While the average American worker is subject to a progressive income tax system where tax rates increase as income rises, the wealthy often exploit a range of loopholes and deductions that significantly reduce their tax burden—sometimes to the point where the biggest corporations and one-percenters pay nothing at all. David Cay Johnston, a tax policy expert and former investigative journalist for the New York Times, joins us today to help unravel the complexity of the American tax system, which has functionally created two different tax systems: One for the wealthy and powerful and one for everyone else.
David Cay Johnston is an award-winning investigative journalist and author known for his expertise in tax policy and economic inequality. Johnston worked as a tax reporter for The New York Times for over a decade. At the Times, he won the Pulitzer Prize for Beat Reporting in 2001 for his coverage of tax loopholes and corporate tax evasion. Throughout his career, Johnston has authored several critically acclaimed books, including “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else” and “Divided: The Perils of Our Growing Inequality.”
Twitter: @DavidCayJ
The Whiteness of Wealth: How the Tax System Impoverishes Black Americans–and How We Can Fix It by Dorothy Brown
https://bookshop.org/a/101360/9780525577331
More from David Cay Johnston:
“Alvin Bragg’s roadmap to convict Donald Trump”
https://www.nydailynews.com/2023/01/08/alvin-braggs-roadmap-to-convict-donald-trump/
Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich–and Cheat Everybody Else
https://bookshop.org/a/101360/9781591840695
Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill)
https://bookshop.org/a/101360/9781591842484
Divided: The Perils of Our Growing Inequality
https://bookshop.org/a/101360/9781595589231
Website: https://pitchforkeconomics.com
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Joe Biden:
It’s time to build our economy from the bottom up and from the middle out, not the top down,
Nick Hanauer:
Middle out economics is the answer.
Joe Biden:
Because Wall Street didn’t build this country, great middle class built this country.
Nick Hanauer:
The more the middle class thrives, the better the economy is for everyone, even rich people like me.
Speaker 3:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
We’re recording this the middle of February, Nick, which means we’re into tax season.
Nick Hanauer:
Yes we are.
Goldy:
So we are, I’m sure you’re busy, you’ve got all your receipts out and you’re filling out the forms like a good American working through your taxes, right? Or using the TurboTax. Which software do you use, Nick?
Nick Hanauer:
Yeah, not me. No.
Goldy:
Yeah, yeah. And I say this, I raise this. Obviously you’re not doing your own taxes, which speaks to, I think the point of this podcast that we kind of have two different tax systems in the United States, Nick. There’s the one for people like me where in fact, well, I don’t actually itemize anymore. My taxes are simpler. I take that standard deduction, but I have to fill out the forms and I do my taxes myself. I get the download, the W2 from you. Thank you very much, Nick and a few other 1099s and stuff like that. And I fill out my own taxes, but mostly the tax I paid or the Federal government has all been withheld. Either it’s a small refund or I’ve got to pay a little bit. It depends on how the years go. You, it’s a very different world.
Nick Hanauer:
Yeah, much more complicated world.
Goldy:
Well, complicated in one way, simpler than another in that you hire somebody or a team of people to actually not just do your taxes. But manage your money in a way to, well, not, I don’t know, minimize, pay less, I don’t know, be efficient. I don’t know. What word do you want to use?
Nick Hanauer:
We definitely try to be smart about it without being unethical about it.
Goldy:
Right. And let’s be clear, when Trump uses the word smart, he means unethical.
Nick Hanauer:
Unethical. Yeah, exactly.
Goldy:
But in your case, you actually don’t want to be unethical, you’re trying to be.
Nick Hanauer:
Trying to avoid it. Yeah. It’s such a crazy screwed up system, and the American tax code today is so riddled with exemptions and loopholes and deductions and all this stuff. It is impossible for a person who has a relatively complicated financial situation to do their own taxes. I mean, it would just simply be impossible to do it unless you devoted half the year to trying to figure it out and do it. And I think that our guest today, David Cay Johnston, would argue that that is stupid and unnecessary and counterproductive and worse because David has spent more or less his whole career sort of investigating upside-down tax system and exposing the loopholes that are in it that advantage the wealthy and big corporations and frankly disadvantage everybody else.
Goldy:
And more than just loopholes Nick, the way it’s written enforced in a way that it really encourages people to cheat. There’s a lot of cheaters out there. This system is built for cheaters.
