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May 28, 2008
Tax Analysts Exclusive -- Conversations: David Cay Johnston
Joseph J. Thorndike and Christopher Bergin

Full Text Published by Tax AnalystsTM

Reporter David Cay Johnston (Photo by Derek Squires)For 13 years, David Cay Johnston covered taxes for The New York Times, winning a Pulitzer Prize for beat reporting in 2001. In April he left the Times to focus on new projects. Joseph Thorndike and Christopher Bergin interviewed Johnston on his last day at the Times, and later by e-mail.

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Tax Analysts: Why are you leaving the Times?

David Cay Johnston: Bigger opportunities. Working for The New York Times has been the greatest honor of my life. But they offered a buyout, which reduced any risk. And the minute I announced that I was leaving -- with no prospects in sight -- to do books, documentaries, and magazine pieces, the phone calls and the offers just came pouring in. To my astonishment.

TA: How did you come to the tax beat at the Times?

Johnston: The day that Ronald Reagan signed the 1986 tax reform act, when I reported for the LA Times, I was driving in a car near the Los Angeles airport and I was listening to the signing ceremony live on the radio. And I thought, "It's too bad my dad didn't live long enough to see that I'm going to be paying taxes at the same rate as the Rockefellers." And at that point I thought, "You know, all the news coverage is about lowering the top marginal tax rate. But I'm going to pay the same taxes. This is nonsense. Why is the media constantly worried about the top rate instead of ordinary people? What is wrong with us?"

In 1988 I went to The Philadelphia Inquirer to cover the casino industry. [ Inquirer editor] Gene Roberts and I talked about how he would like to do taxes on an ongoing basis, not just big projects. I poked around for a while, and then Roberts brought me along in 1995 after he had moved to the Times [as managing editor].

Gene's idea was, you need to have steady ongoing coverage of taxes. Mine was, you need to ignore what the politicians say and cover how the system actually works. So when I came on staff, the Times business editor (who is now a managing editor of the paper) said to me, "Call this number and they'll help you arrange to move to Washington." I told him I wasn't moving to Washington. "That's the whole point -- I'm going to cover it from here," I said. I need to have some distance so I don't get caught in the maelstrom. That was my whole idea.

I was told by some other reporters that you can't cover the IRS, that it's easier to cover the National Security Agency than the IRS. But I said, "I just don't believe that." It just might be difficult.

The real problem was finding people to make stories come alive. I figured out the problem with the alternative minimum tax in 1996, but it wasn't until January 1999 when I did the big AMT story that I found the family that made it come to life. That was always the most difficult part: I'd recognize a problem, but then I had to find human beings.

TA: How did you find those people for the AMT story?

Johnston: Tax Notes. There was a brief mention of their case. Just a routine report.

When I got hired by The New York Times, I went to Don Bartlett and Jim Steele [investigative reporters at the Inquirer who had written extensively about tax]. I remember standing in their office at the Inquirer and saying, "I think I know what I'm doing here, but of course I really don't. What do I need to do?" And they turned to their wall of Tax Notes in the white binders and said, "All you need is this. Just read this religiously and you'll do fine." And they were exactly right.

Back in 1988 when I went to the Inquirer to cover the gambling industry and write my first book, I called Allan Sloan (now at Fortune) and said I needed a little help because I wasn't a business reporter. And he had me come up to Newsweek, where he was working. We went downstairs and got a cup of coffee, and he said, "Here's everything you need to know: Study the 10-K and the index to exhibits." Well, that was right. If you did that, you could find everything. All the family jewels and secrets were in the SEC documents. I mean, there were others -- there were S-1s and S-4s -- but that was the key: You just had to read the documents and you could figure it out.

TA: What's wrong with the tax system today?

Johnston: We have created a tax monster. I don't know anybody who defends our current tax system -- anybody. We have used taxes inappropriately to achieve political, ideological, and social goals. We have sent a strong, clear, unmistakable message to the executives of very large corporations: "Get your assets out of the United States, get your jobs out of the United States, get your intellectual property out of the United States, and you'll prosper." This isn't bad public policy; this is self-destructive public policy that no thoughtful, democratic government should have. And it is wrapped up in the guise of creating jobs. That's the constant mantra. There is an enormous amount of game-playing going on in the tax system to protect those people whose lobbyists have gotten to the right place. There is this enormous outsize influence of the financial companies in the tax system. And there is this absolutely corrupt -- in the institutional sense -- handcuffing of law enforcement.

We're completely missing the basics. The purpose of the tax system is to raise the revenue so that we can live in a civilized society where we can be free. It is not to save the jobs of people in the auto industry or to help mothers who work or to allow Warren Buffett and Jack Welch and Donald Trump -- both personally and through their companies -- to incur a tax liability today that they get to pay 20 or 30 years from now when the money is worth half of what it is now.

