Johnston reponds

Reader comment on: Tax Notes's Tax Hypocrisy

Submitted by David Cay Johnston (United States), Apr 12, 2010 10:56

Ira Stoll muddles many tax issues here, but in that he is no different that nearly all Americans, including me before I started studying tax as it actually works, rather than our societal myths about tax.

First, Stoll charges me with being pro-higher taxes. Provably false. I have written extensively that Congress should balance the budget except for those very rare circumstances (like since the fall of 2008 and before that in the 1930s) when demand is inadequate. There is no false dichotomy, just a misreading by Stoll.

Government can balance budgets by spending less or taxing more, but chronic borrowing is like drug addiction, a subtle high that slowly destroys. We owe 3/4ths of our national debt to just three presidents who were borrowers and spent wildly.

Second, what matters is what you spend taxes on, more than how much you pay.

As Stoll knows from a Tax Notes column I sent him, I voted to raise my property taxes and for each additional dollar I pay I have an extra $1.40 in my pocket. How can that be? Because my neighbors and I reduced our costs by 60% by creating a garbage collection district that created efficiencies.

Taxes are like that -- they can drive up costs or they can lower them. It depends on what the money is spent on.

So to say that higher taxes are inherently damaging is nonsense. We could eliminate the taxes we pay for education, police and courts, but our private costs would rise by far more than the saved taxes. Indeed, without taxes there is no civilization and thus no wealth. The issues are what and how we tax and how the money is spent, not nominal tax rates.

Third, I favor lowering taxes through less spending and enforcing the tax laws we have. The last two administrations both write reports about rampant and growing tax evasion at the top. We are very efficient at taxing wage earners, bot have a separate but unequal system for others. Fair is fair and I am four square for law enforcement and integrity.

Fourth, to borrow-and-spend is to implicitly raise future taxes. I have shown that the GWBush tax cuts, for example, were merely tax deferrals into the future. Their interest cost alone this year equals all of the income taxes paid by all Americans in the first eight weeks or so of the year.

That means more of your taxes go to interest, redistributing current income to China and other investors in Treasuries, and less to government services or reduced taxation. Had we balanced the budget since 1983 we could cut income taxes by about a third.

Fifth, I have been exposing for years now ways that taxes are used to redistribute wealth upwards and showing individuals, small business owners (including myself) and others how they pay taxes that go not to government services, but to enrich some of the richest people in America.

Stoll writes that I am "insisting that higher taxes can make you better off..." False. What he leaves out is that I also wrote in the very same paragraph he cites that payer higher taxes can make you worse off. The devil, I wrote, is in the details of what we tax and what we spend taxes on (see above).

Sixth, why do we have nonprofits and why is Tax Analysts able to operate as a nonprofit?

Here Mr. Stoll reveals a troubling lack of understanding of legal and tax concepts. And he compounds it in his writing on deferred compensation, but again like the overwhelming majority of Americans I am not surprised because our public debate about taxes bears little connection to the reality of taxes.

No one makes any profit off Tax Analysts. No one gets rich from risking his or her capital in hope of making a return. No individual controls Tax Analysts, which is organized as a public charity. And, as I will show, it has done charitable works that have saved taxpayers tons of money.

Now Tax Analysts could have been organized as a for-profit, in which case the law would make it easy for the owners to make profits while reporting little or no profit for tax purposes. Indeed, most small businesses, even of the size of Tax Analysts, show little or no profit because the income tax laws are as porous as a sponge. As Jon O. Fox has shown, only about half of income (including profits) is taxed.

What is troubling is that the world is full of nonprofit fronts for profitable businesses. Take a look at the "donor advised funds" run by Fidelity, which ought to be illegal, but were approved by an unknown IRS bureaucrat. Only punloic charities (like the one my wife runs) should be able to offer these funds. (Primer on this available on request.)

Local nonprofit theater groups sponsor many of the national touring companies of Broadway shows, but those are just fronts for the touring show investors. THAT is a scandal, creating a nonprofit to benefit for-profits.