Nick Hanauer:
It is built for cheaters. It is built for cheaters. But I actually don’t know that much about that. And it will be very interesting to talk to David about what he thinks and at a detail level, what actually is going on.
David Cay Johnston:
My name is David Cay Johnston. I’m a former New York Times tax reporter and a former president of Investigative Reporters and Editors, which is the 6,400 member organization of people who do the kind of work I do. I’m a bestselling author, and although I have never taken a law school class in my life, and therefore I’m not a lawyer, I have been on the faculty of the Syracuse University College of Law for 15 years. I used to teach the law of the ancient world, which is a way to get students to understand the underlying theory and principle of modern law. I now teach undergraduates a pre-law course to get them ready to go to law school.
Goldy:
You’ve done a lot of reporting and writing about taxes. I was hoping, David, that you could explain to me how and why it is that our tax system is structured to advantage Nick, at my expense.
David Cay Johnston:
Well, it certainly is structured that way. American tax law is the most political law we have. It’s not based on ancient, well-established principles that have served civilization for at least 2,500 years. It’s based on who is able to rent the votes of lawmakers and get them to adopt favors on behalf of people. The official government version of Title XXVI of the U.S. code, that’s the tax code is almost 4,000 pages. I am in the process of writing a book proposing an entirely new Federal tax system. Nothing radical about it. Everything in my proposal is well-established existing law. What I do is throw away roughly 3,700 pages of the existing tax code. That’s where the favors are for people who own assets, invest in real estate, invest in fossil fuels, and a variety of other things that we favor in the tax code sometimes for reasons that make sense, but most often for reasons that have only to do with political pull.
Goldy:
See Nick there, a fellow traveler. We were just talking earlier before you called in that if I was benevolent dictator, my tax code would get rid of all deductions and exemptions, but the standard one, raise the standard deduction, get rid of everything else. And now at that point you put all the lobbyists out of business because there’s nothing to jigger around with to advantage people like Nick.
David Cay Johnston:
Well, let me tell you that when I first set out on this project, and I began my career as a teenager when I was in high school writing for two little shopper newspapers in Santa Cruz, California. And I began it with taxes and explaining taxes in plain English, not the way government bureaucrats hand out press releases that are designed not to be understood. And at the age of 19, it got me a job as a staff writer at the San Jose Mercury, currently the sixth-largest newspaper in America, and I was on the front page quite quickly. So, I’ve spent my whole life, not every day of it, but throughout my life, looking at taxes and there are basic principles on taxes that are agreed on by everybody in the tax business, right, left, middle, apolitical, and our tax code has nothing to do with that.
Nick Hanauer:
I was very intrigued by something you said a moment ago, which is that our tax code does not reflect, and I’m paraphrasing, I hope I get this right, 2,500 years of experience. So, I’m fascinated to know if there are ancient lessons from prior societies on taxes, and is this what you’re referring to, what apolitical people think about taxes?
David Cay Johnston:
Yeah, the basic principles of tax are first and foremost ability to pay. That’s the number one principle. There’s no point in trying tax desperately poor people. They don’t have anything. The second principle is convenience. It should be easy to pay your taxes. The third is timing. In an agricultural society, you want to collect taxes after the harvest, not when farmers are borrowing money to buy equipment and seed to plant in the ground. And you want the tax burden you have to be understood. You should know what the rules are and know what to expect, so that you can plan in your business. We have a society now where you can have two families who make the same income, have the same number of children, both own homes for the same value with roughly the same mortgage terms, but who will pay wildly different amounts of tax depending on some decisions they make.
For example, do they rent the house or own it? Do they save in a 401(k) plan pre-tax as almost everyone does or post-tax with what’s called a Roth? Do they get benefits that aren’t taxed? Does one person because they run their own business, have to pay for their income, their healthcare, they get a deduction for it, but they pay for it or someone else? It’s an add-on to their pay. So, there’s two things to think about here. One is vertical progressivity. The more money you make, the more wealth you have, the more capacity you have to pay taxes, and you are in effect giving back to the society that made your riches possible. Because if we don’t have a civilized society and you live in the jungle, then whatever group of thugs come along can just steal what you have. The other principle is horizontal equity taxpayers who make roughly the same income should pay roughly the same tax.
