The federal tax system that millions of Americans are forced to deal
with before April 15 is not at all what you think it is. Congress has changed
it in recent decades from a progressive system in which the more one earns the
more one pays in income taxes. It has become a subsidy system for the super
Through explicit policies, as well as tax laws never reported in the news,
Congress now literally takes money from those making $30,000 to $500,000 per
year and funnels it in subtle ways to the super rich -- the top 1/100th of 1
percent of Americans.
People making $60,000 paid a larger share of their 2001 income in federal
income, Social Security and Medicare taxes than a family making $25 million,
the latest Internal Revenue Service data show. And in income taxes alone,
people making $400,000 paid a larger share of their incomes than the 7,000
households who made $10 million or more.
While millions of Americans in the last quarter-century debated about who
shot J.R. and scurried for news about who would be Jennifer Lopez's next lover,
Congress quietly passed tax laws that shift the tax burden from the 28,000
Americans in households with incomes of $8 million per year or more.
One 1985 law, promoted in the Senate as relieving middle class Americans,
gave a huge tax break to corporate executives who make personal use of
company jets. CEOs may now fly to vacations or Saturday golf outings in luxury
for a penny a mile. Congress shifted the real cost of about $6 per mile to
shareholders, who pay two-thirds, and to taxpayers who suffer the rest of the
cost lost as a result of reduced corporate income taxes.
Since 1988, Congress has also cut in half the Internal Revenue Service's
capacity to enforce tax laws, replacing it with extra effort to reduce audits
of corporations and the rich.
On March 30, Congress was told that 78 percent of known tax cheats in
investment partnerships are not even asked to pay because there are not enough
tax collectors to go after them. Congress and the Bush administration rejected
the request by the IRS Oversight Board, a citizen panel Congress created, for
extra money to pursue some of these tax cheats and stop about 1 percent of the
$311 billion in estimated annual tax cheating.
In the late '90s, a crooked banker gave the IRS records on 1,600 criminal
tax cheats who used his Cayman Islands bank. The Justice Department prosecuted
49 of them, but the other 1,551 were not even asked to pay, lawyers for some
of them say.
Two billionaires in New York, the art dealer Alec Wildenstein and his
former wife, Jocelyn, testified under oath in their divorce that for 30 years
they never filed a tax return. They have not been prosecuted.
There are now seminars that show business owners how to drop out of the
tax system with virtually no risk of detection by the IRS, which relies on a
computer system installed when John F. Kennedy was president.
As tax law enforcement has declined, illegal tax evasion has risen,
especially among the rich and more recently among the young.
All of these actions reward cheats at the expense of honest taxpayers,
but because "tax" is a four letter word in Washington, nothing is done. Those
who support tax law enforcement are denounced on the campaign trail as
advocates of higher taxes.
While letting rich tax cheats run wild, Congress did finance a crackdown
on the poor. The working poor, most of whom make less than $16,000, are eight
times more likely to be audited than millionaire investors in partnerships.
The audits of low-income taxpayers found little cheating. Two-thirds of
the poor get either their full refund or more than they sought.
These and other unseen changes in the tax system are major factors in
profound economic changes that have caused so many in America to lurch from
job to job, a fourth of which pay less than $8 an hour, while helping a very
few grow very rich.
Because the news media focus on what politicians say about the tax system,
rather than how it actually operates, few Americans realize that:
-- Corporate income tax laws reward companies that move jobs offshore,
allowing them to earn untaxed profits as long as the money stays offshore.
-- Widespread cuts in health insurance and pensions for the rank-and-
file are driven by a special law that lets top executives defer paying taxes
for years, in a way that adds 35 percent to the cost of their bloated pay.
-- The 2001 Bush tax cuts included a stealth tax increase on the middle
class and upper-middle class that will cost them a half trillion dollars in
the first 10 years and, for 35 million families, wiping out part or all of
their Bush tax cuts.
-- The stealth tax boost on people making $30,000 to $500,000 was
explicitly used to make sure that the super rich would get their entire Bush
-- A California couple who make $75,000 to $100,000 and have two
children face a 97 percent chance of losing part of their Bush tax cuts to
this stealth tax increase and overall will lose 42 percent of their Bush tax
cuts by next year.
-- If your child becomes seriously ill, Congress, under this same law,
will raise your income taxes if you spend more than 7.5 percent of your income
trying to keep your child alive.
-- Since 1983, under a plan devised by Alan Greenspan, Americans have
paid $1.8 trillion more in Social Security taxes than have been paid out in
benefits, money that is used to finance tax cuts for the super rich while
robbing the middle class of their capacity to save.
-- A family earning $50,000 this year will have about $1,500 of its
money funneled to the super rich because of the Greenspan plan.
-- Since 1993, the income tax burden on the 400 highest-income Americans
has been cut 40 percent when measured the way that President Bush prefers,
which is by counting how many pennies out of each dollar go to income taxes.
In 1993 the top 400 paid 30 cents out of each dollar in federal income taxes.
By the end of the Clinton administration in 2000 they were down to 22 cents.
Under Bush, their burden is less than 18 cents. Everyone else felt their tax
bite rise to 15 cents on the dollar from an average of 13 cents.
Over time, the impact of tax relief for the super rich and more taxes for
everyone else is profound. The rich can save and invest more and more,
increasing their incomes and political power over time through the magic of
compound interest, while everyone else has less of their money to spend or
save and millions of people are mired in debt.
While wage earners have every dollar of income reported to the government,
the super rich control what the IRS knows about their incomes. But the rich
are rarely audited anymore. Congress also gives them many perfectly legal
devices to defer reporting income for years or decades. That means that the
real incomes of the super rich are much larger than the IRS data show and
their tax burden is even lighter.
IRS data, adjusted for inflation, show that the poor are really getting
poorer and the super rich are getting fabulously richer, a trend enhanced by
their falling tax burden. In 1970, the poorest third of Americans had more
than 10 times as much income as the super rich, the top 1/100th of one percent.
Back then the poor had more than 10 percent of all income and the super rich
had one percent.
By 2000 the two groups were equal -- the 28,000 Americans at the top
had as much income as the 96 million at the bottom. The poor's share of income
fell by half while the super rich's share rose to more than 5 percent of all
Not only did the poorest third's share of income shrink, they actually
had less money. The average 25-year-old man in 1970 made $2 per hour more,
adjusted for inflation, than in 2000.
Over those three decades the bottom 99 percent of Americans had an
average increase in total income of $2,710. That is an annual raise of less
than $100 per year, the equivalent of a nickel an hour raise each year for 30
years. The super rich did fabulously better, their average incomes rising $20.
3 million to an average of $24 million each.
Plot these figures on a chart and the results astound. If the increase
for 99 percent of Americans is a bar 1-inch high, the bar for the super rich
soars heavenward 625 feet.
All of this is having a devastating impact on America, which the preamble
to our Constitution says was created to "promote the general welfare." Until
Americans decide to take back their democracy and become actively engaged in
politics, the super rich will continue to rig the tax system for their benefit
David Cay Johnston is a Pulitzer Prize-winning reporter for the New York Times and author of "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else," from which this article is adapted.
© 2004 San Francisco Chronicle