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Tuesday, April 15, 2014

The Problem With U.S. Tax Policies

The Internal Revenue Service building in Washington is shown, March 22, 2013. (Susan Walsh/AP)

The Internal Revenue Service building in Washington is shown, March 22, 2013. (Susan Walsh/AP)

Tax expert David Cay Johnston says it’s easy to fool the IRS, but there’s one catch: “you have to be rich.”

Johnston says Congress keeps passing laws that make the tax code increasingly complex, while at the same time it’s cut funding for the IRS, making it very hard for the agency to inspect returns properly.

Still, says Johnston, it’s almost impossible to cheat on your taxes if you earn your living in wages, because most taxes are deducted from your check before you are paid. On the other hand, people who own business and those who make most of their money from investment “self-report” their income, which creates many opportunities for mistakes and for cheating.

Johnson says there is a fundamental problem with our tax code — it’s not structured for growth and job creation; it’s structured to reward speculation and cash hoarding.

“What we have is a tax system designed for the industrial economy of the 20th century, and we need one for the 21st century, but no one in Washington is serious about that kind of major reform,” he tells Here & Now.

Capital Gains Shares by Income (IRS)


  • David Cay Johnston, investigative reporter who won a Pulitzer Prize while at The New York Times. He teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal“, “Free Lunch” and “The Fine Print” and editor of the new anthology “Divided: The Perils of Our Growing Inequality.” He tweets @DavidCayJ.



It's HERE AND NOW, and it's tax day. Some post offices are staying open later today. Polls show nearly a quarter of us wait until the last minute to file after tackling a more and more complicated code. Now most people think they pay too much in taxes, but our next guest says there's a group that doesn't pay enough and that taxes add to the problem of income inequality.

David Cay Johnston is the Pulitzer Prize-winning reporter and teacher at Syracuse University College of Law. His latest book is an anthology. It's called "Divided: The Perils of Our Growing Inequality." He joins us in the studio. David, welcome.

DAVID CAY JOHNSTON: Glad to be here.

YOUNG: And so as I said, everyone thinks they pay too much, but you...

JOHNSTON: Me, too.

YOUNG: You looked at a recent report from the IRS. Broadly, what did it find?

JOHNSTON: Well, it showed that - you're talking about the capital gains report. That capital gains, the money you get from buying stocks or other assets at a low price and selling at a high price, have grown enormously in this country. But the way the pie is sliced has changed. So the bottom 90 percent of Americans, that's basically whoever makes less than $100,000 a year, their slice of the pie is so much smaller that even though the pie is 40 percent bigger, the amount of pie they're getting has been cut in half.

YOUNG: Well wait a second, you said capital gains, that's money from buying and selling stocks, for instance.

JOHNSTON: And other things, yeah.

YOUNG: It's - well yeah, it's money from selling homes that you've owned...

JOHNSTON: Almost all of it's stocks, though.

YOUNG: See that's...

JOHNSTON: The overwhelming part.

YOUNG: Because some people think, well, wait a minute, capital gains are going to help me, too. Part of that pie is me. And you're saying what? You're saying...

JOHNSTON: I'm saying that the pie is getting bigger and bigger and bigger, but the slice going to the roughly bottom 90 percent of Americans, the data show, has shrunk so much that your helping of pie, even though it's a much bigger pie, your helping of pie has been cut in half. And the people at the very top of the income group, the people who are making $10 million and more, that's about 18,000 households, their piece of the pie has grown from about 22 percent to 44 percent. When you consider how much bigger the pie is, they're doing fabulously well.

YOUNG: Well, and so what - you know, therefore, what does that mean because that's how many people in that bracket make their income, they buy and sell stocks. They buy and sell businesses.

JOHNSTON: Exactly.

YOUNG: So if it just so happens that they're making more by doing that, what...?

JOHNSTON: Well, here's what's changed. Remember President Bush once talked about an ownership society? JP Morgan did a report I think a year ago saying we're becoming a renter-ship society. The average income of the bottom 90 percent of Americans has fallen now back to the level of 1966 - 1966. I'm eligible for Medicare. In 1966, I was in high school. So we've gone nowhere for the bottom 90 percent.

If you go back one year to 2011, and you take - there was a little higher income in 2011 than 1966, for the vast majority, and just count that as one inch, they got $59 more income after all those years, they got one inch. The plutocrat class, this is the small group at the top of in this case 16,000 because it's a different statistical measure, 16,000 households in a country of 316 million people, compared to that one inch their income is up five miles, just a bit under five miles, one inch to file miles.