We end up with a country now though, where people with similar incomes can pay wildly different tax bills depending on whether they own their home or rent, save in a Roth IRA, post-tax or a regular IRA, as almost everyone does pre-tax, whether they get untaxed fringe benefits or have to buy their benefits out of their after-tax income. And we have a situation where we know because of IRS documents that got out that we have people who have fortunes literally in the hundreds of billions of dollars who pay no tax. So, the principles of progressivity and of equity among similarly situated people that go back 2,500 years, those are just totally violated under our system because the American tax code is the most political law we have.
Goldy:
And these violations aren’t random on the issue of horizontal equity. We had Dorothy Brown on the podcast a while back to talk about her book, The Whiteness of Wealth, and she points out the many ways the tax code, maybe not intentionally always, but the tax code is written in ways that tend to benefit white households over Black households.
David Cay Johnston:
Yeah, Dorothy Brown is one of our best scholars on the discriminatory nature of tax. When you hear about critical theory, mostly we hear about it in terms of race theory, but there’s critical accounting theory, critical tax theory, et cetera. And in critical tax theory, you look at the law and say, gee, that appears to be fair and equal to everyone. And then when you look into the detailed rules, the administrative procedures, you discover, well, no, that’s not equal at all. It’s quite unequal. Critical theory is simply about looking beneath the surface to see how systems really operate as opposed to the textbook ideal version.
Nick Hanauer:
David, as you look around the world, whose tax system do you think most closely resembles the ideal?
David Cay Johnston:
I think that everybody has gotten away from this. We have a global economy, especially when we’re dealing with great wealth and large corporations, and we have only four significant accounting firms. We call them the Big Four. When I was a young man, there were eight. There are now just four. And those four firms who you’ll see their names on big office buildings in cities from New York and Houston and Sydney, Australia and Hong Kong, these firms are at the epicenter of tax avoidance, whether it is legal tax avoidance, tax avoidance through buying political favors by getting special laws passed, tax avoidance by underfunding the tax police. That’s what the IRS are, the tax police. So, they can’t do their job or outright evasion, and accounting firms should not be big drivers of an economy.
They should be servants of an economy, but because of the capacity they have to distort economic reality. When it’s seen by the tax authorities, they become enormously powerful and influential and entirely on behalf of very large wealth holders and people with very large incomes. And we have people in America who make in some cases millions of dollars per day. I point out that Larry Ellison, the head of Oracle, his dividends per year are over $1.8 billion. That’s more than $5 million a day, and that’s just one of his sources of income. And yet I probably pay a higher effective tax rate that is a larger share of my income in taxes than he does.
Goldy:
And no doubt I pay a higher tax rate effective tax rate than Nick does. Well, I can’t know for sure because Nick, you don’t do your own taxes.
Nick Hanauer:
I do not.
Goldy:
So, you don’t really have a good idea of how much you pay,
Nick Hanauer:
But I think it’s higher now than it used to be. I mean, the cap gains tax rates going up and so on so forth.
Goldy:
And now you got to pay that in Washington state, unlike your old friend Jeff.
David Cay Johnston:
If like Nick, you’re a significant wealth holder, and Nick is one of the most honorable traders to his class that I know how much you pay in tax is mostly a function of how willing you are to pay money for tax avoidance vehicles. And some of them work, some of them work but shouldn’t work, and some of them are outright shams. I mean, there’s a reason I was called many years ago by a prominent Duke University law professor, the de facto chief tax enforcement officer of the United States. I was exposing these sham tax shelters and business owners, small business owners who were boasting, well, I haven’t paid taxes for years. I tell everybody that, I haven’t been arrested. So, you see, taxes are voluntary. By the way, every one of the 15 guys I exposed went to prison and some of them died there.
Nick Hanauer:
Yeah, yeah. A friend of mine went to prison for four years. He didn’t shelter his own money. He owned a company that cooked up these tax shelters for other people, and he offered one to me, but we passed. We were like, no way.
David Cay Johnston:
Smart move Nick.
Nick Hanauer:
No way.
David Cay Johnston:
There are tax shelters that work, and here’s one of the most fundamental principles in tax. Any tax advisor who’s sophisticated will tell you that a tax you can defer for 30 years is no longer a tax. It is a source of profit to you because the earnings by investing the unpaid tax dollars will vastly exceed the tax on which, by the way, during the deferral, there’s no interest. So, if you owe a thousand dollars a tax and you don’t have to pay it for 30 years, you’ll pay it dollars of 30 years from now, that’ll be worth what, 40 cents on the dollar maybe?
