Is The Tax System Rigged in Favor of the Super-Rich?

The Tax Policy Center

Published: January 09, 2004     ||   Availability:  Printer-Friendly Version

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LEONARD BURMAN: This is the second in a three-part series the Tax Policy Center has sponsored on tax fairness. The third event will be next Wednesday here at the Urban Institute when we will discuss Rudy Penner's new discussion paper called "Searching for Tax Justice."

I'm delighted to welcome our panel today. David Cay Johnston is a Pulitzer prize-winning tax reporter for the New York Times and has been a finalist for three other Pulitzers, which is remarkable. Having spent most of my career trying to write about taxes in an accessible way, I'm in awe of anyone who can explain the arcana of tax policy in an engaging way.  Jane Gravelle just said David is the great muckraker of tax policy, and I think I can endorse that.

When I was at Treasury, David was known as one of the few reporters who actually understood corporate tax shelters and our efforts to rein them in. The word on David is he does his homework. He would call me up and say, "Have you read this report?" It may be something that was released earlier that day or the day before. And I would say, "Not all of it."  And David would say, "Well, I have, and there's something really interesting on page 233."  And a week or two later there'd be this great article in the New York Times.

David's book is currently number six on amazon.com, remarkable given that it was just listed, I think, a few days ago.  David points out that the other five books are a work of fiction and four diet books –

(Laughter.)

DAVID CAY JOHNSTON: -- which I probably should be reading.

LEONARD BURMAN: There are copies available for purchase and I think David will sign them after the forum.

Bruce Bartlett is another gifted and prolific writer. He's written over a thousand articles op eds and commentaries over the years. He writes a bi-weekly column for Creators Syndicate that is the most widely read on economics by policy makers in the White House and in Congress today.  Bruce is the Senior Fellow at the National Center for Policy Analysis. He's also served as deputy assistant secretary for Economic Policy at the Treasury and has done stints at the White House, the Heritage Foundation and the Joint Economic Committee.

In contrast to these two highly public commentators, John Buckley's done most of his work behind the scenes. He's the Democratic Chief Tax Counsel on the Ways and Means Committee where he's worked hard to educate lawmakers about the intricacies of corporate and individual tax shelters and find ways to stop them. John has also served as chief of staff at the JCT and in the office of House Legislative Counsel where he drafted tax legislation. And in his spare time he teaches at Georgetown Law Center.

Without further ado I'd like to turn the program over to our panel.

DAVID CAY JOHNSTON: Good morning. It's really nice to see all you people, especially because I know that all of you know about taxes and many of you I've gotten to know over the years and I hope to meet others of you.

I going to tell you a little bit about the book, but I want to tell you more about the things that aren't in the book, about how it came about. All throughout my life as a journalist I have tried to write about complex law enforcement agency issues in areas that I felt were not being well covered by other journalists. So there was a period in my life when I covered public utility regulation and got it regularly on the front page both of the Trade Free Press and later the Los Angeles Times. That also was my first introduction to taxes, when a man named C. Arnholt-Smith came up with a wonderful scheme to make passengers of the old Air California airline pay a tax which would not be passed on to the government and he could put it into his pocket while he was in bankruptcy.

Then I was the first reporter to seriously examine the Los Angeles Police Department when to say it was anything other than the most honest, efficient, effective law enforcement agency in the world was absolute heresy. And of course that issue to this day is still the dominant political issue in LA and the police department operates under the jurisdiction of our federal government. I was the first reporter to write seriously about charities as hard news and then casino regulation in New Jersey and the spread of casinos. I wrote a public policy book like this one called "Temples of Chance," which was public policy through the lives of individual people. That book is being made into a movie in Hollywood. They just threw away the policy and kept the characters. I don't think that's going to happen with "Perfectly Legal."

I had the good fortune to work for the Philadelphia Inquirer for a few years and -- Bartlett and James Steele worked there -- and Gene Roberts, the editor and I used to talk about tax coverage. We didn't like it. We didn't think we really understood what was going on. It consisted basically of this politician said this yesterday and oh, here's how to save $5 on your tax return.  Bartlett and Steele did not want me writing about taxes, however, if they were going to be writing about them.

