Nikel and Dimed

DATE May 10, 2001 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Interview: David Cay Johnston discusses tax inequities and
loopholes
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

Do you really understand the president's tax plan? You know it will affect
your pocketbook, for better or for worse. You know it will affect how much
money the government has to spend on federal programs, but can you make
sense
of the confusing details and cut through the political rhetoric? My guest,
David Cay Johnston, covers the tax system for The New York Times. He's made
it his mission to investigate behind-the-scenes political and financial
maneuvering and to explain it to his readers. Last month he won a Pulitzer
Prize for beat reporting for his coverage of tax inequities and loopholes.
As
Congress continues with its complex process on the budget and tax plans, we
invited Johnston to talk with us about our tax system. Johnston says he's
neither for nor against the Bush tax policy. What he is for is honesty in
the
debate. I asked him what he thinks has been the most misrepresented aspect
of
the tax debate.

Mr. DAVID CAY JOHNSTON: I'm not sure that the public appreciates the degree
to which this is a tax cut totally focused on people at the high end of the
income stream and how, for the group known as the next 4 percent--that is,
people who make--who are on the income ladder on the 95, 96th, '7th, '8th
and
'9th rungs of the ladder, are paying for this as, to some degree, are those
between the 80th and 95th. The tax cut, as designed by the president
initially, provided, at a minimum, 45 percent of the benefits over the next
10
years to the top 1 percent of the income group. These are people who
average
over $1 million a year of income. The--if you are a person anywhere below
that, you get very little. For example, if you're in the next 4 percent
group--that's people who make $145,000 to about $350,000--that's a group
heavily occupied by two-income career couples and professionals who are not
in
finance and investment banking, and business owners--your average tax cut is
about $1,300 on the income tax side. The people right above--the top 1
percent--their average tax cut is $28,000. And within that group, the very
wealthiest people, the top 400 taxpayers in America, get an average tax
break
of about $2 million each per year just in income taxes.

GROSS: Does your research show that the supporters of President Bush's
proposed tax breaks are intentionally gearing these tax breaks for the
wealthy, that they know what they're doing, they want the wealthy to get the
biggest cuts?

Mr. JOHNSTON: Oh, sure. And I think they've acknowledged that here and
there
that--their argument is that those who pay the most ought to get the most in
tax relief. And we do have a system now where, if you are a family of four,
you don't start paying income taxes till you're at about $28,000 of income.
On the other hand, let's take that group, the top 400 people in this country
who have an average income of $110 million each in 1998. Those people are
getting a tax break under this plan that is disproportionate to their income
and their share of the taxes. They're getting more than twice as much
compared to their share of the taxes. In the top 1 percent group, those
people pay 35 percent of the income taxes in this country. They make
about--I
think it's 18 percent of the income and they will pay about 35 percent of
the
taxes. They're getting about 45 percent of the tax breaks. So it's not
proportional. It is very heavily weighted towards that group. Secondly,
the
fundamental flaws that put a lot of unfairness in the tax system that have
traditionally been complained about by Republicans in Washington are not
being
addressed in this plan. The most important of these is the alternative
minimum tax.

GROSS: What is that?

Mr. JOHNSTON: Well, back in 1969, when I was a young man, I remember one
day
picking up my morning newspaper where I worked and a story appeared that 55
wealthy Americans--people who made over $200,000--paid no income taxes. And
this caused a huge political uproar and very quickly Congress passed a tax
designed to make sure that very wealthy people have to pay something, that
you
can't use aggressive tax deductions to pay zero income tax. It has not been
a
success. The most recent year we have data for, 1998, 2,400 people did not
pay any income tax and had an income of over $200,000. Instead, though--but
Congress hasn't fixed the alternative minimum tax. And what's happened now
is
that a single mother making $28,000 can pay the alternative minimum income
tax
and, under President Bush's plan, about 80 percent of people who make
$80,000
to $200,000 will pay the alternative minimum income tax when his plan, as
originally proposed, would be fully phased in. The tax, however, does not
apply to the wealthy. If you make $350,000 or more, you don't pay the
alternative minimum income tax because Congress has not adjusted it to keep
pace with inflation and other changes in the tax law.

GROSS: So what does that mean? If you make under $350,000 a year, then you
have to pay this alternative minimum tax. How does the alternative minimum
tax compare to what you'd ordinarily pay?

Mr. JOHNSTON: It's sort of like a "Star Trek" show, you know, where they
have a parallel universe. There's a parallel universe of taxes called the
alternative minimum tax. You have to figure your income taxes two times and
then you have to pay the higher figure. And under the alternative minimum
tax, you lose your deductions for state and local taxes. You lose your
children, because these are considered tax shelters under the law. Now I
don't know anybody who has children as a tax shelter, and I say this as the
father of eight.

GROSS: When you say you lose your children, you lose them as deductions.