And you’ll have earned all this investment income and well, you’ll have to pay taxes on that investment income. Nonetheless, you’ll end up with more than a thousand dollars adjusted for inflation at the end of the 30 years. And that’s one of the big games. Now for you and me and everyone else, we have a limited time in which to do this. The clock is going to run out on us, but corporations, they exist forever. And if they run out of the life’s blood of a company money, guess what? We put them through bankruptcy, we inject new money into them, and they go on as zombie corporations. They can exist forever.
Goldy:
Right. My stepfather is an accountant, a retired accountant, and he once me that the four rules of tax accountancy are defer, defer, defer, and die.
David Cay Johnston:
Exactly.
Nick Hanauer:
I did not know that.
David Cay Johnston:
Exactly. Correct.
Nick Hanauer:
I like the first three. I’m not crazy about the fourth.
Goldy:
Well, maybe you are rich enough that you can avoid that Nick, but for the rest of us, not so much.
Nick Hanauer:
So David, what are the most nefarious practices? I mean, I do have a-
Goldy:
Are you looking for tips, Nick?
Nick Hanauer:
Well, I mean I do have a team of people who do this, but we are very conservative in the sense that we assiduously avoid anything that smells like a dodge.
Goldy:
Well, that may have been the first time I’ve ever heard somebody describe you as conservative, Nick.
Nick Hanauer:
Yeah. But what are the most nefarious practices?
David Cay Johnston:
Yeah. Well, let me just lay down a little track about that though first, Nick. There is a big range of attitudes about tax shelters among both individuals and corporations. There are companies that when somebody shows up wanting to sell tax shelter, tell them, “Get out of our building.” And the other people are like, “Yeah, you got any friends you want to bring them.” And the same thing applies to individuals because there are so many different options about this. You can be so conservative, you can do what the New York Times did. The New York Times was so worried about its public image that the way they arranged the purchase of the Boston Globe about 30 years ago caused the New York Times for 11 years to pay a corporate tax rate of 77%, even though the statutory rate was 35%. And the reason was they couldn’t deduct the goodwill of the Boston Globe, which was most of its value.
I had just left the paper when I revealed this, and I assure you they were not happy that I had pointed this out. So, one of the biggest ones that’s easy for people to understand involves real estate. So, you as an investor, usually with other investors, you buy a building, you get to depreciate the value of the building. That is the building in theory at least wears out a little bit each year. So, over a schedule of a couple of decades, you write down the value of the building because you’re supposedly going to have to replace it at the end. And those write-downs, you get to deduct against your other income if you do it the right way, your salary, dividends, interest capital gains and shelters some of your money. But 20 years later, when you go to close the real estate deal and cash out by selling the building at a profit, the government is supposed to recover the depreciation that you wrote down and you are supposed to pay taxes on it.
So, if you wrote down a million dollars over the 20 years, you sell the building for $5 million more than you paid for it, you’re supposed to report $6 million a gain, the $5 million more than you paid for it, and the million dollars you wrote off over the 20 years on your tax return. This kind of cheating involves hundreds of billions of dollars a year according to Jerry Curnutt, who was the internal revenue service specialist who figured out what was going on, he had every real estate and other partnership tax return in America on his desk at the IRS. And the way you cheat, very simple. You just don’t check a box. That’s all you have to do if you just don’t check the box unless you’re audited and partnerships are audited, roughly one in 500, and you would have to be audited the year of the closing out of the deal.
So, the odds are tiny, why you just go on your merry way and you get that million dollars you wrote off tax-free. Jerry was given all sorts of awards and bonuses by the IRS. They sent them around the country to teach people in every big city who audit for the IRS how to catch this kind of cheating. And the number of cases the IRS has actually brought, as best I can tell from the public record, is zero. The number of cases in New York State, which is a major center of this kind of cheating, not one since the 1980s. And that goes to, we don’t have enough police, enough tax detectives to police the system.
And so, people just get away with this stuff. And imagine that you had invested in one of these and you had this big profit and the IRS comes after you as happened in Pennsylvania after they hired Jerry Curnutt following his retirement from the IRS. Pennsylvania is almost the worst state in the country to detect this kind of cheating because of peculiarities about its tax laws. The company that he caught that owed a fortune, tens of millions or maybe a hundred million dollars in taxes, they immediately hired lawyers and began consuming the resources of the state to fight them, trying to get them to settle for pennies on the dollar, which is very often what happens.