So when Gene became the managing editor of the New York Times, he brought me in and we had this idea that we would cover taxes in a different way. For starters, we'd cover it out of New York and out of my home in Rochester, New York.  And for the first year and a half that I was there I think the immediate editors who worked above me thought this was the craziest notion they'd ever heard in their life.

Being a journalist is a little like being a graduate student with the exception that your papers get read and graded by the public and I'm sure mine would all be graded for the first year and a half as muddy and unreadable.  But in time I was able to begin to learn how the system worked and who the real players were.  There were an enormous number of people who wanted people to understand more about the system and were not getting the message out and that's what I began to focus on. And the most invaluable part of that, frankly, was Tax Notes magazine and I wanted to note that the very best tax reporter in America is not me.  He's sitting over here.  His name is Ryan Donmoyer.  He just hasn't had the same outlets that I've had.

Anyhow, what I wanted to do was explore how does the system work?  Just like I wanted to look at how the LAPD really operates.   How does casino regulation really work? And as I got into this I began to find that things were not as I imagined at all and, being the person that I am, I just go where I see the facts seem to go.  I'm not an ideologue, I don't have a political viewpoint. There are things that I believe would put me way out here and way off there.  I go where the facts seem to lead me based on my interests.

I certainly, like many journalists, tend to want to look at things in terms of how's the underdog doing. I'll plead guilty that that's one of the things I do pay attention to.  It's informed my reporting throughout my life. It's the reason that one time in my life that I hunted down a murderer the police had failed to catch and got a man who was sentenced to prison for life by a judge who said, "Mr Cooks, I believe you're innocent, but I hereby sentence you to life in prison," out of prison.

What I began to learn as I looked through the tax system is that the news media talks about the marginal rates.  What is the top tax rate? Not about average or effective rates, not about the interplay between taxes.  And I began to think about taxes as being like a game of pickup sticks -- you move one stick and the dynamic of the whole pile shifts. And yet Congress treats taxes as if they are discrete levies.

I also began to realize that all this talk about complexity was misleading because so many Americans file what amounts to a postcard tax return.  And we probably could eliminate filing for many of those people if we put our minds to it.  I began to think about should  we exempt as many people as we do from paying taxes?  Is that really a wise policy that we don't require some little bit of tax and participation by people in the income tax system -- I'm talking about Social Security here. And I began to think about what are the other ways to look at numbers?

I went to the University of Chicago's Graduate School of Economics but I do not have a college degree. I do have six years of college. I skipped my freshman and sophomore years and went for six years and they wouldn't give me a degree. They said to me -- I remember going in and they said well, how do we know you can write, and I said well, here's a textbook at the Michigan State University, I wrote it. Well, how do we know you can add numbers?  Well, it's partly about numbers, but no, you can't have a degree.

I began to recognize that the numbers that we were using in the news media were not complete. Numbers only have meaning in relation to another number.  It's the great joke at the end of the Hitchhiker's Guide to the Galaxy, it's a number. Numbers have meaning in relation to each other.  So you have people who will say, well, the top 1 percent make 21 percent of the income and they pay 37 percent of the taxes.  Now they pay 37 percent of the income taxes, but what percentage of their income are they paying? And the top 1 percent -- that's a big group, $300,000 up to a couple of billion.  So what about the fractiles in that group?  How is that broken down?

I also thought about the fact that, as I got into this, that taxes are at the core of our democracy. I believe that the United States of America is the greatest experiment we've ever had in human history and I also believe it doesn't necessarily always have to exist. It is not an entitlement.  If we don't work at it we won't have it for our children or our grandchildren won't have it.  And you cannot have civilization without taxes, as Oliver Wendell Holmes noted, but there are a lot of people who would like to have civilization on the discount. They don't want to pay for it, they want you to pay for it.

Now, there are lots of well-motivated people.  My book is not an attack on the rich.  I don't have anything against rich people at all.  In fact I consider myself to be a wealthy man.  By any reasonable standard in the world, even in America today, I'm a rich guy.  I have to get up and work every day so I'm not independently wealthy but I'm a rich guy.

What I think we need to pay attention to are how the burdens of government affect people's behavior and they do affect behavior.  Do we want a society of strivers, or do we want a society of people who got lucky in how they got their money through a lottery, a lucky investment, family money, something that happened in their life to benefit them? What are we trying to accomplish with our tax system so that we can perpetuate our democracy?

