How You Can Have a Billion-Dollar Income in America and Pay No Taxes

When I was growing up, people joked about how much they hated taxes, but they paid them, and we had a solid middle-class society. Real wages rose from WWII through 1973.

Today one of our two major political parties — nationally and in state capitals — is unwilling to consider raising taxes no matter the circumstances. Though most of Washington's officials and media are hysterical about the deficit, and willing to hurt anyone in an effort to reduce it, both parties voted in December to extend tax breaks for the wealthiest Americans for two more years.

Despite profits of $14.2 billion — $5.1 billion from its operations in the United States — General Electric, the nation's largest corporation, did not have to pay any U.S. taxes last year. Its CEO, Jeffrey Immelt, recently replaced Paul Volcker as leader of President Obama's Economic Recovery Advisory Board as its name was changed to the Council on Jobs and Competitiveness.

David Cay Johnston worked as an investigative reporter for several newspapers, including the Los Angeles Times from 1976 to 1988, and the New York Times from 1995-2008 where he won a Pulitzer Prize for his innovative coverage of our tax system. He now teaches at Syracuse University College of Law and Whitman School of Management and writes a column at Tax.com. He is the author of two bestsellers, Perfectly Legal and Free Lunch. His next book, The Fine Print, will be published later this year.

Terrence McNally: When I last interviewed you on Inauguration Day 2009, I said, “Due to the scale of our multiple calamities, we may finally be ready to make meaningful changes to business as usual,” and I read a quote from Rebecca Solnit: “Obama, who is merely impressive as an individual, is unstoppable as a phenomenon created out of the collective hopes and desires of the public, which must continue dreaming and prodding him forward to make the world we want to see.” Your response?

David Cay Johnston: The last two years have demonstrated quite clearly that President Obama, like everybody else who gets a serious shot at being president, has to be acceptable to the establishment, and in particular, acceptable to Wall Street. While we continue to suffer from the serious problems left by the previous administration's policies, the responses have all been very focused on what Wall Street thinks are the solutions.

TM: Obama's first two years have made it clear that in the current system all presidential contenders ultimately represent their funders, and, given Citizens United, that will only get worse.

DCJ: Citizens United is an unbelievably important decision. I have research assistants gathering everything they can about the nature of corporations at the time of the Founders. Justices Scalia and Thomas in particular argue that their view of the Constitution is based on the original intent of the framers, not some amorphous modern idea, right?

DCJ: Under Citizens United, we have granted political rights to corporations, which are not natural entities. In 1977, Justice Rehnquist — not exactly a raging liberal — in First National Bank of Boston v. Bellotti, wrote that it was one thing to grant property rights to corporations in order to protect their property. This is what the Supreme Court did without hearing in the Santa Clara case in 1886 that created personhood for corporations. But he warned, you don't want to do this for political rights, because those belong exclusively to natural persons, i.e. human beings.

At the beginning of the republic, corporations were very tightly controlled: they could exist for a limited period of time to fulfill a specific purpose; they operated often only in a single state and were tightly regulated in every way. Today they can do anything they want to do, anywhere in the world. Citizens United is to the expansion of corporate power what the Big Bang was to the creation of the universe — it is the whole universe.

TM: The corporation existed at the pleasure of the sovereign in England, and, of course, in the U.S., the sovereign is “we the people.”

DCJ: At one time New Jersey was the state of choice for corporations; now it's often Delaware. Corporations have figured out how to take all their expenses in the states where they actually make a profit and claim all of their profits in states that don't tax them. By exploiting differences among the states, large corporations have figured out how to get all the benefits states provide — like infrastructure, education, health care, and the criminal justice system —while bearing very little of the cost.

TM: We usually think of those services as existing for the good of a state's citizens, but they are absolutely essential for a corporation to function.

Let's frame the conversation in terms of three big questions. How is the tax system broken? What's the evidence? Second, how did it get broken? What's the history, what are the causes? Finally, how do we fix it? What are the solutions? What's the evidence that the tax system in the US is broken?

DCJ: Tax revenues have been falling even as the population and the economy expand. Even if you start with 2001 — the first year of the Bush tax cuts and a recession year — per capita income taxes in this country fell 32 percent by 2010. While the population grew by 8 percent, the total amount of money collected in individual income tax has fallen 27 percent.

