulations put in place that provide various businesses with ways to either charge prices that are unreasonable, collect benefits that are unreasonable, or vanquish competition so that we don’t have competition.

And all of the indicators, if you go to the CIA World Fact Book ‘cause they’re nothing anybody can question the loyalty of the CIA, their competence on some things maybe but not their loyalty, you will see that America is falling behind the rest of the world rapidly. We went from 1st in the internet to 16th now. By some healthcare measures we are behind Cuba, a country where in 1959 Desoto was considered a modern car.

DYLAN: If you were to look at the causality, ‘cause for me the indication of a failing system is one that it consumes a lot of resources and produces a little; and we obviously spend more than any country in the world on healthcare and now we’re ranked 37th.

DAVID: Almost half the world’s expenditures on healthcare are in the US and taxpayers, directly and indirectly, spend as much money as the next wealthiest country does as a share of its income. And then we have all that private spending and then we don’t cover a sixth of our people; and at any point in the year, a quarter of them have no health coverage.

DYLAN: So where would you begin? Where would you begin? Where would you demand your president begin to not come out with a Deficit Commission that makes $4 trillion in proposed cuts for a country that is suffering $70 trillion in unfunded liabilities and an ongoing extraction that is being ignored inside of the tax code, the financial system, and our trade policies? How do you engage the power structure, that status quo power structure which defaults to this sort of phony debate on what are we going to cut, and oh, my goodness, how dare they raise Social Security and all this nonsense?

Which it’s not to say that that point of view is nonsensical. It’s to say that the entire debate about cutting in the context of the problem that we have is nonsense when there is this massive again financial trade and tax policy extraction in place that is depriving the vast majority of the occupants, the citizens of this country, of resources. And it must be very frustrating for you to watch this. I know it’s frustrating for me and I’d be interested in your thoughts as to perhaps how we can shake the cage a little bit to get people to put this in the context that actually is honest as opposed to this flawed debate that we’re still being forced into as if austerity against an extraction and manipulation is in some way a solution.

DAVID: Well, this is a real tough problem, Dylan, but I would suggest that there are two things we need to get at. We first need to recognize that the Chicago School -- and I studied there for two quarters when I was a young man in the Graduate School of Economics. I’m not an economist -- but I studied there. That the Chicago School theories don’t work. They don’t recognize that in many cases we’ve drawn literally criminal elements into places and we have seen widespread problems in this thing called “control fraud” where big businesses are run basically to extract money for the managers and they don’t care if it collapses later.

DYLAN: Yeah.

DAVID: And, you know, the FBI has announced that it is partnering to go after mortgage fraud. It’s not partnering -- who is it partnering with? The very bankers who caused this problem and trying to say it was caused by little people -- when it wasn’t.

So, we need to understand that the theory we’ve been taught and has been inculcated in our minds that comes from the Chicago School and Milton Friedman’s idea -- remember, he wanted to eliminate all public parks because this was socialism. No child should be allowed to play in the swing if they can’t buy a ticket basically -- that these ideas are not working in the real world and our economic competitors who are going a different route are doing better than we are and we’re falling behind. That’s one. [25:00]


Secondly, we need to develop some historical perspective about this and recognize as you mentioned in how incomes grew for the bottom 90% up until 1980 at twice the rate of the super rich. Since then they’ve been flat and the rich are taking off.

DYLAN: But if you were to look at the core vehicles by which the wealthy are able to perpetrate their extraction, which is largely based on a control fraud or accounting fraud, whether it’s inside of a large corporation or the stunning accounting fraud that is the root of the financial system right now in the banking system where we have $144 billion worth of bonuses to be paid out this year on an insolvent and really nonexistent pool of assets that is only allowed to retain its value by virtue of the accounting relief that was given to them and continues to be given to them by the government.

So if you look at accounting fraud at the core root of the evil, along with tax code, is there a way at this that you can see that doesn’t have to precipitated by a cataclysmic financial market event or civil unrest of some kind to force the actual engagement with the reality of that fraud?

DAVID: Well, there’s a real problem. I mean I have written that I’m concerned that we could actually devolve into a revolution because I think things are going to get a lot worse on the road we’re going down. We absolutely need to recognize that accounting, and I’m sitting in an office at home with several awards for my writing about accounting on them. The accounting profession has become totally corrupt and its rules make the tax code look simple; and the principal reason for those rules is to avoid presenting reality in financial statements and it makes it very hard for the majority of honest businesspeople to compete when these rules allow predators to run loose.

Democracies do not generally make a major course correction without either a powerful leader coming forward, FDR and Reagan being two good examples of that.

DYLAN: Teddy Roosevelt is another one of that.

DAVID: Teddy Roosevelt would be another excellent example. Or when they face a terrible, terrible crisis and we will face an awful crisis if we don’t address that these problems we have are fundamental. They're endemic. They aren’t just about taxes. That’s just part of it. It is that we are largely not living in a market economy anymore. We are living in a largely rigged economy and little businesspeople like me have to compete but for many, many big businesses, what has happened is the government has passed all sorts of rules and policies which is the summary for my next book, The Fine Print. They’ve never been in the newspapers. They’ve never been on TV. They are extracting money from people and in some cases we pay 4, 6, 38, 100 times what people pay in Europe and Japan and Australia for the same services, but people don’t know that because they’re here.