Now, my book asserts that the system has been rigged for the super-rich and I say we have two tax systems in America, separate and unequal.  There is one system for wage earners who are effectively efficiently taxed by the United States of America because of the reporting mechanisms.  The other system is for people who control the information the government gets:  business owners, landlords, investors. They benefit in two ways.  In one way there's no -- there's some but not very good independent reporting and some of that reporting, as I show in the book with the disaster of K-1 matching to partnerships, is ineffective because it's not been carefully thought through the way we have wage and dividend reporting, and home mortgage interest reporting.

The second benefit is that the IRS are the tax police.  The LAPD, they're the street cops.  The SEC, those are the securities cops.  The IRS, they're the police, they're the tax police.  We have only 12,000 civil tax detectives. That's what auditors are. They're detectives.  We have fewer than 3,000 criminal tax detectives for the whole country.

We have radically reduced our effort to go after serious tax cheating in America. The IRS is focused on a trivial pursuit of finding chiseling by people who try to comply, who file a return.  We are not spending money finding non-filers, finding people who seriously cheat the system through layered partnerships and LLCs and other mechanisms.  And we have then handcuffed the tax police from doing their jobs.  All of that affects the nature of our democracy and how it operates.

I want to make one final point and that is there is absolutely nothing wrong with the super rich trying to get the tax law set up for their benefit. Nothing.  It's proper for them to do it.  They should be doing that if that's what they want to do. And the super rich are not monolithic, but who are?

The problem that I identify is that the middle class has withdrawn from politics in America. The working class has withdrawn from politics in America, and as a result members of Congress who spend all this time raising money principally hear from the people who buy access to them, and therefore their concerns have become the concerns of Congress. And that the American people, if they want a better tax system and one that works with our economy so that more of us are prosperous and the idea of America endures, need to become actively involved in their government again.

LEONARD BURMAN: Bruce?

BRUCE BARTLETT: It's always a pleasure to be back here as the token right-winger at Urban Institute. As most of you probably know, I'm a last minute fill-in. There is one advantage to that. You're not expected to have prepared too terribly much in advance.  I was able to skim through David's book but was mostly interested in his comments of which I found almost nothing whatsoever to disagree with. So I'll have to find something.

First of all, I guess if Ken Kies were here -- he may be possibly the richest lobbyist in Washington and he got that way by being one of the people who put tax shelters into the Tax Code.  That's his job. That's what he gets paid to do. And I suppose if he were here perhaps he would be more willing to defend the existence of these things. I'm certainly not going to do that. I think that this is a very bad thing.

One of the things that struck me as I was going through David's book is that, as all economists know, there are two measures of equity:  horizontal and vertical. And when I first got to Washington both were very much in discussion. But over the last 20 years or so, the whole idea of horizontal equity seems to have just disappeared from the discussion. That is to say, equal treatment of equals. And I think that one of the things David has done is sort of put that issue back on the table. I have -- some of you may remember an old book called "The Rape of the Taxpayer" by a guy named Philip M. Stern that raised a lot of the same issues in the context of the tax law at that time and this book had a lot of impact. I think it had a lot to do with the Tax Reform Act of 1976, for example.

But that whole idea seems to have gone by the wayside and I don't really understand precisely why, but it's a perfectly legitimate question. It's one on which I think that both the right and the left probably have more areas of agreement than disagreement -- certainly more areas of agreement than they would on the notion of vertical equity in which I think the twain will never meet. But the fairness of the Tax Code is central to its administrability, if that's the right word. When people -- when I looked over the polls, for example, I find -- you can't totally generalize about this -- but people seem to be more upset when one of their neighbors who they view as a peer seems to be paying a lot less taxes than they are as opposed to the idea that somebody who's a lot richer than they are may not be paying a great deal more percentage-wise.

In other words, I think they really are more concerned about horizontal equity than they are about vertical equity, despite the fact that vertical equity is the primary discussion of debate on tax policy in Washington. It's always the rich versus the poor and that sort of thing rather than how can we make sure that people in roughly the same circumstances are paying roughly the same taxes. And I suspect that there's probably a great deal of even more variation among the wealthy in terms of what they pay than there is among the middle class because it's a function of how hard you want to try to reduce your tax burden.