At Tax Analysts no one gains beyond their compensation for their labor. No stock otions, no stock to rise in value.

And yes a Tax Notes subscription costs about two grand. Many nonprofits charge fees. Harvard charges tuition.

Tax Analysts has virtually no advertising. That means subscribers pay for the journalism, which they value highly or they would not pay so much. How much more integrity would journalism have if it got off the intermediary between buyers-and-sellers model and operated from subscriptions? The answer to that is uncertain, but worth pondering.

And the charitable benefit? The reason we know about private letter rulings (a frequent area of taxpayer abuse by the wealthiest among us), IRS procedures and manuals and practices is because of nearly 40 years of dedicated efforts by Tax Analysts to force these things into the public light.

This has involved extensive and costly litigation undertaken to make government accountable, lifting for all a veil of secrecy that before was raised only for the accounting firms and their best clients, as was the case before Tax Analysts began.

No one has tried to measure the benefit of this journalism, but I think it reasonable to conclude that this benefit is worth at least a hundred times and possibly many thousands of times the taxes not paid on the modest surpluses (what for-profit businesses call profits) that Tax Analysts has earned in some years. (But keep in mind that Tax Analysts, if organized as a for-profit, might well have paid no taxes because of liberal rules on loss carry-forwards.)

Not everything is done for profit, for commercial values. There is a legitimate role for public service. Indeed, without public service private wealth creation would suffer.

Finally, look at the deferred sums Stoll mentions from the publicly disclosed tax return of Tax Analysts (a document that would be secret if it were a for-profit venture, like his website): less than $10,000. Congress says anyone with a 401(k) can save more than that.

I have written in Tax Notes that we should question ALL compensation deferrals and should end the laws allowing any deferrals beyond the modest limits of what are called qualified plans, no more than $22,000 for older workers. Contrast the modest figures Stoll cites with hedge fund managers, who legally defer unlimited sums – sometimes several billion dollars of income per year – and when they take a payout years or decades in the future get the preferential capital gains rate even though they had no capital at risk, but instead for their success in managing the risks of their clients. Now there is a scandal.

In short, I am thrilled that Stoll is writing about taxes. We need to have a serious, not ideological, understanding of how the biggest enterprise in the world – tax – actually works. We need to understand how it can promote wealth creation or retard it.

My hope is that Stoll will leave ideology behind and learn how the system actually operates because the reality bears almost no relationship to the assumptions in his post today.

The absolutely best place to start learning how the system really works is by reading the reporting (as opposed to my opinion column) in Tax Notes.

Note: Comments are moderated by the editor and are subject to editing.

The Future of Capitalism replies:

Great, if that Tax Notes reporting is so valuable, and the purpose of Tax Analysts is to educate the public, then why not make the reporting available to members of the public who, unlike the accountants-and-tax-lawyers to-the-rich, don't have $2,000 to drop on a subscription, and can't deduct it as a business expense?

The reason is that if the real purpose of the organization was to serve the public, and the information were given away freely, the employees who are now making fat salaries by operating a trade publication for tax accountants and lawyers under the false banner of serving the public wouldn't be able to make as much money.

The whole secret of this non-profit, as in many others, is that the profit is the employee compensation. That's what drives the organization, not the public service mission. If there were a genuine public service mission, they wouldn't be charging $2000 to subscribers and hiding the content behind a pay wall. They'd be making the information freely available on the open internet to anyone who wants it, and raising money like other real charities, by seeking voluntary support from the public, rather than by selling tax-deductable-as-a-business-expense subscriptions to tax professionals.

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Title By Date
This is exactly right about Tax Notes Today [59 words]Gary B.Sep 19, 2010 15:09
Game, set, match [63 words]Rich HandApr 12, 2010 17:54
The real issue [226 words]Michael TrachtenbergApr 12, 2010 17:45
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David Cay JohnstonApr 12, 2010 12:23
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David Cay JohnstonApr 12, 2010 13:07
⇒ Johnston reponds
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David Cay JohnstonApr 12, 2010 10:56

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