The corporate income tax went from $187 billion in 2001 to $191 billion in 2010 — adjusted for inflation. It grew 3 percent, but corporate profits in real terms grew about 25 percent during that time. Take into account population growth, and the corporate income tax fell 5 percent per person.

We live in a world in which knowledge is the most important driver of economic growth. Yet the state of New York just announced they're going to cut $800 million from schools. The state wants to save a few tax dollars today and forego huge amounts of tax dollars in the future, because the population will not be as well educated and won't make as much money.

TM: From a New York Times editorial March 20th: “Governor Cuomo [is] refusing to impose any new taxes or even continue a current surcharge on New York's wealthiest and least vulnerable citizens.”

DCJ: Enormous fortunes are made in Manhattan, yet New York's top state income tax rate is half what it was a generation ago. It's been cut from 15 percent to about 7 percent, and the highest rate kicks in at a half a million dollars. People who make a half a million dollars a year pay the same tax rate as people who make half a million dollars a day — and there are lots of them in New York.

TM: We now take in less taxes and grumble about it more while we face huge deficits for which most people's only solution is to make cuts.

DCJ: You will hear that the top 1 percent pay 40 percent of the taxes. It's not true. The federal individual income tax is only about one out of every five dollars of all taxes raised in America. We have federal taxes, state taxes, local taxes, payroll taxes, and I'm ignoring all the things that used to be covered by taxes that are now paid by fees — three different fees for using the airport, surcharges when you rent a car, etc.

While it's true the top 1 percent are paying around 40 percent of the total income tax, in recent years they also have earned as much as 20 percent of the income — 21 percent in 2008, the last year we have full data. Because their income has gone up vastly faster, the share of income tax paid by people at the top has gone up — even though their rates have been cut.

It's important to recognize what's happened to incomes in America. More than half of the income in the top one percent goes to the top 10th of one percent — one out of a thousand families in America. For every dollar they made on average in 1980, in the year 2008 they made $4, adjusted for inflation.

But in 2008 the bottom 90 percent of Americans earned on average a dollar and a penny for every dollar they earned in 1980. In 28 years, their average income went up 1 percent, $300 and change for the year, basically a dollar a day.

I did an analysis comparing 1961 incomes to 2007. The bottom 90 percent — after higher income and social security taxes — was making just a little bit more than they made in 1961. For each dollar in 1961, they made a dollar and twenty cents in 2007. The group at the top got $36.50 after tax per dollar they made in 1961. That's 180 times as much growth.

The top 400 taxpayers now make about a million dollars a day. We have redistributed income, through a variety of means — suppressed unions; reduced taxes and tax deferrals to people at the top; encouraging owners to withdraw capital from their businesses, destroying jobs. In the bottom half, people are making less now than they did 30 and 50 years ago, when you adjust for inflation.

The Republican answer to this is the same answer that George Washington's doctors applied to him when he got sick: they bled him. When he didn't get better, they bled him more, and they ultimately bled him to death. Let's cut taxes for the rich and cut them for the rich and cut them for the rich, and the economy keeps getting worse. It's not true that high taxes destroy jobs. Low taxes destroy jobs by encouraging owners of businesses to withdraw money from the business.

TM: The small business owner that the tax-cuts-for-the-rich crowd claim to represent.

DCJ: Most small businesses don't pay taxes. They are designed not to earn a profit, but to draw down to zero so they pay no taxes. Maybe even have losses. Unlike a publicly traded company, where the goal is to report the biggest profits you can, to pump up the stock prices, and — like GE — still pay no taxes.

TM: In the Wall Street Journal March 22nd: “IRS Targets Rich Taxpayers. The rich not only face calls for higher taxes, they also face more audits to make sure they pay.” And the article ends with this question: “Do you think the new tax force is welcome tax justice or capricious wealth redistribution?”

DCJ: In the late 1980s if you were a high income tax payer, your odds of being audited were about one in 11. They have been as low in recent years as one in 400. They're currently a little over one in 100, probably about one in 75. If you're in the $10 million-up crowd your odds are much higher, they're more like one in six. But the audit rates are still very low.