There are many, many legitimate areas of the Tax Code and the ones that are really important. I think, we need to emphasize are not the really exotic, strange things that are barely comprehensible that David writes about, but stuff like the charitable contributions deduction. I was quite struck by the column he wrote the other day about this new report that showed that the top 400 richest Americans in the aggregate contributed 7 percent of the total amount of charitable giving in the United States in -- what, 2000, was it?

DAVID CAY JOHNSTON: In 2000. It's probably actually more than that because --

BRUCE BARTLETT: Right, exactly. I mean, that's just an astounding figure, and clearly a lot of this is charitable remainder trusts and things of that sort I suppose, I don't really know, but it would certainly be interesting to find out. But I think when you think about the charitable deduction you don't think about that as a tax loophole because, after all, people are giving up the money for some social purpose such as supporting organizations like this one and the one that I work for. But at the same time, clearly if I give a great deal more to charity than David does and our incomes are the same, I'm going to pay less taxes. So it does have an impact on the distribution of taxpaying and I think part of what we need to wrap ourselves around is this whole idea of what is a socially desirable distribution of taxation given that people spend their money in different sorts of ways.

One of the areas of great complexity in the Tax Code for example is that my friends in the Republican Party have become very obsessed over the last few years with giving tax breaks to families. Now, personally I happen to believe that the individual is a more appropriate base for taxation but I have repeatedly lost that debate and so I won't waste any more time on it, because I think it creates a lot more simplification, a lot more fairness, especially for single people such as myself -- (laughter). But anyway, my point is that some of these things are so deeply ingrained now in the tax system that to even have a serious discussion about changing the base of taxation more towards the individual and away from the family is just a waste of time. Neither party is ever going to address that issue. We've made our bed and we're going to have to live with it.

A couple of other things I wanted to mention. David said that the discussion of tax rates in Congress these days is almost entirely on marginal rates and, frankly, I applaud that. When I first started working on tax policy back in the 1970s, the only discussion of taxation was the average effective rate. And I think it's been a great benefit to tax policy discussion in the United States that people -- most people anyway, or at least in Congress -- understand that there's a difference between the two. Before, the tax rate was tax rate and they never conceived that there were two different ways of thinking about it. Of course, as all economists know, it's the marginal rate that affects economic activity, at least unless you're a total Keynesian.

But I think that all of the literature on taxation since the '70s has pretty much reinforced the idea that high marginal tax rates are bad, that's why almost every major country that I know of has reduced its marginal rates over the last 20 years or so. So I think there is a consensus about that. But perhaps we've reached the point now where the truly prohibitive rates have been eliminated and we're now in an area of compression where the difference between the top rate and the bottom rate is so small that we have to really seriously think about tax reform as opposed to tax rate reduction if we want to promote a more growth oriented Tax Code. Personally I'm very much in favor of moving towards a consumption base.

I think it would help a great deal in terms of simplification as well as economic growth, and I think that that issue is going to come back on the table very soon because I do believe we have a serious fiscal problem in this country. And I saw Peter Orszag here, and he's got a new paper out about that. And I see Doug Holtz-Eakin here. He's got a new paper out about the same thing, and the IMF has a new paper out.

So everybody knows that there's a serious fiscal problem but my disagreement with them basically is that they just assume too much in terms of extrapolating from current trends infinitely into the future and it's clear that the trend is going to change. I recall not too many years ago there was some serious discussion in Washington about what will we do when we pay off the national debt? I mean, I just would laugh and shake my head when I'd read these things.

And serious people would talk about it. Alan Greenspan testified about it and I'd just say, it ain't gonna happen. You know, I've been around too long, the deficits of a certain size are political unstable and surpluses are also unstable and I think that we're going to have at some point, probably very soon after the election this year, a massive fiscal restructuring of some kind whatsoever that will inevitably involve a very significant increase in federal revenues.

Now, I personally don't think you can really get the kind of revenue out of the existing tax system by closing tax loopholes and raising rates on the rich. I think that's all nonsense. I think if you want to get something like one percent or more of GDP of additional revenue each year, you've got to have to think about broad based consumption taxes. And I think that at some point we have to have a serious discussion in this country about something like a value added tax to replace the corporate income tax. I think it would solve an enormous number of problems, administrative problems on the corporate side very, very quickly, and it's such a potent revenue raiser you could do a heck of a lot to improve the distribution of the tax burden in lots of ways.

