How off-Base Was That Review? Let us Count the Ways
by David Cay Johnston

David Cay Johnston responds to Prof. Sheldon Pollack's review of his book, Perfectly Legal.

Date: Feb. 15, 2005

David Cay Johnston responds to Prof. Sheldon Pollack's review of his book, Perfectly Legal.

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To the Editor:

Authors are wisely advised to ignore reviews, so when I saw red after reading Prof. Sheldon D. Pollack's review of my book Perfectly Legal (Tax Notes, Feb. 9, 2004, p. 795) I set it aside. A year has passed and on rereading I am still steamed.

While praising my book, Prof. Pollack ignores important facts and in so doing builds a false case that I am motivated by ideology rather than facts garnered through nine years of pioneering work for which I won a Pulitzer Prize and was a Pulitzer finalist three other times.

The professor accuses me of ideological bias, yet more than 60 other published reviews praised Perfectly Legal as even- handed, noting how I show that both parties are to blame for the mess of our tax system.

That taxes should be based on ability to pay is arguably the most conservative principle in Western Civilization. It was the idea on which democracy was founded. Ancient Athens was a tyranny with a head tax, an absolute flat tax, until its philosophers reasoned that those who gained the greatest economic benefit from a society had a moral duty to bear the greatest burden of maintaining that society with their taxes. Taxation based on ability to pay -- progressive taxation -- and the birth of democracy are intertwined. Plato, Aristotle, Adam Smith, Karl Marx, David Riccardo, John Stuart Mill -- every classic worldly philosopher has embraced that principle, which I show from official government data no longer applies in the world's longest-surviving democracy.

Prof. Pollack describes my chapter on income distribution (not, as he writes, "wealth distribution") as "old and familiar news." Evidently he skipped over the major news I break on page 39.

I do indeed recount the now well-known story, first reported by me in The New York Times, that the top 1 percent (or 2.7 million) had as much income in 1999 as the bottom 100 million. What Prof. Pollack ignores is that I then show that that story is itself wrong.

In 2000, Perfectly Legal reveals, "the top 13,400 households had slightly more income than the 96 million poorest Americans."

That 28,000 people -- a crowd so small that it would leave two- thirds of the seats at Yankee Stadium empty -- have as much income as the bottom third of Americans was news I dug out of the Piketty-Saez tables. And I put it in context -- back in 1970 that super-rich group had one-tenth as much income as the bottom third of Americans. Ponder those figures for a moment. They show the income gap is widening at an awesome pace and that it is two orders of magnitude greater than the old story.

Prof. Pollack also writes that I downplay the old and well-known figures that in 2000 the top 1 percent earned 22 percent of the income and paid 37.4 percent of the income taxes (but just 25 percent of all federal taxes). I agree.

But he makes no mention of my showing how and why the top 1 percent is a misleading measure. The entry point is not much above $300,000 and tops out at several billions of dollars. The economics of a two-income couple who work all year to earn $300,000 have nothing in common with someone who makes that much every 45 minutes.

It is the top 1/10th of 1 percent and the top 1/100th of 1 percent who, I show, are the major beneficiaries of tax cuts, shifting the burden of taxes onto everyone else. Subsequent work by economists has only added weight to the validity of the news I broke in Perfectly Legal.

The professor wrote that "the rest of us would be glad to swap places" with those in the top 1 percent. He missed the point.

Is it fair that those making as little as $400,000 pay a larger share of their income in federal income taxes than those making $10 million or more? Or that when payroll taxes are counted those making $100,000 pay a larger share of their income in taxes than those who make $100 million or more each year?

The income tax system is widely believed to be at least mildly progressive, as the professor writes.

Yet when one gets into the upper reaches of income effective tax rates fall sharply, my analysis of IRS statistics shows. This is news. Yet Prof. Pollack ignored that, creating a false impression.

Prof. Pollack ignores my reporting that the top 400 taxpayers saw their effective tax rates fall sharply during the Clinton years. In 1993 they paid 30 cents on the dollar. That fell to 22.2 cents in 2000 -- and I calculate that they would have paid 17.5 cents if the Bush cuts had been in effect. That is an actual cut in effective tax rates of more than 25 percent and a potential cut of more than 41 percent.

During those same years everyone else saw their effective income tax rate rise by about 15 percent.

That taxes on those with average incomes of more than $100 million fell sharply while effective taxes rates on everyone else rose is news broken in Perfectly Legal, but unmentioned in Prof. Pollack's review, another inconvenient fact that got in the way of his provably false charge of ideological motivation.