Mr. JOHNSTON: That's correct. You lose them as deductions. And,
therefore,
this tax applies very heavily to people in the high-tax states, which happen
to be, by the way, the states that produce lots of revenue for the federal
government. So if you have a large family and you live in New Jersey, New
York, Connecticut, Massachusetts, Maryland, California, you will be hit,
almost certainly, by the alternative minimum tax under President Bush's plan
if you make more than $80,000 a year but less than about $350,000.

GROSS: And if you live in one of these states, you won't be able to
deduct--you won't be able to use your children as deductions.

Mr. JOHNSTON: You won't be able to use your children as deductions and, in
addition, you will lose the deductions for property taxes you paid on your
home and the state and local income taxes you paid on your wages.

GROSS: So this is only if President Bush's plan goes through?

Mr. JOHNSTON: That's under the terms of his original plan. We don't have
any of the details of the revised, shrunken-down plan, which is about
three-quarters the size of the old one. We don't know yet how Congress is
going to divvy up those tax cuts.

GROSS: And when will we know?

Mr. JOHNSTON: When Congress decides to put out a bill for
mark-up--hopefully
in a few days, but probably at the last minute, just before they vote for
it,
when there'll be very little time for the public to scrutinize its details
before it becomes law.

GROSS: You--I mean, how many people even know about the alternative minimum
tax? I mean, this is the kind of thing--doesn't it just go right past the
public's radar?

Mr. JOHNSTON: The alternative minimum tax is a stealth tax. A lot of
people
don't know they pay it. You would have to look on your tax return. If you
prepare your taxes on a program like TurboTax, it does it for you
automatically, but you may notice the line that says it. If you--like many
people, you have a tax professional do your taxes and you just sign them,
you
just look at the total dollars that are there. But it's an enormous revenue
maker for the government. Under the president's original proposal,
alternative minimum tax revenues would increase by $132 billion. So
basically
people who are in the $80,000 to $350,000 income ranks--that's the top 10
percent, minus the very top 1 percent--that group of people would face an
additional $132 billion tax burden over 10 years.

GROSS: So is it fair to say that the people in the $80,000 to under
$350,000
income bracket would be making up a lot of the difference that the very rich
won't be paying in taxes if the plan goes through?

Mr. JOHNSTON: I think that's a fair way to look at it, that this shifts to
a
significant degree from the top 1 percent to the next 9 percent, where the
government is relying for its revenue. And there's a fundamental difference
between these two groups of people. The top 1 percent are people who own
businesses, in many cases, who belong to organizations that are significant
sources of campaign contributions. The next group, the next nine rungs on
the
ladder, are not in the same class as a whole and they don't have the kind of
clout in Washington that people do in the top 1 percent.

GROSS: My guest is New York Times reporter David Cay Johnston. He won a
Pulitzer Prize last month for his reporting on tax inequities and loopholes.
More after a break. This is FRESH AIR.

(Soundbite of music)

GROSS: My guest is David Cay Johnston and he won a Pulitzer Prize this year
for beat reporting for coverage of inequities and loopholes in the tax code.

Now you wrote a couple of articles about the estate tax that had a lot of
impact. President Bush has said he wants to repeal the estate tax and one
reason why he gave for it, he said he wanted to save the family farm. You
investigated whether repealing the estate tax would help save the family
farm.
What did you find?

Mr. JOHNSTON: Well, I went out to Iowa and I interviewed about two dozen
Republican farmers who laughed at me. One of them said to me, `Boy, you
city
boys are really dumb, aren't you? You swallow that stuff, huh?' And these
guys thought it was just hilarious that we would believe that. And I'd say
to
them, `Well, excuse me. This is the leader of your party.' And they'd say,
`Yeah, well, he's trying to get something else and he's just using us.' In
the Midwest, grain belt states, 100 percent of the income farmers receive
now
comes in the form of subsidies from Washington for price supports.
Nationwide
it's about 50 percent of farm income. And what farmers want are better
prices
for their crops. Under current law, you can pass about $4.1 million of farm
property to your heirs without paying income taxes if they want to continue
farming. If they don't want to continue farming, you can pass $2.6 million.
The average net worth of farms in Iowa is $1.2 million. The existing law,
without any special breaks for farmers, covers farmers, and the American
Farm
Bureau Federation could not supply us with a single example anywhere in
America of a farm lost to estate taxes.

GROSS: Did you go back and talk to the Bush administration about that?

Mr. JOHNSTON: The position of the Bush administration is that farmers have
to
plan for the tax. They shouldn't have to do so. They don't call it the
estate tax. They call it the death tax. And they argue that it is immoral
to
tax someone at death.

GROSS: After your article saying that there's no evidence that the estate
tax
has ever forced a family to lose its farm, what did the Bush administration
have to say? Did they respond to the article?

Mr. JOHNSTON: Not directly. They stopped using farms as an example in
their
rhetoric. They continued to push for repeal of it. And in recent days in
Washington, I've noticed that a number of congressmen are back to saying
that
we need to repeal the estate tax in order to save the family farm. That
is--once you get inside the Beltway, you're in another universe and there's
often little relationship between the blather you hear from politicians and
the facts that exist out in the real world.