Goldy:
So, at the risk of poking a bear here is this some of what Donald Trump has done to he brags about paying low taxes.
David Cay Johnston:
Donald is a blatant tax criminal. And I’ll give you my two favorite examples to establish this and you’ll see that. Eight years ago I broke the story that Donald Trump had been tried twice for tax fraud, income tax fraud. Now, these were civil trials, not criminal. He lost both cases. In both cases he had submitted as part of his tax return, something called a Schedule C. That’s what gig employees and freelancers and sole proprietors do. There are many millions of these. The government receives every year. Well, this company didn’t exist. It had no revenue, it had no business records. Donald took over $600,000 in deductions even though he had no receipts, no evidence of anything.
One of the two judges who heard this case, these were city and New York State trials, put Donald Trump’s longtime tax lawyer, Jack Mitnick under oath because the tax return in the public record did not have what’s called a wet signature. There was no ink pen signature on it. And he asked Jack Mitnick, Trump’s guy, “Did you prepare that tax return?” And Mitnick said, “No, your Honor. Neither I nor my firm prepared that tax return.” Donald Trump forged his own tax return by forging the signature of his tax guy, and he lost in both cases he had to pay the taxes he owed. But he was put on notice by doing this that this is illegal and you may not do it.
Well, when we got Donald Trump’s tax information recently, it turned out that in the recent years, including when he was president, he created about 65 similar phony companies that have no business. They don’t exist. And he took deductions for them. And in fact, I wrote a piece in the New York Daily News saying to Alvin Bragg, the district attorney there, you’ve got an easy to make fraud case here. Donald Trump was on notice that it’s illegal to do this. He did it 65 times in a couple of years, and you can easily convict him of tax fraud for doing that. And I suspect if we had tax transparency like we used to have when tax returns were public literally 100 years ago in 1924, we would discover lots of this kind of tax cheating, Goldy.
Goldy:
Let’s use that. Let’s transition there into how to fix the system. That’s a proposal I’ve seen put forth a number of times that we should. A big fix would be just making tax returns a public record. So Nick, you could see my tax return. I could see your tax return if I had several weeks to do that reading. But what else would you propose to address this egregious tax system we have?
David Cay Johnston:
Well, first of all, we don’t need to make the tax return public. What we need to make public is here’s your income and here’s the tax you paid, so that people will check up on one another. And it used to be until about 50 years ago that you could ask the IRS, “Hey, my neighbor Joe here, did he file his tax return?” And they would tell you if that person had filed their return and paid their taxes or had an agreement to pay them, which is the functional equivalent. And Congress stopped that. And the argument is that this is a private matter, you think between Google and Apple and all the data companies out there that they don’t know, and roughly how much money you make, Goldy or I make, what are houses worth? I mean, you’re a city school teacher, it’s public record. My wife was the CEO of a $600 million charity. Her salary was public record, and the commercial purveyors all know roughly what kind of income you have. So, I’m not impressed with the we have to have secrecy argument, but there are other simple things-
Goldy:
Right. I use the tax filing software. They know.
David Cay Johnston:
Yes. So, there’s some simple things I propose in my forthcoming book to simplify the tax system. The first one is in America, one of the things we have are two income tax systems separate and unequal. Workers have their taxes taken out of their paychecks before they get the money and wherever they work, there is a person, usually an executive who is personally responsible for making sure the taxes are withheld and turned over to the government. Because if they don’t do it, they are personally liable for those taxes. So, they make sure they get paid. But if you are a sole proprietor, if you’re a book author like I am, if you are the owner of your own business, you take money out of the business whenever you want and you settle up with the government later. I propose that we go to a single system, nobody can get money until a trustee has withheld the taxes and make sure that they get turned over, and then we’re all treated the same way.
Similarly, I would end the system under which very wealthy people like Jeff Bezos and Elon Musk live by borrowing against their assets. Until very recently with inflation, if you were wealthy, you could borrow against your assets for 2%. I know that because I’m not a rich guy, but I was able to borrow 2% and who would pay the government a 20% capital gains tax rate when they can borrow against their assets instead and then the next year, if you’re wealthy enough, you roll your loan over, you take out a new one. So, if you have a billion dollars and you need $5 million a year for your lifestyle and you just keep running up the loans, you’ll never pay hardly anything because you’re paying interest at a 10th the rate or maybe just a quarter the rate of the lowest government tax rate.
