David Cay Johnston: The Tax & Deficit Debate Is Absurd

Think of it as the cheaters ball.  It’s the American tax code.  If you have the right amount of money and the right number to dial, it’s the best way to get rich.

It’s a fact — special interests utilize the tax code in America as one of the primary favor-trading venues for extracting wealth from the average taxpayer.  Why is this?  Why is the code structured in a way that it discourages investment, and encourages reckless speculation?

If you think the tax code is a mess, so does David Cay Johnston.  Johnston was a Pulizer-prize winning investigative reporter with The New York Times, and is the author of the bestseller Free Lunch: How The Wealthiest Americans Enrich Themselves at Government Expense and Stick You With the Bill.  He currently blogs at Reuters.com.

“We are spending a trillion dollars a year just with the federal government subsidizing businesses and wealthy individuals.  And you know how much money the income tax brings in?  A trillion dollars a year,” says David.

Isn’t it absurd for the deficit commission to talk about cutting expenditures without looking first at the extraction that’s happening through the American tax code?  “It’s completely upside down.  And the people who are on the deficit commission are part of what I call the ‘political donor class,’ or it’s beneficiaries.  These are people who live in Washington who spend most of their time hearing wealthy people and the lobbyists representing them saying, ‘you know, Senator, we’ve discovered this little problem in the law, and if we could just have fairness. And fairness for those guys turns out to be a lot of money in their pocket that came out of yours,” says David.

“What we’ve developed is a socialist redistribution scheme up.  It isn’t trickle down economics, a phrase that was designed by opponents of Mr. Reagan to denigrate him.  It’s Niagara up,” David points out.

“From 1980 to 2007, the average income of the bottom 90% of Americans was unchanged when you adjust for inflation.  However, at the very top, the top 1/100%  — and that’s a small group of people, 30,000 people… that small group of people back then was getting one penny out of every dollar of income in the country.   They’re now getting 5 cents, almost 6 cents out of every dollar,” he says.

But won’t lower tax rates for the top tier of taxpayers stimulate the economy and encourage spending, as many in Washington have argued for?  David says that’s not the case. “In fact, and I know this is counterintuitive, higher tax rates encourage economic growth and jobs.  And the reason — imagine if you own a business,  and I own part of a business, by the way, with 25 workers.  If we take money out of our business, we’re essentially destroying future jobs, because there’s less capital in the business.  So, if the cost of withdrawing money is a 70% tax rate — that’s what we had when Ronald Reagan came into office — you say, ‘wait a minute.  If I take a million dollars out, I’m going to 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 more likely to take money out in an unproductive way that doesn’t grow business or create jobs.”

David points out that “that the purpose of this country is not to create billionaires,” and points out how our country started, and how far we’ve departed from its original intentions.  ”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 the market!  Don’t make it through these subtle backdoor deals.”

David Cay Johnston is author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You With the Bill, Pulitzer prize winning reporter with The New York Times and blogger on tax policy at Tax.com and at Reuters.com.