GROSS: In another article you reported that if the estate tax was repealed
in
the way that it's been proposed by President Bush, the very rich could
legally
reduce their income tax bills. What did you report about that?

Mr. JOHNSTON: Well, there are a lot of different ways you could repeal the
estate tax. The president's proposal would eliminate all reporting at death
and it would also repeal something called the gift tax. You have to have a
gift tax in order to keep the integrity of the estate tax. And we broke a
story in January that the way in which the president designed his plan would
allow very wealthy people to avoid significant income taxes by legally
making
gifts to relatives and getting the money back, tax-free, when these older
relatives died. Say you have a stock that you bought for $1 that's now
worth

$100 million. If you want to sell it, you'd owe $20 million in capital
gains
taxes. So you give it to Aunt Martha, who's in her 80s. Aunt Martha dies.
It comes back to you. Under the president's plan, you'd now have your $100
million and you would owe no income taxes on that money. We also showed how
people would be able to avoid state level income taxes on their investment
income and how you could cut your spouse out of all of your money and leave
your spouse penniless under the president's plan. Say, you know, you don't
like your wife and you have a girlfriend. You could give all her money to
you
with no reporting or knowledge and she could end up with the money,
undermining state laws designed to protect spouses in the ownership of
marital
property.

At the time, the story was very heavily criticized by people who said that's
just wrong, and they said that because they had not read the actual
legislation. Subsequently, Congress had its tax experts examine this issue
and they concluded that, under the president's plan, over the next 10 years,
wealthy Americans could use these techniques to avoid $185 billion of income
taxes. As a result of our story and the finding by Congress, the president
then altered his plan and removed all of these provisions that would have
allowed these legal gains to be played by the very wealthy to avoid income
taxes by manipulating estate taxes.

GROSS: The president would like to repeal the estate tax, but there's also
a
movement to just reform the estate tax, to change it. What are some of the
proposals to change the estate tax instead of repealing it?

Mr. JOHNSTON: The estate tax is a tax on your right to transfer wealth and
property to someone else. Congress has long provided for exemptions, and
currently the exemption is such that 98 percent of Americans aren't subject
to
the estate tax. Only the top 2 percent are. But the exemptions have not
kept
pace with inflation. The $600,000 threshold set in 1986 should today be
about $1 million, but the threshold now is only $675,000. In addition,
there's been a fundamental change in the way people hold their retirement
assets. It used to be most people got a pension and didn't own the asset.
Now people own their retirement accounts and live off the income from those
and the estate tax has not been adjusted to deal with that. So there are a
lot of people who propose that we should raise the threshold on the estate
tax
to $1 million immediately, perhaps to as high as $5 million for a couple, in
order to keep this tax relatively narrowly focused on people with very
substantial wealth, a lot of which has never been taxed during their
lifetime.

GROSS: Any predictions on what the likely outcome of the estate tax debate
is
going to be?

Mr. JOHNSTON: Well, Terry, tax systems have to follow the economic order.
And because of the way the world economy is changing, I don't expect that we
will see outright repeal of the estate tax. You know, it used to be that in
an agrarian world, the king or whoever the ruler was took part of your crops
and that's how the state financed itself. Once we went to an industrial
wage-based economy, we and most of the rest of the industrial world, quickly
went to an income tax system. Well, we're moving from a national industrial
wage-based economy to a global, digital, asset-based economy. And the tax
system is going to need to recognize that assets are a fundamental aspect of
the economic future and the tax system is going to somehow have to address
that. So I'll be surprised if we have outright repeal of the estate tax.

GROSS: If the president's tax cuts go through, or if most of them go
through,
how much less money would we be collecting in taxes, approximately?

Mr. JOHNSTON: Well, over the next 10 years, tax revenues would go down by
about $1.35 billion. At least that's the best estimate. But going forward
from there, when the tax cuts are fully phased in, because most of them are
delayed to the end of the 10 years ahead of us, revenues would drop very
sharply. And so the question isn't really can Washington adjust its
spending
to deal with the next 10 years. We can certainly choose to do that, and we
just choose to buy different services or fewer services for ourselves
through
our government. But going forward from 2011, where the tax cuts really take
full effect, the revenue loss to the government would be significant and it
would require some fundamental rethinking about how the federal government
operates if we're going to have a balanced budget going forward.

GROSS: What kind of fundamental rethinking?

Mr. JOHNSTON: Well, Washington now, since World War II, has been run on the
notion that we want the federal government to be a major supplier of
services
in this country. Now there are four basic areas where the government spends
most of its money: the military, interest on the national debt, Medicare
and
Social Security. And that's about 80 percent of federal spending. If you
want to restrict the spending going forward, you restrict income to the
government and then we're going to have to look at how we're going to
finance
the government long run. Clearly, the advocates of less revenue to the
government have taken to heart the statement of the great conservative
philosopher Edmund Burke, who said the revenue of the state is the state.
If
you want the state to be smaller, the most effective way to do that is to
restrict the revenue to the state. So by passing the tax cut today, we're
making budget decisions that are going to continue for a long time into the
future. Now it may be that we'll enter an era here of enormous economic
progress and the government will grow enormously in its revenues and
there'll
undoubtedly be pressure for a new tax cut. It may be that we will end up in
a
situation where we'll either have to go back to borrowing money rather than
taxing for it in order to maintain spending, or we will have to reduce our
spending.