I'm constantly reminded whenever I think about this of Larry Summers' old quip that the reason we don't have a value added tax in this country is because liberals think it's regressive and conservatives think it's a money machine. He said we'll have a value added tax when conservatives figure out that a VAT is regressive and liberals figure out that it's a money machine. It's an absolute true statement I believe. In Europe the liberals there decided they liked having a money machine, and they didn't mind the regressivity so much. In this country we still have to move some more in that direction. But I don't remember what the point was that I was getting at.

There was just one last point that I wanted to make about complexity and the burden that it places on people. There was a GAO report I think two years ago where they looked at people who were using the standard deduction and looked at their other things that they could have deducted like mortgage interest for example, and they found that some 2.2 million people every year are paying more taxes than they have to, simply because they used the standard deduction rather than itemizing. Now, itemizing for most people is not that tough, yet apparently there are people who are either ignorant of the fact that they would save taxes, or it's just too damn much trouble.  And I suspect a lot of it is simply the latter.

So I think that there are -- and there was another GAO report also which found that small businesses overpaid their taxes by $18 billion over some two year period -- I forget which one, '99-2000; I don't remember -- because they miscalculated their taxes. So there is a real cost that's being paid by having complexity and having a simpler Tax Code ought to be something that people care about. But, unfortunately, every time this issue has ever come up in Congress over the time I've been in Washington, it just flounders on the rocks of all, not just the special interests, but the general interest of people that they'd rather keep complexity if they believe it lowers their taxes -- and I think I quoted Len Burman on this the other day -- than have a truly simple tax system. But there's still I think some hay to be made from this and I wish one of the presidential candidates would try to make it an issue. I'll stop.

JOHN BUCKLEY: Well, also thank you for letting me participate in your conference. I've read the book and I hope those in the audience who haven't do so. I think it is really a unique book. Unlike most books for a general audience on tax issues, it doesn't just focus on the personalities, the process or the politics of enacting tax legislation, it attempts to do something far more difficult and look at trying to explain what are arcane issues and how they affect the average individual. It also is unique in that the level of reporting here, I think, is just breathtaking, the facts that are gathered here.

It is the product of four or five years of reporting and you have to be impressed. And also I think it's unique that the conservative and the liberal on this panel find little to quibble about the thrust of the book. It points out there are real serious problems. On the difference between marginal and effective rate, I hate to have disagreement go too far, but I agree marginal rates are important. I also think you want your effective rates close to your marginal rates, because if your effective rates aren't close to your marginal rates that means you have a horizontal inequity I think is the term -- not that I've used it before, but is the proper term.

(Laughter).

But, David and Bruce really are saying very much the same thing I think the book is. You want in an optimum systems to have both your marginal and effective rates close and if your effective rates are much lower than your marginal rates it means something's going on that you really don't like, and he's got ample examples in the book of things that you really don't like.  Although the book's written for a general audience, I think there's things here that are useful for all of us in this room, including many of those who consider ourselves experts in the field, and I'll just point out a few of them.

One of the things he does is talk about the distribution of the tax burden, and he makes the standard argument that the rich may pay a disproportionate amount of the income tax system -- income taxes, but if you look at the overall burden of the taxes, it's roughly proportional. They pay the same proportion of their income that most other people do. The federal income tax may be progressive, most other taxes are regressive and the overall system is fairly neutral.

He also makes a point that I think has been missed, and I guess I'm speaking to economists in the audience now, that our standard way of looking at tax burden is based on reported income. The joint committee looks at AGI, adds back a few items and then figures out what share of the income goes to the top and what goes to the bottom and where the taxes are. He makes the point in this book, which I think is very good, that there's large amounts of unreported income here.

And you take Peter Kellogg, who's one of the poster childs of the book, he had a dramatic tax saving through the use of a captive insurance company. His effective rate under the standard distribution system stayed the same. His income, his reported income to the Internal Revenue Service may have millions dropped and his effective rate stayed at 35 percent the way we analyze it.

