Tuesday, April 22, 2008

I just finished Perfectly Legal, by David Cay Johnston, with the large subtitle "The Covert Campaign to Rig Our Tax System to Benefit the Super Rich--and CheatEverybody Else".

This book is good at getting you riled up over the problems with the US tax code but it doesn’t really deliver on its main thesis – that the rich are rigging the system to move more of the tax burden onto the middle class and poor. From the book’s conclusion, the two main instruments the author accuses are over-funding of social security (which is tilted towards the lower end because the income affected tops out quite quickly) and the creeping increase in the alternative minimum tax. Neither of these is part of a scheme by the super-rich – both are clearly side-effects of previous policy decisions, not explicit intentions.

In the case of social security, it was not intended as a tax to be shared with general revenue, but instead a forced retirement savings plan where people would get back similar amounts to what they paid in, and the over-funding was seen as a way to delay the point where the fund became insolvent. Of course, in reality the cash flow from this was seen as a way to appear to reduce deficits but this is simple political opportunism, not scheming by the richest citizens.

Similarly, the increasing cash flows from the AMT are a result of an oversight when it was set up that didn’t index it to inflation. These are now seen as necessary to avoid larger deficits, so neither side wants to reduce the bracket creep.

In other parts of the book, the author gives details on legislative schemes pushed by the rich that will reduce taxes paid by the rich, but is this surprising? Once it became clear early in this century that property laws as they apply to taxes no longer applied and that there were no limits to what would be taxed or how much would be taken, it became a free for all and it’s not surprising that people with more resources (i.e. the rich) are better at defending their interests than those with less resources (i.e. the poor).

Fundamentally, this book suffers from a lack of philosophical understanding of its issues – is it right to take wealth from some, and give it to others? If so, what are the limits on this, if any? This lack of clarity leads the author to lump together corporations taking advantage of legal schemes of avoiding taxes and those that are deliberately breaking the law to hide income. The first is a natural result of an incredible complex tax code that is constantly being updated for political reasons to favour some activities and penalize others. Any complex system will produce unexpected results, and these will be exploited by those with the resources to find them. The second is simple crime, even though it is encouraged by the same Byzantine and arbitrary tax code mentioned above.

The author also spends some time on income disparities, and the supposed stagnation of income for the middle class. But if you read carefully, you notice a common mistake. The income figures he is using are based on household income, and they are close to flat for the middle class since the 70s, but that assumes that household size stays the same. The average number of people per household has actually been shrinking, which means that the income per capita, which is what really matters, has been growing for the middle class. The rich and super-rich may still be getting larger slices of the pie but income has not been stagnant for other groups.

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