GROSS: Some of the rationale behind the tax cut is that there's been, you
know, budget surpluses and part of that budget surplus comes from the fact
that the stock market has done so well. A lot of people have made a lot of
money in the stock market and paid more in taxes, you know, in recent years.
What happens if the stock market goes into decline and stays that way for an
extended period? How does that affect the logic behind the tax cut?

Mr. JOHNSTON: Well, most of the revenue, first of all, comes from the
income
tax on wages and salaries. That's--more than 80 percent of federal income
tax
revenues comes from that side of the equation. However, the fundamental
question is, I think, a very sound one. Long-term budget projections just
aren't accurate. Ten years ago, the projection was that today we were going
to be in a terrible, terrible situation. We were going to be borrowing
hundreds of billions of dollars a year and interest on the national debt was
going to continue to swell and become the biggest item in the federal
government's budget. Then we raised taxes on high-income people in the
early
'90s. There were a lot of predictions that this would lead to economic
disaster. In fact, that's not how it worked out and the linkage between how
heavily we tax people at the top and how much revenue the government takes
in
is pretty tenuous. So I think to make projections, 10--more than five years
out is pretty tenuous and in all likelihood we will go through an economic
cycle over the next 10 years. No one's repealed the fundamental laws of
economics and we're going to see the government have periods when revenues
go
down and periods when revenues go up.

GROSS: David Cay Johnston covers the tax system for The New York Times.
Last
month he won a Pulitzer Prize for his reporting on tax inequities and
loopholes. He'll be back in the second half of the show. I'm Terry Gross
and
this is FRESH AIR.

(Soundbite of music)

GROSS: Coming up, tax loopholes, the so-called marriage penalty and the
consequences of an understaffed IRS. We continue our conversation with
Pulitzer Prize winning reporter David Cay Johnston. And Maureen Corrigan
reviews "Nickel and Dimed: Or Not Getting by in America" by social critic
and writer Barbara Ehrenreich.

(Soundbite of music)

GROSS: This is FRESH AIR. I'm Terry Gross. As Congress continues with its
complex process on the budget and tax plans, we're talking to New York Times
reporter David Cay Johnston. He won a Pulitzer Prize last month for his
coverage of tax inequities and loopholes.

Let's talk about a loophole that you reported on in March of 2000. This is
one of the articles that won you the Pulitzer. You reported on a loophole
that could cost the Treasury as much as $4 billion a year. What was this
loophole?

Mr. JOHNSTON: Companies that sell property and casualty insurance--that's
the kind of insurance you have on your house in case it burns down or gets
burglarized--have discovered that if they move their parent corporation to
Bermuda--just open a little office there with a few file cabinets--they can
avoid paying taxes on their investment income. And it turns out that's the
only place property and casualty insurers make money. You send in your
check
for the insurance on your house or the business that you run. The company
then goes out and invests that money. They're taxed on that investment
income
every year. And over the next 20 years or so, they will pay out in claims a
hundred percent of what you paid to them in premiums. Well, if you move
your
operation to Bermuda, instead of paying a 35 percent federal income tax on
every dollar of profit you make investing, you can pay zero tax. Now you do
have to pay a 1 percent excise tax when you send the premium out of the
country, but that's a much smaller tax than the income tax.

A number of large insurance companies who don't want to do this because they
would face enormous tax burdens because they've been in business, say, 200
years and have huge, built-up capital gains that would be taxed, because if
you want to leave the US, if you're a company, and set up offshore, you've
got to pay your tax accounts up to date as you leave--have objected to this.
And we found out they were lobbying in Washington to stop other companies
from doing this. There's a fundamental trend, though, by American companies
to do this and, indeed, if I were setting up the next General Electric right
now, I would not domicile it or headquarter it in the United States. I
would
set it up in Bermuda and then I'd put all my operating units in the United
States. I'd make all my profits in the United States, but I would arrange
to
transfer those profits to Bermuda and I would operate in the US without
sharing any of the obligations of citizenship.

GROSS: Is it just Bermuda?

Mr. JOHNSTON: Well, Bermuda is the place of choice to do this. There's a
group of industrial nations who had been fighting what they call these tax
havens, arguing that they are encouraging behavior that's harmful overall to
industrial economies. Interestingly, the Heritage Foundation has taken up
the
cause of these small islands and argued that this tax competition is a good
thing and that places like Bermuda are actually good for the United States
because they encourage the US to keep taxes low on business.

GROSS: So when was this loophole written into the tax code and who put it
there?