The point of the book is that the effective rates at the top are far lower probably than what the standard economic analysis would suggest, and that's due to tax avoidance techniques, or I would argue and the book does as well that high levels of unqualified deferred compensation that aren't reported even though it's purely economic income. And I guess it's a thought that had never occurred to me and I think it's a thought that comes through in the book that I think is extremely interesting and one that should be pursued. He talks a fair bit about tax shelters. If there was any doubt left after the Joint Committee Enron Report that tax shelters and tax avoidance transactions are a problem -- this book eliminates any doubt. It does build on the work done by the Joint Committee and by Senator Levin's subcommittee investigations.

He does add the thought that I've heard expressed elsewhere, but he expands on it a fair bit in the book, that there has been a change in behavior and the change in the legal structure of accounting firms and law firms may have played a large role in the change in behavior that we've seen at the accounting firms and the law firms. And that is the move from general partnerships to limited liability companies. At one time, partners in a law firm or partners in an accounting firm were liable for the misdeeds of their partners, their personal assets were at risk. I believe that engendered a great level of care in when they audited or provided legal advice, because you were responsible.

There has been a shift now totally to -- largely, I think all accounting firms, I think maybe some law firms are still general partners, partnerships, but you have seen this shift in legal liability within the structure, and David makes the point that has had an effect. And that's a point I've never seen before, and I think it's one that's well worth exploring. Anecdotally I've had that told to me but I've just never seen it in public.

His story about the minimum tax is -- I have to say, since I've paid the minimum tax for years, because I have children and we live in the District of Columbia -- I found it quite compelling. He did make the point that I think most people miss, is that the minimum tax has been transformed from a tax that was designed to hit the very high income taxpayers when they use tax shelters and now is one that has been transformed to hit people like me who have children and live in high tax jurisdictions. One of the points in his book that I would disagree with quite strenuously is his notion that repeal of the minimum tax would create opportunities for greater tax avoidance.

All tax avoidance structures that I know of, all flow through our current minimum tax, notwithstanding the cite of Mr. Blattmachr here, who I respect, the minimum tax does nothing to stop tax sheltering, it just simply takes away many of the benefits of the recent tax cuts for families with children who live in the District of Columbia -- or states like the District of Columbia -- and New York, which may explain some of the passion of David has on the issue.

The final point I would make, and it's a point in the book that I have the most respect for -- I have respect for a whole series of things here -- is its treatment of the Internal Revenue Service. You know, at a time when it is extraordinarily popular to vilify the Internal Revenue Service, David takes a completely different approach in his book. He's well aware I think that jack-booted rhetoric works well politically. It would also work well to sell books, David. And I respect the totally different approach that he took here. It's a far more balanced approach to the IRS. He is sharply critical of the Service, for focusing low-income taxpayers and on small, petty tax avoidance transactions, while ignoring some of the very large public tax avoidance transactions we've seen. But he's very clear that they are responding to directions from above.

I think the most telling quote in the entire book is the quote of Mark Weinberger when he was the first assistant secretary for Tax Policy in the current Bush administration, where he was asked his views about swap funds. And swap funds are a technique, you don't have to get into details, to avoid capital gains taxes. You have to have a single block of stock well into hundreds of thousands of dollars before this technique is available to you, and Weinberger's response is, we don't like capital gains taxes, therefore these things are okay. I mean, I'm paraphrasing the quote, but it was essentially that.

It is not surprising the IRS would not explore this technique -- the IRS has the authority to shut down swap funds under current law. You don't really need legislation to do it. It's not surprising that they would shift their resources to doing something else when the directions from above are just about that explicit. On swap funds it's one I think is the worst because Congress tried to shut it down three times in the past. Even Bill Archer who is no fan of capital gains taxes tried to stop swap funds, so, it is kind of a known abuse.

The other thing he does in the book is makes it clear that the IRS is an important institution and needs more resources. That's the first time since the 1986 Senate Finance Committee Bill that I've seen actually the statement that, you know, more resources are needed in the IRS. They're outgunned. They're desperately trying to do their job. And he also goes on to point out that much of the Roth hearings were misdirected, much of the testimony in the Roth hearings has proved to be not substantiated. And the consequences of the changes made by reason of those hearings has largely handicapped legitimate law enforcement. So I could say I think it's -- I think that was a vitally important part of the book and it runs pretty much throughout the book, and it's a part that I applaud very highly.