From interviews with dozens of IRS agents all over the country who weren't supposed to talk to me, it's clear many of these audits are superficial. They're told not to pursue things.

They were going to prosecute the IRS agent, Renee Welling in Encino, California, who stumbled across the backdated stock options scandal in 2004. The whole system came down on her head, simply because she said, “I'm not going to look the other way and let this company get away now and forever with a crime.” In my book, Free Lunch, I said that the investors of America should erect a statue in her honor.

TM: Because she was actually putting some muscle behind the word audit.

DCJ: When a guy in San Francisco with a stellar 30-year career at the IRS was put in charge of collections, he announced that they were going to go after the elite and the politically connected with the same fervor they were going after Joe Six-Pack. He was literally put in a room with no windows and no computer and told to sit there day after day. They mucked up a charge to go after him because there was some pornography in his computer. Of course, 10 years ago you could just open an email and suddenly have all sorts of pornography exploding on your computer. Plus he had used his computer to help one of his subordinates find an inexpensive airfare. For this we should undo a 30-year career and discharge him in disgrace.

TM: There's some muscle in that audit!

DCJ: I was able to dig out that he went after the family of former Mayor Alioto of San Francisco and Al Davis, owner of the Raiders, among others.

TM: Let's talk about corporations. “60 Minutes” recently did a report on corporations fleeing the US to avoid taxes. Transocean, the company that owned the oil-rig in the Gulf spill, is one of many companies that claims to be located in Zug, Switzerland.

DCJ: The “60 Minutes” piece basically defended this, treating corporations as victims who had no choice.

TM: The segment's on the Web site at CBS (March 27, 2011). One of the heads of Cisco gets the most empathetic treatment. He says the corporate tax rate in the US is too high and we owe it to our shareholders to do this.

DCJ: My Pulitzer was for exposing this kind of stuff more than 10 years ago. If anything's changed, it's the skillful marketing of the idea that corporations are being abused.

We have chosen to have this global multinational corporate environment. Certain things are going to flow from that decision. One of them is falling wages. The most generous people in the history of the world are American blue-collar factory workers, who have given up their opportunity to get solidly into the middle-class so that the rural poor of China can have a better life.

Companies have figured out on the international scale the same thing that they previously figured out on the national scale: take your profits in Delaware even though you earn them in New York and California. Get all the benefits of being in the United States, and take your profits in Zug, Lichtenstein, the Cayman Islands, and Bermuda.

This is also a big problem in Western Europe, and it's growing in Japan. There was an effort more than 10 years ago by all the big industrial countries to harmonize their taxes, so they could ignore transactions designed to escape taxes. One of the very first acts of the Bush administration was to kill this.

One out of every five banking deposits in the world is in the Cayman Islands — except there's nothing there. The “60 Minutes” piece showed that Weatherford, a $10 billion a year company, rents a conference room so that they have an address in Zug, Switzerland.

TM: Like the folks who rent a mailbox as their corporate address because they don't actually have a company.

DCJ: Exactly the same thing.

Corporations are an effective, efficient means to run companies and build wealth. But, instead of them being the servant of everyone, we have instead made them our ruler. Much of the ownership of corporations is very fleeting. People in hedge funds who own a stock sometimes for a second have a greater voice than employees who expect to work there for years and customers who rely on the company for years.

The inevitable result is that we are pushing the burden of taxes down the income ladder. Today in every state, there's a heavier tax burden at the state and local level for four-fifths of families than for the top one 1 percent. At the federal level, a worker who makes the median wage, $26,000 — half of all workers make more, half make less — pays a heavier burden than the top 400 taxpayers who make almost a million dollars a day.

Then there are hedge fund managers who make billion-dollar incomes year after year in America and pay no taxes.

TM: They pay no taxes?

DCJ: That's right. The media says that they pay a 15 percent capital gains, but they only pay that when they cash out.

TM: If that's how you make your living, you don't cash out.

DCJ: John Paulsen made $9 billion in the last two years alone. If you've got $9 billion in your account, you go to your banker and say I need to borrow $300 million, and he loans it to you with an interest rate currently of less than 2 percent.