Mr. JOHNSTON: Well, like most loopholes in the tax code, it wasn't
expressly
written into the law. It comes out of how one deals with the principles
that
exist in tax law. Because we live in now a global economy--not a national,
industrial economy, but a global economy, it's our policy to encourage
trade.
And, as a result, our policy is that we tax individual Americans on their
worldwide income. You move somewhere else in the world, you still have to
pay US income taxes. But we tax corporations on their domestic income here
in the United States. So just as we've seen a lot of news stories in the
last 10 years about companies moving manufacturing jobs overseas and
investment overseas for tax reasons and keeping those investments overseas,
now we're seeing a movement to move corporate headquarters overseas for the
same fundamental reason that you move to a jurisdiction that is lightly
taxed or not taxed at all, but you conduct your profit-making operations in
the US.

GROSS: So what was the impact of your article on this loophole?

Mr. JOHNSTON: Well, the first thing it did was it brought a lot of
attention
to this issue. It has resulted in a bill that was introduced last year and
was reintroduced this week in Congress designed to minimize this activity
and
to make it unattractive for companies to set up their operations in Bermuda.
That's come under attack from people who argue that it violates fundamental
principles about free trade.

Underlying that, Terry, is a more basic issue that we're not debating in
this
country. And that is since we now live in a global economy, do we want to
continue to tax corporations at all? And if we do, do we want to continue
to
tax them the way that we are because it's creating enormous inequities?
Certain companies that have to operate in the United States or, by size,
operate in the United States face relatively higher burdens than those who
are able, for a variety of technical reasons, to move their corporate
headquarters overseas.

GROSS: My guest is David Cay Johnston. He's a reporter for The New York
Times. Last month, he won a Pulitzer Prize for beat reporting for his
coverage of inequities and loopholes in the US tax code.

Do you think that sometimes, people are for a tax break, assuming that
they're
going to get a big tax break and it'll help them financially and that they
sometimes don't understand who's really getting the benefits of the tax
break
and it's not necessarily them?

Mr. JOHNSTON: Oh, Terry, there's lots of evidence that shows that. And let
me give you one of the best examples of that. Less than 2 percent of
Americans pay estate taxes when they die, but surveys show that 17 percent
of
Americans believe that they have to pay estate taxes, and while I don't
believe in taxi-cab journalism, I made it a point over a couple of weeks to
ask every cabbie in New York City who picked me up what he thought about the
estate tax. And I was absolutely astonished that seven of the eight cabbies
told me that when you die, the American government--all these guys were
immigrants--the American government takes half of what you have. And I
said,
`Well, have you got--are you married?' `Yeah.' `Have you got $1.35
million?'
`Of course not.' `Well, the government doesn't take anything unless you
have
that much money.' `No, no, no, no, no. I heard it on the radio. I heard
it
on the radio.'

And they would cite a couple of the most widely listened to commercial
commentators who were saying, you know, `We've got to stop the estate tax.
It
takes more than half of your money.' And they had no context to understand
that until you've got $3 million on the margin, the government doesn't take
half. And if you do any kind of reasonable planning, you've got to have
about
$20 million of wealth, which puts you in an extraordinarily narrow bracket
of
Americans before the government would take, at your death, half of your
estate.

GROSS: You say that you'd like your article to help the American public
talk
about the real issues and not just the rhetoric. Let's look at what is
often
called the marriage penalty. What is it and is it really just a penalty for
married people?

Mr. JOHNSTON: Well, there's a marriage penalty and there's a much less
discussed marriage bonus. Because we have a progressive income tax, the
more
you make, the more you pay. Then, when you have a two-income couple who
both
have similar high incomes, they pay more in taxes than if they lived
together
as two single people.

On the other hand, if you have one spouse who makes a lot more money than
the
other one--say the second spouse is not at all a primary wage earner, you
actually can end up with a marriage bonus. You pay less in taxes because
you're married.

Now there are a variety of ways to fix this and the legislation currently in
Washington does not fix it. One way to fix it, since almost all tax returns
that are complex now are done on computers, is to simply allow people to
calculate their taxes as if they are married, filing jointly and to have the
computer recalculate it if they were single, divvying up deductions any way
they want between them. And you would then have a neutral system.

There have been other proposals that are somewhat technical by various
experts
in the field on how to make this issue of the marriage penalty and the
marriage bonus go away. But remember, if you want to remove the marriage
penalty in an even-handed way, then you're going to take away the bonus for
some people unless you let them be taxes as single individuals.

Most industrial countries, by the way, tax married couples separately. They
tax you individually on your own income. But the marriage penalty can be
very
severe. If you are a married couple and each make about a hundred thousand
dollars, I think currently, the marriage penalty is around $7,000. So one
could argue that in order to have a license to sleep in the same bed, the
government's charging you a fee of about $20 a day.

GROSS: So because there--for some people, there's a marriage bonus, whereas
for others, there's a marriage penalty, do you see that the rhetoric has
unfairly colored the debate?