The right-wingers are exactly right that our tax system is ruining our economy. Boy, are they right about that one. The problem is that their solutions would make it worse. And at the core of this is a deeper problem: Are we going to be a democratic society? Are we going to govern ourselves, or are we going to outsource the duties of citizenship? Right now we're outsourcing -- to the political donor class -- the rulemaking in our society. The rules are getting totally distorted while the donor class pursues their interests to the detriment of everybody else. But in the long run, they're worse off, too. Because if we're all healthier and wealthier, we will be a wealthier society and the wealthy will be better off.

There's this wonderful and strange book, For Good or Evil, by an antitax guy named Charles Adams. It's a history of the world through tax instead of wars. It's really a terrific book.

The one thing Adams fundamentally implies, no matter what you think of his work otherwise, is that successful tax systems flow from the economic order, they do not cut across it. They grease the wheels of commerce, they don't throw sand in the gears. That's the meta-message from his book. Well, we're throwing sand in the gears as fast as we can. And this is just disastrous for us. And we're poorer for it.

TA: How does the tax system need to change to reflect the new economic environment?

Johnston: You've got to tax the things you can tax. This is the problem with taxing capital. We've set in place rules that capital can move freely across borders. But labor can't move even if you want it to.

TA: So we can't tax capital anymore?

Johnston: Not the way we've got it set up now, no. Not fairly, not thoroughly.

TA: What can we tax?

Johnston: Well, look at what we're doing very well: We're taxing wages. We're very efficient and very effective at it. So maybe we should just go to a national wage tax. The problem is, some people don't have wages. How are you going to tax them?

We certainly can't have a national retail sales tax. People will be furtively slipping into buildings to buy diamond rings and mink coats and perfume, instead of drugs. We'll have a black market, and it will just be awful.

We could heavily tax fuel. Even Forbes magazine has said that we should tax carbon. We could tax electricity, water, bits of information on the Internet. But we need to have a fundamental breakthrough in what and how we tax. And the principle we have to follow is that taxation has to be based on ability to pay, which is arguably the most conservative and long-standing economic principle in Western civilization, the very concept that gave us democracy 2,500 years ago. So we need to tax a proxy for wealth.

TA: Let's talk about the tax policy process. What's your assessment of the Treasury Department? Historically, it's been the defender of the fisc. Does it still play that role?

Johnston: No one is defending the fisc. It isn't even on the agenda to defend the fisc. And the last person at Treasury who said anything to defend the fisc was Paul O'Neill when he expressed some concern that there was substantial and growing tax cheating by the very rich. Nobody's talking about the fisc.

The problem isn't just Treasury. Politicians have to operate in an environment, and our current environment has totally demonized taxes. I've been giving these college lectures all across America. I actually had a student at a major university ask me, "What does the government do with all its tax money? Do they just burn it or dump it in the ocean?" There is no connection for many people between paying taxes and paying for a war, or the FBI, or bridges and highways, or anything else.

TA: What about the IRS today?

Johnston: Awful. Morale is bad. We have these totally unreasonable expectations of the IRS. We have them going after all these single mothers and poor people. Some of them are gaming the system, and I understand that. But if you caught everyone in the world who is actually cheating on the earned income tax credit, it looks like you're talking about single-digit billions of dollars. We've got individual companies who have probably cheated the government out of that much over time. But it's beyond the capacity of the agency to go after these companies, as shown by the Joint Committee's four-volume report following up on my story revealing that Enron did not pay taxes. The committee staff said the machinations of Enron were just too complex for the IRS to understand. And even when the devices are understood, they strain the system. What an awful job. It's like being a police officer and told to patrol speeders on the highways while riding a bicycle.

We should have a tax agency that's thinking strategically and is given the right tools, both legal and technological, for the job.

TA: Are we ever going to get that sort of agency?

Johnston: This is just a nutty system, and you're never going to have really smart law enforcement. I've talked to people in Sweden and Britain and other places, and they're no better at it than we are. You need to have a system that's self-reinforcing and much simpler.

TA: The IRS seems torn between two jobs: customer service and enforcement. Can the agency really do them both? And do them both well?

Johnston: Sure. The IRS is somewhat like a news organization in that it tends to play gotcha. The system reinforces and encourages that. But it ought to be much more about collecting the right amount of tax -- vigorously and without fear or favor.

This system of former IRS guys going and making the private deals is outrageous. It's not corrupt in the sense that they don't pay anyone any money. It's just understood that they will get good jobs when they leave, have favors done on their behalf. It's just wholly and totally inappropriate. We've got to stop this revolving-door business.

The IRS has become less and less effective in every area except in collecting taxes on wage earners. That's unfair to wage earners, and it's damaging to society as a whole, and it breeds disrespect for enforcement. But you've got to change the tax system as it applies to these other people, either through independent reporting or other devices. You can't blame the IRS for that. It's Congress, Congress, Congress. The IRS agents are just the tax police. They just do what they're told. The parameters are set by Congress and the leaders of the administration.