TM: Corporations have billions in profits sitting overseas, which they claim they'd bring home to help the American economy if they could get a tax break on it. Give us an amnesty for the good of the country. Talk about that.

DCJ: The driving force is the assertion that if they didn't pay any taxes, we'd all be better off. I can't tell you how many blue-collar and office workers have told me that their boss has said to them that if he or she or their company doesn't get a tax break, they're going to cut their wages.

I was at a conference sponsored by the people who own tax.com [where Johnston writes a column], a non-partisan non-profit that for 40 years has been fighting to make the tax system transparent and fair. All the talk was about lowering the corporate tax rate from 35 to 25 or 20 percent. And I said to the senior vice president of the US Chamber of Commerce, “If you think this is complex and difficult and unfair, why don't we get rid of the corporate income tax?”

We would have to have some rules about expense accounts and travel, etc., so that executives and owners of publicly traded businesses can't live off the company. But that's nothing compared to the complexity of what we have now. Let's just reduce it to zero, and raise the tax you pay on any money you take out of the business. This guy immediately dodged the question, saying he'd have to see the exact details before he could comment. The fact is, that wouldn't be popular with business at all, because they don't want to pay any taxes. There's a whole body of literature that says that the very wealthiest people should not pay any taxes because they create jobs.

TM: This obviously was the argument behind renewing the Bush tax cuts that both parties went along with in December, but it's clear that it doesn't work. If you give money to poor people they spend it, if you give money to state governments, they spend it, but the very wealthy are choosy about when and where and how they spend.

DCJ: I stumbled upon a Medicare tax database by accident one day that includes everybody in America who has a job and shows to the penny how much they get paid. It goes all the way up to $50,000,000, so I can tell you how many workers in America make $50 million a year or more. It was 72 in 2009 and 74 the year before, and on average they made over $80 million.

From the year 2000 to the year 2009, the median wage has been a little over $500 a week every single year. It grew six-tenths of one percent from 2000 to 2009. Even in the peak year of 2007, when the economy was doing well, it went up 2 percent. From 2000 to 2009, the average wage has gone up 2.2 percent.

The average wage is right around $39,000, or $750 a week. But that's all because of the growth at the top. 75 percent of workers make less than $50,000 a year, 99 percent make less than $200,000 a year. The growth is all in the group that makes $100,000 and up.

I'm old enough to remember that Richard Nixon once said that cleaning bedpans has the same dignity as the presidency. In Europe janitors and practical nurses make enough money that they can live a decent life, but not in America.

TM: Do workers in Europe make enough because they make relatively more or because the safety net of necessities is taken care of — or is it both?

DCJ: It's both.

First of all, they have minimum income policies. Then there are many things paid for with the tax system there that you and I pay for with our after-tax dollars. While Europeans have lower incomes and higher taxes, they generally live better lives and they have more job security. Only in America, amongst modern countries, do people go bankrupt because of medical bills or do they die for lack of medical care. What we're doing is immoral.

I am shocked by politicians who spout their religious beliefs and then say universal health care is wrong. They are no different than people 100 years ago who said that if you wanted a child labor law you were an agent of the devil. It was God's plan that children work in the mills.

If we ran public schools the way we run the health care system, every kindergarten teacher would have to fill out a daily cost accounting report: I issued so many green crayons today, so many red crayons, so many paste pots, so many safety scissors to my kindergarteners. That's what we do with doctors. It is wasteful, it makes a few people very rich, and more than 1,000 people a day die for lack of health care.

TM: Our linking employers and insurance goes back to World War II when it was a way to get around price controls. Today it's an inducement to send jobs overseas.

DCJ: Overseas, the costs are on society's books, not on the company's.

Not only that, many people in America who have health care, have crummy health care. If the average worker in America had been shot the way that Representative Giffords was in Tucson, do you think they would have been put in a private jet and flown to rehab at the top place in Houston?

Fundamentally we have bought into the idea that we have to cut taxes on the rich or we will all be poor. We've been doing this now for 30 years, and the evidence is overwhelming that it hasn't worked.

Do we need to literally do what George Washington's doctors did — bleed him to death —before we recognize we've made a mistake? Do we have to kill the country? Or at some point do we say, nobody else in the world is doing it quite the way we're doing it, and they're having better results. They have unions in most of Europe and Japan for all workers, and, in some cases for managers and low level executives. Why do we think the lone individual should have to negotiate with a giant corporation or a giant government, instead of doing it collectively as a group?

