Tuesday, February 17, 2004

“To tax and to please, no more than to love and to be wise, is not given to men.”Edmund Burke, 1774

A slow week on the tax blogging front. Finished reading Perfectly Legal: The Covert Campaign To Rig Our Tax System To Benefit The Superrich And Cheat Everyone Else by New York Times reporter David Cay Johnston. It's generally well-written with good examples -- Johnston can dig, and he can tell good stories.

Professor Sheldon Polllack gives Perfectly Legal a mixed review in Tax Notes (February 9, 2004 at page 795). While agreeing that Johnston presents a "somber portrait of a sinking tax system", Pollock argues that the premise of Perfectly Legal -- that the superrich have secretly rigged the tax system to benefit themselves and cheat everyone else -- -- is “infuriatingly simplistic” hype. Pollock’s view, which he explains in more depth in his book Refinancing America: the Republican Antitax Agenda (2003), is that the distress of the income tax system is due to a malfunctioning “electoral system that encourages politicians of all stripes to curry favor with voters by granting them special tax breaks.” Republicans who are ideologically biased in favor of tax cuts find common ground with Democrats who festoon the tax code with tax expenditures -- special credits and subsidies that are the equivalent of spending but are easier to enact and once enacted are rarely reviewed.

From this neutral corner it looks like Johnston wins on points. Both would agree that the swings, shifts and “reforms”of the last 23 years have undercut whatever logical integrity the tax code may have had, and weakened the moral rationale for voluntary compliance. But Johnston emphasizes what Pollack downplays: the connection between tax system malfunction, increasing concentration of wealth and income, and the ongoing efforts to shift the tax base away from capital and onto labor. The civil servants and legal technicians who drafted the 1954 tax code would be aghast to learn that dividend recipients are now taxed at a maximum of 15%, when an equal amount of income from work bears an effective tax rate of 38% or more after Social Security payroll taxes are factored in.

Perfectly Legal is well worth reading as an expose of the hypocrisy of legislators who make tax policy. It’s not deliberate corruption that makes taxes complex – there are no lobbyists for cross-references. There is a more fundamental duplicity at work. It is the need to hide the tax, to avoid been seen doing what one must do to raise the revenue that pays for civil society. Our incumbent tax legislators are masters of the seemingly impossible art of taxing and being loved at the same time.

Postscript: That same February 9th issue of Tax Notes has an article by Martin Sullivan showing that US corporations are sheltering an increasing share of their profits in offshore tax havens. His analysis of Commerce Department data indicates that almost half of all foreign profits of US-based multinationals are in tax havens. The top 4 haven countries (Netherlands, Ireland, Bermuda and Luxembourg) garnered 30% of all profits, tho only 18% of the assets, 9% of sales, 5.3% of plant and equipment and 3.4% of the work force were in these countries. Is this an example of Pollack's trend or Johnston's? How much point is there in having national tax systems try to keep money from flowing to low-tax zones in a world of global finance? And who benefits -- the "rich", the wannabee managers, or the anonymous pension trusts, index funds and charitable institutions that now constitute world finance capital? To paraphrase Vespasian, "Money has no Country".

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