All the gains are going to the top, and it's not because everybody else got lazy or stupid, it's because we cut taxes at the top. We changed the rules. We put in place all these hidden subsidies I've been exposing for years that take from the many and redistribute upward to the few.

YOUNG: So the results of this pie, as you say, this capital gains pie, which is much bigger, the hugest proportion of it is going to this tiny fraction of Americans. Most of us, the way we're taxed is by wages. We have our taxes taken out of our paycheck, whereas with capital gains earners, you say there's a discrepancy there, as well.

JOHNSTON: Well, we had for a long time no checking up on this unless you were audited. And as a result of my work and that of a couple of other people, Congress finally put in some rules to reduce some of that. But if you're selling a business, no, it's still an honor system. And so as wages have been flat to falling for the vast majority of Americans, and the income from capital gains has been going to the top, you're widening this inequality through government policy.

Wages have been falling for a lot of reasons, you know, encouraging the movement of jobs offshore, decimating unions, changes in the law, and getting rid of welfare as we know it in 1995, which flooded the market with low-skill workers and held down those wages.

YOUNG: Well you say there's another sort of adding of insult to injury, that a lot of people who are wage earners, as they run into economic trouble in the past few years, they start selling whatever assets they had, and that is getting gobbled up by the people who can afford to buy it, who tend to be in that...

JOHNSTON: In 2009, the stock market was at 7,600 on the Dow. It's now at over 16,000. It's been unbelievable growth of the stock market under President Obama. Those people who had plenty of assets and didn't have - weren't constrained by the downturn were able to use their dividends and their cash and other to buy up stocks cheap, and that's why they have done fabulously well. Whereas people who lost their jobs, many of them had to cash in their 401(k)s, and guess what, Congress imposes a 10 percent penalty tax if you're under 59 and a half. It doesn't matter that you're out of work. It doesn't matter that your spouse is out of work. You have this penalty tax. And it's...

YOUNG: Well, they're trying to get people to save.

JOHNSTON: Well yes, but it's one of many - there's no exception, though. It's one of many examples that I've shown over the years of how the law is biased in favor of people at the very top.

YOUNG: Because as you say, these people with the wherewithal turn around and buy up whatever the assets were of those bottom 90 percent.

JOHNSTON: Well, and also they have access to members of Congress that you and I don't have. If you're just an ordinary citizen, and you try to get five minutes with your congressman or senator, lots of luck. If you are representative of some wealthy interest, you won't have much trouble.

YOUNG: Well, and then this is your overarching point, is that it's policy, it's government policy, that makes this inequity and that the people who make policy, you're pretty much saying are in the pocket of that sliver of Americans who are benefiting from the tax code.

JOHNSTON: Yes, and I'm actually sympathetic to them. I mean, if I were to be in Congress, I'm not going to be in Congress, but if I were, I would face the same pressures they face. It's the system that is doing this to them. And it's how the reforms we intended after Watergate and some state scandals have been turned on their head. You know, a shield has been turned into a sword against us.

YOUNG: Well, but let's hear the arguments on the other side. First of all, a rising - a balloon...

JOHNSTON: A rising tide lifts all boats?

YOUNG: Well, a ballooning capital gains pie lifts all boats, I mean, that this will trickle down to jobs.

JOHNSTON: That's - if that were true, and that's what the data showed, I'd be all for it. What the data show isn't trickle down by Niagara up. And more and more capital is being invested in unproductive ways. It's being used in this high-speed trading and to froth the market, which I've been writing about for years, and there's now an excellent book out by Michael Lewis explaining as an insider how this stuff works and how we have a bunch of dishonest markets.

American corporations that are multinational have figured out how to turn the corporate income tax into a profit center. They actually make money off the corporate income tax. But if you're a domestic business, you can't do that. You have to pay your taxes.

YOUNG: Well, so what would you suggest? The idea that you propose of changing the tax code would seem impossible.

JOHNSTON: Well, I've already for a long time that we have a tax system that is very well-defined for the 20th century, when we were an industrial economy. We need to start with a white paper and a whole new approach to taxes. We may even want to get rid of the corporate income tax. We need to study that. We need to tax where the economy is now, which is services, cyberspace, molecules, you know, materials and biotechnology and understand where the economy is going and shift the way we tax. And that requires a lot of intellectual work that isn't being done.

YOUNG: OK, leave it at that, pick it up at another time. David Cay Johnston, Pulitzer Prize-winning reporter, also author of a new book, "Divided: The Perils of Our Growing Inequality." We'll link you to some of his writing. You can look at the capital gains pie at David, thanks as always.

JOHNSTON: Thank you. Transcript provided by NPR, Copyright NPR.

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