Mr. JOHNSTON: Well, I think...

GROSS: The rhetoric which just talks about the marriage penalty and not the
marriage bonus.

Mr. JOHNSTON: Well, I think that what the rhetoric's done is not allowed
people to understand that the proposals in Washington won't eliminate the
marriage penalty. You'll notice, if you listen very carefully, that
the politicians who last year were talking about eliminating the marriage
penalty are now talking about reducing it. And what they're proposing to do
is say, `We'll not count $3,000 of income of the lower-earning member in the
couple in order to reduce the penalty.' Well, that'll help a lot of people
in the 40, $50,000 range, but people in the case who each earn, say, a
hundred
thousand dollars, it doesn't help them hardly at all.

And it's not--that's not real reform. That's the appearance of reform.
It's
not going in and fundamentally fixing the law by making it simpler, making
it
easier to comply and treating taxpayers fairly based on their circumstances.
Whether you make, as a couple, $40,000 or a hundred thousand dollars, why
should the couple who makes $40,000 and they both work be freed of the
marriage penalty, but you continue to impose it on a couple who each earn
a hundred thousand dollars?

GROSS: My guest is New York Times reporter David Cay Johnston. He won a
Pulitzer Prize last month for his reporting on tax inequities and loopholes.
More after a break. This is FRESH AIR.

(Soundbite of music)

GROSS: My guest is David Cay Johnston, and he won a Pulitzer Prize this
year
for beat reporting for coverage of the inequities and loopholes in the US
tax
code. He writes for The New York Times.

The staff of the IRS has been greatly cut back over the past few years and
you've reported that the IRS is going after fewer people who have not paid
their taxes. It's auditing fewer people and the Treasury's losing a lot of
money that way. Is the government saving enough money because of the
cutback
on employees--enough to compensate for the amount of money that it's losing
in
taxes?

Mr. JOHNSTON: Oh, it's not even close. The IRS operates on a budget of,
right now, about $8 billion and it's going to bring in $2 trillion this
year,
so that the administrative overhead costs to the government of collecting
taxes overall is less than 1 percent. MasterCard charges more than that to
the merchant when you charge something at the shopping mall.

The Internal Revenue Service is an agency that has focused on the wrong
issues
for a long time. I reported extensively on how we reduced audits of
high-income people, but what the government's done in doing that is reduced
audits of people who control their income. You and I work for a wage,
Terry.
We get a paycheck. The government gets a report from our employer. Here's
how much Terry Gross got paid last year, and they check it against your tax
return. But if you own your own business, you're in control of what you say
is your income. The government's virtually stopped auditing those
businesses.
If you get money from a trust, from a partnership, if you get what's called
a
K-1 form, the government has made virtually no effort to go after those
people
and to focus on them.

In addition--and I think this is the best evidence of how totally weak and
ineffectual the IRS has become--last November on the front page of The New
York Times, I named 23 businesses who have publicly declared that they do
not
withhold taxes from their workers' paychecks and they have stopped filing
returns with the federal government. It's now more than five months
later--almost six months later. All the IRS has done is written letters to
these businesses saying, `Excuse me, sir. You're supposed to pay your
income
taxes.'

GROSS: And these are businesses that withheld paying their taxes because
they
don't believe they should pay it. They're anti-tax people. This is their
protest.

Mr. JOHNSTON: They believe the tax system is a hoax, that we've all been
tricked and that the way they read the law--or, I should say, they
deliberately misread the law, they contend that the law doesn't make you
liable for income taxes. And every one of the arguments that they've made
have been reviewed by the courts and I've gone and examined them myself, and
not one of them holds up. They're malarkey. But the IRS hasn't done
anything
to these people. So if you're one of the competitors of these guys, look at
the position you're in. You're withholding taxes from your workers'
paychecks. You're paying taxes, payroll taxes, the other side of Social
Security on behalf of your workers, and your competition down the street's
getting a free ride, and the government isn't doing anything. I mean, can
you
imagine if we had written the same story on the front page of The New York
Times and said here's the names of 23 drug dealers in the city of New York
and here's the street corners they work at. Do you think, six months later,
the cops would have done nothing? I don't think the sun would have set
before the cops would have acted.

GROSS: So you say this is a sign of how ineffectual the IRS is now?

Mr. JOHNSTON: Absolutely. The Internal Revenue Service has been stripped
of
resources. The number of tax returns has grown by about 28 percent, while
the
staff of the IRS has fallen by 15 percent. The IRS has all these cumbersome
new rules that Congress enacted in 1998 under the IRS Reform and
Restructuring
Act. Just to collect a tax debt that there's no dispute that it's owed,
they
have to now go through 33 new steps in order to enforce collection of that
tax. It used to be they could use something called a jeopardy assessment
against people like drug dealers and others who they had reason to believe
the
money would disappear. Now they have--and they could do it almost
instantly,
so they could seize money from criminals. Now they have to give them 35
days
notice. Well, I assure you, you give 35 days notice to your local drug
dealer
you're going to seize his million dollars in cash he didn't pay taxes on,
that
you'll never get a penny.