TA: So this is a tax system that can't be enforced, even by the best sort of tax police?

Johnston: We can enforce it. If we have enough people. If we have the right reporting requirements. We could just disallow everything that's connected with secrecy. We have to change the rules so people can't hide things.

TA: In your books, you call for tax simplification. But the dynamics of democracy seem to run in the opposite direction. Is real simplification even possible?

Johnston: Sure it is. The reason the system is complicated is favors. We have to get away from the idea of favors. For example, the Canadians and the Europeans don't have the favors for homeownership that we have, and yet Canada's homeownership rates are roughly the same. Take 'em away -- and in so doing, take away the artificial inflating of home prices because of tax rules.

TA: But how do we keep the favors from creeping back into the system?

Johnston: That's a function of political culture. If we went to a national retail sales tax, as soon as the sunglasses industry was in trouble, they'd be in Washington saying, "If you just give us a brief exemption from the sales tax, everything would be wonderful." It will get larded up. The only way to change that is political culture. We need to make it politically unacceptable to do that. Can we change our political culture that way? I don't know.

TA: You identify yourself as a Republican . . .

Johnston: I never identify myself as a Republican. I'm a registered Republican.

TA: Ok, point taken, but you sound an awful lot like the "new populists" that have made such a splash in the Democratic Party.

Johnston: I have a very complicated set of views of the world. Let me give you two examples. I am very, very unhappy about all the crimes committed with handguns, and I tend to be on the side of all the cops who want to restrict handguns. But I read the Second Amendment as saying that you, as an individual, have a right to have a weapon, anachronistic as that is today. I don't object to the death penalty, but I do object vehemently to the way we impose it, which often fails to address paid kill-the-witness and other commercial murders and which has clearly resulted in innocent people being executed, all of them poor or poorly defended. I'm not in favor of more government. I'd like to have the smallest possible government that nourishes a healthy society.

We should be focused in our society, first and foremost, on making sure that everybody gets a fair chance at success. We shouldn't be funding poor kids' schools less than rich kids' schools -- we should be doing the opposite. We shouldn't be erecting these huge financial obstacles to higher education -- we should be doing the opposite, unless we want America to be poorer in the future.

We also need to get rid of all these incredibly ridiculous government funding programs all over the place, especially all of the devices I have exposed that give your and my tax dollars to the richest among us. I look at all sorts of things that government is doing and think, "What are we doing this for?" I want to see less government. I am not willing to work one minute to give my tax dollars to Warren Buffett and Donald Trump and Tyco. They should earn it in the marketplace, not get gifts from the taxpayers, as they all do now.

I don't fit anybody's mold.

TA: What's the most encouraging development you've seen in your 13 years of covering taxes?

Johnston: I'll tell you exactly what it is. There are several polls now that show that a majority of people believe that the tax system is designed to benefit those at the top. If a majority of people believe that, then that's my work.

When I started reporting on taxes, I had no idea that was what the system actually does, that it takes from the many to enrich the few at the top. Like almost everyone else, I bought into the popular belief that the tax system benefits those down the economic ladder. If you just look at individual income taxes in isolation, you get a distorted picture. You have to look at the whole system, not just the income tax, to understand that we have a socialist redistribution system that is not trickle-down, but Niagara-up.

I think I've had a significant public effect in telling people that the IRS is hamstrung and that many of the tax laws favor the rich. The change that I think I've wrought is that a lot of people now understand that the problem is systemic. This is not just a favor here or there -- there is a process under way to impose taxes and burdens on you and relieve them for people who are the greatest beneficiaries of living in this civilization.

TA: So the most encouraging development is that more people understand the most discouraging development?

Johnston: Exactly. [chuckles].

TA: So are we approaching a moment of real change? Will this shift in public understanding allow for real reform?

Johnston: I think we have dug ourselves an enormously deep hole. It's going to be a long time getting out of it. Probably the rest of my life, and I'm an optimist about how long I'm going to live. But there are lots of people looking around after almost 30 years of these dysfunctional economic policies that President Reagan set in motion, saying, "Where's the beef?" Yes. I think you're going to see this idolizing of the rich, just for being rich, disappear for a time.

The most discouraging thing is that the national narrative about our tax system, sustained by the most widely influential people in the news business, continues to be the same utter nonsense. In journalism, if there's an accepted national narrative, even if it's as unreal as the Easter Bunny, so long as you stick to that narrative, you never get in trouble.

TA: And what's that narrative?

Johnston: That if we raise taxes on the rich, it will destroy our economy and cost jobs. And that the Democrats want to do that because they think that it will help some people at the bottom, but it really won't. And that the Republicans want to create a better future for us by reducing taxes so we will all have a more abundant future.