Under our Constitution we can choose a tax system that forces the middle class and upper middle class, groups I define as from $30,000 to $500,000, to subsidize those who make millions. Perfectly Legal reports that it has been argued (in Tax Notes) that the proper tax rate for entrepreneurs with the highest incomes is zero.

Since virtually no Americans know the facts I reveal in Perfectly Legal I argue that the citizens have not made an informed choice.

Prof. Pollack attempts to discredit the core finding of my book -- that our tax system forces the middle and upper middle classes to subsidize the highest-income Americans. He writes that "even a 12 percent reduction in the top tax rate (from 39.6 percent to 35 percent) does not amount to a subsidy."

Nowhere do I make any claim that a lowered tax rate is itself a subsidy. Nor would I, because that would be stupid.

Instead, I wrote that Americans had paid, at the time of my writing, $1.8 trillion more in Social Security taxes than was paid out in benefits since 1983 under a law passed by the Democrats. Congress explicitly promised, according to news accounts at the time, that these extra taxes would be used to pay off the federal debt. Instead the debt continues to swell and the extra taxes are being used to pay the routine expenses of the government. I argue that that money makes it possible to hold tax rates on the highest incomes lower than they would otherwise be. The way Congress uses that extra Social Security tax, I argue, is a subsidy to the super rich paid by those making up to $90,000 this year.

I also show how the 2001 Bush tax cuts were explicitly financed with a $500 billion increase in revenue from the alternative minimum tax. Most of that increase falls on those with incomes from $30,000 to $500,000, especially families of four or more. By President Bush's own standard that is a tax hike. It is also, I assert, a subsidy from those who lose some or all of their Bush tax cuts to those at the very top because it finances their lower rates.

Yet on those hard facts not a word from the professor, further evidence that he is either a careless reader or deliberately ignores inconvenient facts.

Finally, the professor says I view Washington "through a simplistic political model. The rich control politics, big corporations and special interests dominate Washington. . . . "

I did not write that the rich "control." What I point out is that most Americans never meet members of Congress except for a handshake on the hustings, while what I call the political donor class gets private meetings to explain what they want from our lawmakers.

Every politician, I wrote, says donors cannot buy their vote, and that all those campaign gifts buy is access. I accept that. But when the only people who get meaningful access are donors then their concerns are at the forefront in Congress. (In conversations I have since had with more than 40 members of Congress, from both parties, every one of them has agreed that the campaign finance system forces them to think too much about the concerns of donors and too little about ordinary Americans.)

Nowhere do I fault the rich for exercising their First Amendment right of petition. I specifically say they have every right to seek policies that favor them. I lay fault at the feet of the tens of millions of Americans who know the name of Jennifer Lopez's lover but not of their representative or senators. I call for Americans to put time into the work of being informed citizens instead of amusing themselves with trivia to the detriment of our wonderful nation. I also urge reform of how we finance campaigns.

Nowhere do I make any argument against riches or high incomes, though one would not know that from Prof. Pollack's review. I wrote that what we should work for is a society in which more people have wealth and higher incomes.

My critique is of policies that strip away the ability of the middle class to save and prosper, policies that add to their economic risk, and of how lowered tax rates on the already rich expand their capacity to save and thus increase their political influence.

Maybe I am wrong about the outsized influence of the rich in Washington, the effect of campaign donations and the withdrawal from serious political engagement by the middle class and upper middle class. At least the theory I lay out is nuanced. My theory is consistent with classical economics.

That the first tax bill introduced after 9/11 was, as I note in Perfectly Legal, estate tax relief for the victims of Osama bin Laden speaks volumes about how the concerns of the political donor class are paramount in Washington. That legislation did not address the needs of the widows and orphans of the police officers, fire fighters, secretaries, Air Force officers, clerks, waiters, and dishwashers who constituted the majority of those who died that day.

There is a lot of other news in Perfectly Legal. Appreciating it requires an open mind about our national myth -- in the classical sense of that word -- that our tax system is progressive.

Perfectly Legal uses hard facts to cut through that myth and show how the system really operates. I wish Prof. Pollack had read my work with care and then judged it on whether the many new facts support a new paradigm, rather than ignoring those facts and retreating to the comfort of his ideological assumptions.

If my book is so flawed how is it that Congress passed a number of laws to reign in specific abuses I exposed?

By the way, Perfectly Legal, a national bestseller, also won an award. It was chosen Investigative Book of the Year by the 5,000-member organization of my peers, Investigative Reporters and Editors (IRE). And instead of the usual paper certificate they gave it a medal.

David Cay Johnston
February 12, 2005