TM: You've been pouring out the evidence for years, and things only get worse. In terms of solutions it seems to me there's two questions: One, what would work? And two, what's it going to take to move in that direction?

DCJ: There's a theory that democracies don't self-correct until they've gotten into a really deep crisis, and I don't think we're yet nearly as bad off as we could be. But the developments in Wisconsin, Michigan and Ohio suggest that there is an awakening going on among many workers that their interests are under attack. Governor Walker tried to separate the police and fire departments…

TM: …from the teachers and the nurses.

DCJ: The outcome of this will be very important. If Governor Walker, Governor Kasich and Governor Snyder succeed, then I think we're going to see a complete corporatization of the culture and worsening incomes for all but the top 10 or 15 percent of the population. There's a large movement in this country to end public education and public parks.

On the other hand, if there are recalls and this movement is stopped, I think you will begin to see a swing away from the very extreme positions based on corporate socialism, in which the government sets the rules in such a way that profits are privatized and losses are socialized.

The massive hidden subsidies to corporations that I exposed in Free Lunch might be wheeled back, and we'll begin to ask how to create a stable society that rewards people who play by the rules, reinforces virtuous behavior, and punishes vicious behavior.

What did Martin Luther King say? “I want my four little children to grow up in a world where they will be judged not by the color of their skin but the content of their character.” We have instead created a society where you are judged by the presumed content of your wallet. That is no basis to sustain a society, none at all.

TM: You may have a society like that for a while, but it's not a social system.

DCJ: I don't argue that we don't want to have wealthy people. I'm somebody who went to work when I was 10 years old, full-time when I was 13, because my dad was a 100-percent disabled veteran of World War II. I'm a reasonably wealthy man today because I've been prudent and very lucky, and a lot of people helped me along the way.

I'm not objecting to money, but if you're going to make money, make it in the marketplace. Don't have the government pass a law that lets you borrow hundreds of millions of dollars and not have to pay it back. Don't do that. Let's recognize that you can't have a functioning society without police officers, nurses, librarians, and school teachers who are competent and educated. The foundation of private wealth is commonwealth, and we are systematically letting roads and bridges and dams fall apart, so that the already rich can have more and more. It's just not a smart strategy.

TM: You've also written about the role the media plays in this. This current system seems only possible with a failed media.

DCJ: I think it would go on even if the media were doing their job. Having said that, the media have done a crummy job for a couple of key reasons. First of all, most news is “he said” journalism. When you read that the president or John Boehner said something yesterday, that's one thing, but whether the journalist understands what it meant is a whole different question.

TM: And whether he checked if it were true or accurate is yet another.

DCJ: The first rule of journalism is check it out, The second rule is cross-check and cross-check, not just until you know all sides of the story, but until you also know where that story belongs, its importance and relative connection to other things. Those two rules have been breaking down as we have seen huge cuts in media.

Increasingly we're seeing coverage and unskeptical acceptance of talking points. Dean Baker runs a blog Web site called Beat the Press where every day he cites stories in the Washington Post, the L.A. Times, the Wall Street Journal and the New York Times, that have economic nonsense in them.

The far right understand that if you can polish an idea, you can sell it. Fifty years ago young men put Brylcreem in their hair because grease was supposed to make you sexy. They smoked cigarettes because ads said, “Four out of five doctors recommend Lucky Strike.”

Absolute lies serve as ideological and economic marketing to help the already rich make themselves richer. Most journalists do not understand numbers and very few of them have ever taken even one course in public policy or statistics, so they get bamboozled every day of the week.

The odds have changed tremendously. The last time I checked there were 35,000 registered lobbyists in Washington, and a bunch of people who aren't registered. There are literally several tens of thousands of people in DC whose job is to influence congressmen and regulatory agencies. The tiny number of reporters out there are totally outgunned. On the other hand, they're also not skeptical enough. Journalists need to remember their job is to be skeptical. All around the world, in every lecture I give, I say, “First rule of journalism, check it out. If your mother says she loves you, check it out.”