GROSS: Right.

Mr. JOHNSTON: And, in fact, one of the laws passed by Congress in recent
years, the 1997 Tax Reform Act, has been described--we've quoted people in
The
New York Times as calling it "the drug dealers and mobsters tax relief act

of
1997."

GROSS: So what was the logic behind passing it?

Mr. JOHNSTON: Well, this claim that jackbooted thugs from the IRS were out
harassing poor innocent taxpayers. Congress held hearings on this in 1997
and in 1998. We showed in The New York Times, as did other publications who
investigated these witnesses, that a lot of these witnesses were not to be
believed; that some of them were, although not prosecuted, probably should
have been, as major tax criminals; that, fundamentally, their most explosive
testimony they made didn't hold up. And Congress' own investigative arm,
the General Accounting Office, concluded after it investigated this
matter--and, by the way, its initial report was suppressed by the leadership
in Congress, but it did later come out. They concluded that while there
were
anecdotal examples of some individual IRS agents who had behaved improperly,
there was zero evidence, no evidence whatsoever of any systematic abuse of
taxpayers by the Internal Revenue Service.

GROSS: So do you think that the severe cutbacks in staff at the IRS is a
result of the movement in America that both hates taxes and hates the
federal
government for collecting them?

Mr. JOHNSTON: Oh, I think it's a clear movement of that. And I think both
parties are party to this. Taxes have been put into an area that's been so
demonized that no one wants to touch them. And there are only a handful of
people in Washington who will get up and say, as Bob Dole did about 10 years
ago when he slammed his fist on the table, that we need to go after the
people who are not paying, that we need to enforce the law.

In the entire United States, there are only 2,700 tax cops; that is, the
people who are essentially detectives at the IRS who investigate criminal
tax
abuse. They can each do, maybe, two cases a year. Last year, in the whole
United States, we prosecuted about 700 people on the principal criminal
charge of tax evasion. That's just--that's ludicrous. In the city of New
York alone, we have 45,000 police officers. We are not treating tax crimes
as a serious matter in this country and we're not going after people like
the
businessmen who we named in The Times, of whom there are many more now, by
the
way. More and more people have been openly declaring that they're not
paying
taxes and saying, `Gee, it appeared on the front page of The New York Times.
The IRS didn't do anything. What better proof that the tax laws are a
hoax?'

And, at the same time, other people who know the tax system is legitimate
continue to operate without being noticed at all by the federal government
because there's no effort to hunt for those people. The focus at the IRS is
on people who chisel, you know. `Did you take too much on this deduction?
Did you short the government a hundred and fourteen dollars over here?'; not
on the people who make a billion dollars, as one couple did in New York
City,
and don't even file a tax return.

GROSS: Well, people not only on the whole don't like to pay taxes, they
don't
like to read about taxes. Taxes are very complicated things to read about.
No one understands the tax codes. Did you want the tax beat in The New York
Times or was that something you were assigned and reluctantly took on? And
I'll remind our listeners that you've just won a Pulitzer Prize for your
coverage of tax loopholes and the tax code, tax inequities. Yeah.

Mr. JOHNSTON: Terry, when I came to The New York Times in 1995, I
absolutely
wanted to cover the IRS and tax policy and I proposed it to The New York
Times. I think it's one of the really important issues that has not been
well covered. And in my whole career, I've always tried to go cover things
I
didn't think were getting proper attention.

Every one of us has to pay taxes. Nobody likes paying taxes, including me.
And taxes have always been covered in terms of either the blather of
politicians; `Dah-dah-dah-dah-dah-dah, Senator so-and-so said yesterday' or
advice on how to nickel and dime your way to a smaller tax bill. There have
never been consistent beat coverage on an investigative and enterprise level
about how the tax system works. Over the years, there were some great
investigative pieces about the tax system, particularly in the Philadelphia
Inquirer, where I worked for seven years. And the editor of that paper,
when
they were doing their tax coverage, became the managing editor of The New
York Times, brought me into The New York Times and wanted, also, to do this

subject.

There certainly were editors at The Times when I came who thought you can't
do
this. It's boring. And looking back at my clips, some of my stories of
1995
and '96 were pretty boring when I was, basically, going to my own individual
tax school and making readers suffer through my papers. But there came a
point when the principles became very clear. And then once you understand
the
principles of tax and you have good sources in the tax world, which is full
of
people who very much want fairness and equity and transparency, then you can
take it out of the high priest's language and you can talk in the vernacular
about the tax system. And that's what I've been trying to do. I've been
trying to bring sound insights to an issue that's mostly covered with
soundbites.

GROSS: Well, I want to congratulate you on the Pulitzer Prize and thank you
very much for talking with us about taxes.

Mr. JOHNSTON: Thank you.

GROSS: David Cay Johnston covers the tax system for The New York Times.
Last
month, he won a Pulitzer Prize for his coverage of tax inequities and
loopholes.

