Mind the Gap

Americans have had a long, uncertain history with taxation. A full national income tax wasn’t established until 1862, and it was declared unconstitutional by the Supreme Court 34 years later. In 1913 the 16^th Amendment to the Constitution permitted the income tax to be made a permanent fixture in the U.S. tax system.

For years, taxes generally were aimed at the wealthy as a way to ensure a measure of equality, but in the second half of the 20^th Century this concept was turned on its head as the wealthy invented schemes to exempt themselves from these federal levies. As David Cay Johnston points out in Perfectly Legal, this trend intensified in the last 30 years and American families and the middle class have seen their average income stagnate as their tax burden has risen. At the same time the wealthy keep making more money while paying less and less of their yearly earnings to the government. And it’s all done by the books.

Johnston fingers two culprits, the Social Security tax and the Alternate Minimum Tax, as the two most telling examples of how the tax burden has shifted onto the shoulders of middle-income Americans. Social Security has become, in recent years, the primary tax paid by most Americans. The maximum has climbed sharply, from $327 in 1970 to about $4,700 in 2003, while median income for Americans has climbed only from $36,573 to $40,330 between 1970 and 1999. The tax caps out at $87,000, meaning anyone earning more pays the same rate. In other words, a married couple earning a combined income of $87,000 pays the same amount of Social Security tax as, oh, say, Bill Gates. Not a bad deal for Gates. 

Speaking of bad deals, many don’t fare better when it comes to the Alternative Minimum Tax (AMT). Introduced in 1969 as a separate tax system aimed at wealthy tax dodgers, it recalculates the value of a taxpayer’s exemptions and deductions, charging whatever is more. Unfortunately, the tax doesn’t take into account increases in interest rates, so now many of those making between $50,000 and $100,000 are being added to the rolls of the AMT. About 3 million are expected to get hit this year, and if the Bush tax cuts become permanent that number will jump to more than 35 million by 2010. Families making between $50,000 and $100,000 will see their share of this tax jump from 3 cents per dollar to 21 cents per dollar over the next few years, while those making more than $1 million will see their share dip by 3 cents to 19 cents per dollar.

The irony here is that last year’s tax cut lowered the tax rates on most capital gains and dividends to 15 percent, and taxes paid on investments are not subject to the AMT. The upshot? The wealthy now get out of paying this one, too. 

But I can throw figures at you all day, and in the end the fact that last year the average income of the country’s top 400 earners was $174 million is just that — a fact. Over the past four years Bush policies have slashed taxes for the wealthy while stealthily sticking it to the middle and upper-middle classes. As a New York Times reporter and Pulitzer Prize winner, Johnston knows how to dig up sources and lay out the facts, but keeping an engaging narrative going for 300-plus pages is a different story. The book is a policy wonk’s dream, and there’s enough here to make you pull out your hair over the amount of graft and outright cheating going on in the open. But the repetition of numbers, data, charts (some of which may be a bit selective in their sources), and newspaper-style prose becomes dreary after awhile, and the reader longs for a break from the steady diet of bad news Johnston forces them to digest.

That said, Perfectly Legal is important in a way that many other screeds only wish to be, and, in an easily perfectible world, would serve as a rallying cry for tax reform. The fleecing of the American taxpayer is an issue that cuts to the very heart of our democracy, and deserves the single-minded attention of our greatest policymakers. But the reality is that those in charge of making the changes are too busy courting the corporations and wealthy individuals who benefit most from their anti-democratic sleights of hand.