The U.S. rich get richer while the rest tread water

After three years of recession and frustratingly slow growth, there is broad agreement that 2004 will be a great year for the American economy.

But if profits, productivity and stock prices are on the rise, so are concerns about the nation's economic future.


As some experts see it, the grinding power of capitalism combined with demographic forces already visibly in play are undermining principles of social justice and fair play that define the American way of life.

Globalization is changing the basic economic equation -- sending growing numbers of manufacturing and service jobs abroad, while rising health-care costs are squeezing consumers and a mounting federal deficit is threatening the retirement futures of millions of baby boomers.


David Cay Johnston, the Pulitzer Prize-winning tax reporter for The New York Times, sees a more prosaic issue at the root of our anticipated economic dilemma -- the greed-driven power of America's wealthiest citizens.

Johnston argues that the richest families in the nation have been using their political influence to systematically undermine the nation's tax system to cut their own taxes while taxes on the middle class and upper-middle class have been raised to make up part of the difference.

"There is much talk these days about our income tax as a socialist redistribution scheme," Johnston says in his new book, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else (Portfolio, 327 pages, $25.95).

"But the scheme is not to take from the rich and give to the poor, deserving or not, as the courtesans of wealth in Washington would have us believe when they pontificate on the Sunday morning talk shows.

"Rather, as Orwell taught us, ours is like all systems in which some animals are more equal than others -- it is the pigs who grow economically fat off the tax system."

Johnston argues persuasively that:

* The income tax is collected only against reported income and that because the tax code includes an array of methods for the rich to avoid recognizing income for tax purposes, they pay a much smaller share of what they earn than middle-class Americans.

* The IRS is starved by Congress of the resources it needs to effectively prosecute tax cheats.


* As a consequence of the current inequitable tax system, the incomes of the richest 1 percent of the population, especially the top-earning 13,400 American families, have soared, while the bottom 80 percent of Americans have seen their incomes stagnate for three decades.

The way Johnston sees it, the tax breaks for the wealthy are crippling the nation socially and economically.

"Do we shrink our government, cutting even more spending on public education, stunting the development of new human capital?" asked Johnston. "Or do we cut spending on research and development, as executives like [former GE Chairman] Jack Welch did to boost short-term gains at the expense of long-term growth?"

Johnston notes that, in a trend started by President Bill Clinton and continued by President George W. Bush, taxes on capital gains have been steadily reduced with the avowed goal of eventually eliminating them.

There ought to be a more public debate over how the tax system might be changed, he argues.

To be better prepared for that debate, readers might be well advised to read Taxing Ourselves -- A Citizen's Guide to the Great Debate Over Tax Reform, second edition (MIT Press, 337 pages, $22.95).


In this book, Joel Slemrod, a tax expert from the University of Michigan, and Jon Bakija, who teaches at Williams College, give a masterful overview of the history of taxes in the United States and discuss the social and economic effects of various reform possibilities.

They note that Americans have loved to complain about taxes since the republic began and that the popular goals of achieving simplicity and fairness are a far more elusive target than they might seem at first blush.

For a closer look at the super-wealthy who are viewed as the enemy by Johnston, New Yorker editor David Remnick has collected some powerful portraits, warts and all, in The New Gilded Age: The New Yorker Looks at the Culture of Affluence (Random House, 432 pages, $26.95).

In a typical essay, Joan Didion assesses Martha Stewart, a driven business whirlwind who created a billion-dollar company, the only real product of which is Martha Stewart herself.

As Stewart deals with the consequences of her alleged greed -- she faces trial later this month on insider trading charges -- Johnston argues in his book that striving is not the problem but rather efforts by the wealthy to permanently stack the economic deck.

"Do we want a an inherited aristocracy of wealth? Or a meritocracy of strivers? Do we want a society where people create new fortunes through their enterprise or a society of people who owe their wealth to what Donald Trump calls the lucky sperm club?"


Again and again, Johnston shows the power of the tax system's inequities to shock and anger. He illustrates this with stories about the unfairness of the existing law -- how the poor are audited more often than the rich, how the middle class is likely to be squeezed by an alternative minimum tax that few are aware of and how the campaign to eliminate the "death tax" on family farms was really designed to benefit a handful of wealthy families.

Particularly alarming are the tales of how salaries of the executives who run America's largest corporations have exploded while the incomes of ordinary workers have climbed hardly at all.

And Johnston points out that executives typically do not pay taxes on their huge incomes immediately, the way everyone who makes much less must. Congress lets these Americans put off paying taxes for years or even decades, and there is no limit on how much they can set aside untaxed.

It hasn't just been salaries that have been making rich Americans even richer.

Johnston describes how a tax consultant named Jonathan Blattmachr once devised a way for Bill Gates, the richest man in America, to reap $200 million in profits on Microsoft stock without paying the $56 million of capital gains taxes that federal law required at the time. The plan was so lucrative that Gates would not have to pay a single dollar in tax and would even be entitled to an income-tax deduction of $6 million or so.

Such tricks have led to remarkable stratification of American society. In recent years the rich have been getting much, much richer while the poor and even the middle class have been basically treading water. Between 1970 and 2000, for each dollar of additional income going to each of those in the bottom 99 percent of Americans, the richest each averaged a remarkable $7,500 gain.


Johnston says that arranging to have torrents of money flow into a very few pockets required putting "immense pressure on Corporate America's front lines."

He also blames Congress for passing legislation that facilitated the accumulation of wealth while weakening regulatory oversight of corporations.

The media and an indifferent public have contributed to the problem, he asserts.

"As publishers cut news budgets, ... fewer reporters were assigned to explain how government policies and administrative practices affected individual lives and the economy. And with stagnant incomes, Americans were working longer hours just to stay even, leaving less time for family, not to mention keeping up with what serious news there was about politics and government."

Is there a way out of this mess?

Johnston says reform is possible. What is needed is for Americans to stand up, one by one, and demand a simple and fair tax system that actually promotes long-term prosperity.


"Reform begins with you," he says.

Larry Williams is currently business editor of The Sun. In 1986 he edited a Pulitzer Prize-winning series of stories by then-Philadelphia Inquirer reporter Arthur Howe reporting on massive deficiencies in IRS processing of tax returns, which eventually inspired major changes in IRS procedures and prompted the agency to make a public apology to U.S. taxpayers.