Coming up, Maureen Corrigan reviews Barbara Ehrenreich's new book, "Nickel
and Dimed." This is FRESH AIR.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Review: Barbara Ehrenreich's book, "Nickel and Dimed"
TERRY GROSS, host:

Barbara Ehrenreich has a new book called "Nickel and Dimed." And according
to
Ehrenreich, that's the way a lot of working Americans feel these days. Book
critic Maureen Corrigan has this review.

MAUREEN CORRIGAN reporting:

Leave it to conservative commentator George Will to turn me into a Maoist.
I
was watching "This Week" with Cokie Roberts and Sam Donaldson last Sunday
morning and Will was opining about the sit-in protest at Harvard, which was
then going into its third week. A group of students had occupied the
administration building and were demanding that Harvard's lowest paid
workers,
mainly janitors, dining hall workers and security guards, be paid the
minimum
living wage of $10.25 and hour. That's what the Cambridge City Council
determined a person would need to live in the surrounding area. The
student-led call to conscience ended successfully this past Tuesday when
Harvard agreed to re-examine university wage policies.

Last Sunday, however, George Will, whose modus operandi is to patronize
anything or anyone he disagrees with, was characteristically patronizing the
students, chalking the sit-in and accompanying demonstrations up to spring
fever. Will also expressed disdain that Harvard's minimum wage workers
wanted
more money, instead of being grateful for the university's largess in
offering
them access to classes in their spare time.

That's when I was tempted to think that maybe Mao's cultural revolution
wasn't
such a bad idea after all. I imagined George Will in overalls, pushing a
broom, scrubbing toilets. I wondered how motivated janitor George would be
to
improve his mind after working all day cleaning up other people's messes?
Barbara Ehrenreich knows the answer.

In 1998, Ehrenreich, the respected left-of-center social critic and writer,
became curious about how the millions of mostly women who were about to be
nudged into the labor market by welfare reforms, were going to make ends
meet
on minimum wage jobs averaging 6 or $7 an hour. So like a latter-day Nellie
Bly, Ehrenreich decided the best way to research the story was to live it,
to
the extent that an educated upper-middle-class woman could. Ehrenreich
immersed herself in the world of the minimum wage worker. She left home and
family, moved into crummy apartments and motels across the country and found
work as a nursing home aide, waitress, cleaning woman, hotel maid and, as
she
dubs it, `wall Martian.'

Ehrenreich describes her odyssey into the economic underworld of the working
poor in her absorbing new book, "Nickel and Dimed." Apart from its profound
insights into what it's like to sweat for a living and still not make ends
meet, "Nickel and Dimed" is remarkable for its dispassionate, occasionally
wry tone. This book could have turned into a voyeuristic exercise in
breast-beating, but Ehrenreich realizes the story here is not about her own
sensitivity. It's about the rough texture of the daily lives of the working
poor.

Some of Ehrenreich's co-workers are funny, some stupid, some resilient, some
just plain scary. All, as Ehrenreich says on the very last page of "Nickel
and
Dimed," where she allows herself some outrage, are the major philanthropists
of our society. They neglect their own children so that the children of
others will be cared for. They live in substandard housing so that other
homes will be shiny and perfect.

"Nickel and Dimed" is also woefully fascinating. It's hard to isolate any
one
section as particularly choice. But perhaps because housework is familiar,
I
found myself especially caught up in the chapter where Ehrenreich works as a
maid for a cleaning service in Maine. She viscerally describes the job
orientation process where she watches chirpy training videos on how to dust,
and the actual work where she's part of a maid team that fights losing
battles
against soap scum, counter crud and excrement, all for $6.65 an hour. I
don't
know what it is about the American upper-class, Ehrenreich drolly observes
while cleaning bathrooms, but they seem to be shedding their pubic hair at
an
alarming rate.

What else did Ehrenreich learn? That no work, no matter how lowly, is ever
unskilled; that even a PhD-holding crusader like herself finds, after a few
days working as a waitress, that something loathsome and servile infects her
so she doesn't stand up for a co-worker accused of stealing. Ehrenreich
discovers she cares about doing a good job sorting clothes at Wal-Mart and
scraping dishes at a nursing home, not because the work itself is ennobling,
but because, for better or worse, it becomes part of her identity. And
ultimately, she realizes that working two low-wage jobs in today's America
still won't pay the bills.

And what did those Harvard students learn, I wonder? Certainly something
about the power of organized protest and maybe also something about respect
for invisible labor. A detail of the story about the end of the sit-in in
Tuesday's New York Times that I really liked was that the students bagged
their own garbage and vacuumed the halls of the administration building when
the sit-in ended. Somebody had to do it. Somebody, if not George Will,
always has to do it.

GROSS: Maureen Corrigan teaches literature at Georgetown University. She
reviewed "Nickel and Dimed" by Barbara Ehrenreich.

(Credits)

GROSS: I'm Terry Gross.
Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.