DYLAN: The thing that strikes me, and I’ll leave this on a somewhat hopeful note, is that as daunting and discouraging as the facts of the matter for this country today may be, that the problem that we’re suffering from of again the wealthy and the government effectively conspiring to their own self-preservation at the expense of the balance of the continent and its people is a practice that is as old as governments, banks, and people; the Egyptians and the pharaohs, medieval Asia, medieval Europe.

And then I’ll add to that the incredible rate of change that we’re presented with right now because of the digital revolution and all the other things that people are familiar with, and the way things at the very least could be done, the way you could conduct healthcare, the way you could innovate in education, the way you could innovate in energy even though that is obviously not happening because the status quo institutions, the big businesses that control our government are extraordinarily and understandably threatened by that level of disruption.

But the country has been through this type of a Gilded Age before. I brought up Teddy Roosevelt for that reason. As we watch the agricultural economy switch to the industrial economy in this country and the consolidation of resources and the realization by the Rockefellers and the Carnegies and the J.P. Morgans that suddenly because they have this new technology, that my goodness, between railroads and the combustion engine, I suddenly think we can cut down every tree in California which is going to make us a lot of money. [30:00] And the fact of the matter is --


DAVID: In the short run.

DYLAN: In the short run. And the fact of the matter is that technology to chop down all the trees in California simply did not exist prior to the industrial revolution. So fast forward, you’ve got the phenomenon banks, people, and the government at the historical pattern of the banks and the people who are the wealthy and the government getting together to extract that on behalf of the people, and add to that the disruption of a major economic revolution, in this case the digital revolution, it set the table for the muckrakers and ultimately Teddy Roosevelt to come in and break those institutions apart.

And I’d be interested in your sense of historical context as to the severity of the consolidation we are suffering from now in the context of past consolidations. And am I misguided to look at the response to those consolidations with formidable political response, formidable social response that ultimately resulted in that change? And it’s not the first time we’ve structural change in this country. Women can now vote. We no longer have slaves. There are lists of major structural social changes that have been made in this country and there has a history at least for Teddy Roosevelt of major economic engagement against special interests who are extracting this country. Am I wrong to look at that aspect of history with the belief that yes, as dire as all of this is and as absurd as all of this is, that it is inevitable that a leader and/or a catalyst will emerge that will drive us to end the extraction? Am I naïve?

DAVID: No. Well, first of all, your recitation of the history is very, very good. What’s important to remember here is Teddy Roosevelt got into office through several accidents of history including the assassination of William McKinley. It is just as likely that we can end up with a president who will lead us into a fascist environment as it is that we will get a reform era, and the people will be back in control of their government. It is terribly important that we have a vigorous debate on this, that we fight back against those people who say, “This is off the table, you can’t take talk about that,” that we challenge the neoclassical economics, the official dogma of the US government.

Because all those people who have clips and articles showing that they said -- for instance, there was a housing bubble and I was one of them, and an internet bubble and I was one of them and have the clips -- were people who aren’t recognized, that there are other economic theorists like Adam Smith’s classical economics besides neoclassical. But we have to get a vigorous debate going about "how do we get this out of this?" It is likely that it will get a lot worse before it gets better and we have to be very careful about who our leaders are so that we end up not with someone who panders to people’s fears, but who like Roosevelt, Teddy Roosevelt, appeals to people’s understanding of society.

DYLAN: And fairness.

DAVID: And absolutely, absolutely. I mean read the preamble to the constitution. That will tell you what our government is supposed to be doing, including promoting the general welfare.

DYLAN: Hear, hear, David Cay Johnston. Thank you for the time, for the conversation, for the education, for the insight. David, the author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense And Stick You with the Bill.

As we prepare to enjoin what I assure you will be a vigorous debate, not on the deficit, not on cutting Social Security but on the very basic structure of how we solve problems in this country, the economic model which is protecting giant businesses whose primary capacity is to extract money on behalf of management as opposed to create value for customers and be compelled to create that value by virtue of the competitive structure of a true capitalist society, I for one believe the day will come where we will be in that place; and my goodness me -- if there was ever a place where unfairness was rampant, it is indeed in our tax code and the one good thing about how unfair and how rampant that tax code is, well, there’s lots of low hanging fruit to begin the process of making it a little bit more fair.

As a friend of mine once told me, by the inch it’s a cinch, by the yard it’s hard; and certainly, there’s lots of inches that can be taken out of that tax code and the only barrier to that is our own willingness to admit to the scale, scope, and true foundation of the problems that we are suffering from and not indulge the manipulations of our political leaders or the naiveté of a political philosophy that would have you fight over a particular item when we have every item to be discussed. And it’s not just how much we spend. It is how we produce and how we incentivize production in this country that is really what is at stake.

David Cay Johnston, thank you so much. That'll do it for Episode 9 of Radio Free Dylan and we'll talk to you soon.