Goldy:
Right, because you’ll never realize your gains, so you’ll never pay a capital gains tax.
Nick Hanauer:
I would like to mention though, you can do this and for Bezos and Musk, of course it makes perfect sense because when you have fortunes that large, it’s impossible, almost inconceivable that something bad could happen. But my God, in the tech business, there are so many stories of people who tried that gambit and then the stock went down 50% or 75%, and now you have these giant loans and the loans are called, right? Because your collateral is no longer big enough, and then you have to sell the stock, which generates a taxable event and bankruptcy follows. I know a bunch of people have done that.
Goldy:
Will somebody not think of the poor billionaires like Nick instead of just focusing on the rich billionaires?
Nick Hanauer:
I just want to say I am 100% with David on this practice. It’s ridiculous that somebody like Musk and Bezos don’t pay any tax. You should just, I don’t know what to do, but if you have it more than a billion in assets or $500 million or whatever it is, you just will pay a minimum tax, right?
David Cay Johnston:
This strategy only works if your fortune is maybe a hundred times larger than your annual consumption.
Nick Hanauer:
Yeah, astronomical.
David Cay Johnston:
And you have to have a large part of your fortune in assets that we used to call blue chip assets, not highly speculative ones where the stock runs up and then bingo, the company’s gone, but they’re always fools being separated from their money. They think they can get a free lunch.
Nick Hanauer:
What else would you do?
David Cay Johnston:
This is a little off tax, but it’s the center of tax. If we had the French or German healthcare systems and the French system is the best in the world, according to every study that’s ever been done that I’m aware of. It would save us about 6.3% of our gross domestic product. It’s gone down a little bit now, maybe just at 6%. Now, does that number mean anything to you? I mean, I deal with this all the time. 6% of GDP, what the heck is that? Let me give meaning to that number. All of the income taxes paid by people who make less than $500,000 a year equal what we spend on healthcare above the French and the Germans, and they have universal care. We only have 90% coverage and another 30% of people have crummy coverage. Nobody goes bankrupt and loses their home in France or Germany over medical bills, but it happens all the time in America.
What I’m giving you is a statistical number because there would obviously be effects from having a universal national healthcare service. But even if we couldn’t raise the threshold for income taxes to a half million dollars a year, by the way, that’s most of the taxes come from people who make over a half million dollars a year. What if we could raise it for a $100,000 for one person, $200,000 for a couple or even $50,000 for one person and a $100,000 for a couple? It would have enormous beneficial economic growth effects for America. So, that’s another thing that I would do. And then here’s one of the most important things we should be doing with tax. I propose that we have something called ALIA, A Lifetime Investment Account. So, you are able to save and build up some money and you have done pretty well because you bought Apple stock or some high-tech stock and you say, “Gee, I really want to get out of that and I’m going to buy electric utilities because they’re a lot more stable and they pay a dividend.”
Well, you go, “Oh, a big capital gains tax.” And so, people hang on to the risky tax because they’re risk averse and they don’t want to pay the tax. Under my plan all your stocks and things would be held in this ALIA. You could own your business in ALIA if you want to sell Apple and switch to electric utilities, you would not owe any tax at the time except on money you withdraw from your ALIA to spend. Each of us would have an individual account. When you die, as we all are going to do, the taxes that are in that account are due. Wouldn’t you rather pay a tax after you’re gone than during your lifetime? Now what about your spouse? Well, under my plan, your spouse can use your box until your spouse dies. And what happens if your spouse, as happens in Japan, marries a much younger person to avoid this and do it again, that doesn’t work. My box, my wife can have when she dies, my box gets emptied and her box gets emptied as well.
Goldy:
Is this pretty much what you’re describing, is it like a traditional IRA in which you can put as much money into, but take money out of at any time and just pay taxes on the money you take out?
David Cay Johnston:
Goldy, that’s exactly what I’m proposing. You wouldn’t get a deduction for the money you put into the plan you’d put in after-tax money. And as long as you leave it there, you can trade this company’s stock for that company, do whatever you want with it. There’s no tax effect. But when you withdraw, now you owe your taxes. And when you’re run out of time, then you’re going to owe your taxes on the gains.
Goldy:
Would this be in addition to Roth and traditional IRAs or just replace them both because it actually has features of both?
David Cay Johnston:
I would replace all of those things. Complexity is the friend of the chiseler and the cheat. I want to simplify the tax code. I want to make it as simple as it can be and eliminate loopholes and try very hard to have a system treats everybody equally and that meets the ancient principles of ease of paying, et cetera.
Nick Hanauer:
I love it. Okay, so we’ve gone a little bit over time, which is fine, but we should wrap it up, David. And you’ve answered in detail one of our big questions, which was, if you were a benevolent dictator, what would you do? And you have explained that, but one final question is why do you do this work?
David Cay Johnston:
I’ve always been very interested in power and the exercise of power, and I had a very unusual sort of upbringing. My mother was an only child. It was a disowned heiress. And my father was a disabled World War II veteran, a very smart guy, but he had only a third grade formal education. And I watched how the system and employers and whatnot treated them. It made me very interested in how people exercise power. Many people are prudent and thoughtful and caring, but there are a lot of people who are bad actors and far too often our laws and policies help the bad actors and punish people who behave well. And I’ve been trying to show that in my journalism since I was 17 years old.
Nick Hanauer:
That’s a beautiful story. I love that. I love that. Well, thank you so much for being with us and thank you for your work and continuing to try to put pressure on where pressure is needed and clearly it is.
Goldy:
And when do you think the book you’re working on will come out?
David Cay Johnston:
Well, I put this book aside, Goldy when Donald announced in 2015, because I knew him better than anybody else in journalism, and I knew my peers would not cover him, and they did not correctly, they don’t understand to this day. But I’m hoping to have it done the next couple of months. And I will tell you the tentative title of this book is The Prosperity Tax because we always think of taxes as something that can destroy, but a properly designed tax system actually can make us better off.
Nick Hanauer:
That was a fascinating conversation. And there are so many dumb things in the tax code that make it easy to cheat. But there is a bigger problem with the American tax code, which is just the way in which it’s been influenced by neoliberal ideas. For example, making income from things like dividends lower than income from work.
Goldy:
We used to have these terms, Nick, you’re old enough. Remember we used to talk about earned income and unearned income. Earned income, it was like a paycheck. What you got as a wage.
Nick Hanauer:
Yeah.
Goldy:
Unearned income was interest, dividends and capital gains.
Nick Hanauer:
Yeah, clipping coupon. Right.
Goldy:
Right.
Nick Hanauer:
Absolutely. And I do believe that there should be some incentive to invest. So, pick a threshold where if you make an investment, a long-term investment and sell that asset and make some money, that some amount of that return is taxed preferentially. But the idea that somebody can make a billion dollars a year on dividends or whatever it is, and pay less taxes a percent than somebody who is working for a living is absolutely absurd. And it’s just criminally stupid. And I suspect that as much cheating as there may be and sort of nefarious tax avoidance in the system, just the upside down nature of it, I think is the bigger problem.
Goldy:
Yeah, it’s all interrelated. And of course what you end up with is a tax system that exacerbates inequality in our system, in our economy, and that leaves the government without the resources to address many of our needs. And I thought it was particularly interesting the way David brought up our healthcare system, which tying together these two incredibly broken and inefficient systems, healthcare and taxes, that in fact, if you had a more efficient healthcare system, if you had a healthcare system like in France or Germany or just about any other developed country, we would have so much more of our GDP to spend or to keep individual families who keep to spend on the things they need. It would actually allow us to tax at a slightly higher rate that would pay for other things we need.
Nick Hanauer:
Absolutely.
Goldy:
So, I don’t know yet another screwed up part of the Great American economy, right?
Nick Hanauer:
Yeah, yeah. No.
Goldy:
The greatest system on Earth, apparently.
Nick Hanauer:
Yeah. No, it is a sad story and it’s hard to imagine a political scenario that would straighten it out over time. It just seems to get kind of worse and worse and worse. Every layer of tax reform actually makes it probably worse in ways.
Goldy:
I think, Nick, you and I actually looking back on this conversation, it may not be the most coherent conversation we’ve had because we have not spent maybe enough time thinking and talking about this. So, it’s an issue I think we’re going to have to come back to in the future.
Nick Hanauer:
Yeah, I think you’re right.
Goldy:
If you want to read more from David K. Johnston, you can find his books at your local independent bookstore or at that big online Monopolist.
Speaker 7:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer, follow our writing on Medium at Civic Skunk Works, and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening. See you next week.