LEONARD BURMAN: One thing that struck me about the book is that David sees things that the rest of us don't see when you're looking at the same information. He pointed out that in those hearings, the IRS agents were shown behind a screen to protect their identity, which made them look just like Mafia bosses or drug chieftains or something, and didn't do a lot to burnish the image of the IRS. Even though they were the good guys, or should have been.

Does anybody on the panel want to respond to anything that was said before we go to questions?

BRUCE BARTLETT: I'll just make a point about the AMT. I think it's important to remember that this was something that when it was first introduced, people like myself, said that one of the problems with these kinds of things and high tax rates, in general, is that they don't stay put. Incomes rise, we have inflation, and people get pushed up into brackets and into tax structures that were originally put in to be for the rich, and eventually they end up affecting the middle class. And I think that's one reason not to do them, and that's one reason why I favor something like a flat tax where everybody would pay the same rate and you wouldn't have that kind of problem.

JOHN BUCKLEY: Well, then let me respond to that, just to make sure our agreement doesn't go too far here. (Laughs.) But, you know, the AMT may have had the infirmities -- the only reason people pay the AMT today is not for the reasons you suggest, it's for the reasons that the Bush tax cut deliberately used the AMT to cut the cost of the nominal rate cuts.

BRUCE BARTLETT: But still, the threshold was awfully low, even if --

JOHN BUCKLEY: But it was used in 2001 consciously and directly with full knowledge of its impact on the distribution of the rate cuts, that cut the cost of what appeared to be a very large reduction, and the book makes that point fairly clear. And for most people the Bush rate reductions are temporary, and I don't care what the Congress does about the sunsets.

BRUCE BARTLETT: Well, of course everybody uses the AMT to project future revenues that you know are not really going to be there.

JOHN BUCKLEY: Absolutely.

LEONARD BURMAN: I think I'd like to go for questions now. If you could identify yourself, there's a microphone.

VAN OOMS: Thanks, Van Ooms from CED. This is a question for Bruce having to do with the consumption tax. In the 1990s the economy performed extremely well with marginal tax rates a bit higher than where they are now. CBO has done some simulations suggesting that if we sunsetted the tax cuts and went back to those rates, that it might reduce the rate of GDP growth by something along the order of one tenth of one percent or less over the next 30 years or so. In light of that, is your conviction that a consumption tax is the only way that we can raise significant amounts of revenue because you think the consumption tax is simply less visible, or if not, what is the rationale?

BRUCE BARTLETT: Well, it's partly for administrative reasons. I do think it's easier to. At least in theory of course, that always goes without saying. I mean, if we did something like a VAT I'd want to do the subtraction method, but to my knowledge no country does that except maybe Japan. Every other country uses the credit invoice method, which undermines a great deal of the simplicity of having that kind of tax system. But we're all theorists here and we can't always take into account, shouldn't have to take into account, the politics.

But then the other reason is simply that, let's say for the sake of argument that some Democratic candidate who now favors total repeal of the Bush tax cuts does get elected it's almost a certainty you're still going to have a Republican Congress to deal with. So if you want to get a Republican Congress to enact some sort of very significant tax increase, then I think you have to do it in the way that is more sympathetic to their economic view.

They're just not going to raise tax rates on the rich. They're not going raise marginal rates.  They may do a lot of gimmicky stuff like was done so often in the 1980s and all those tax bills that Ronald Reagan signed, and maybe they can cobble together something, you know? Maybe between tax shelters and loophole closing and let's give some more money to the IRS and assume that we get 10 times more revenue than the cost of the outlays. There used to be a figure, maybe somebody here remembers that was always used that you got X percent more revenue from enforcement for every additional dollar that you gave to the IRS. Maybe they can cobble together something like that.

But I think you've also got just this whole international side of the corporate tax is just so totally screwed up that I think you just have to scrap it and put in some kind of system that the corporate community will support in terms of refundability at the border. I think I can see an unholy coalition of different people, Republicans who like consumption taxes, corporate community that likes refundability, and other people who want deficit reduction coming together on something like this. It's just a theory but I will point out that when Texas had a serious revenue problem during the time George Bush was governor there, he appointed a commission to propose reforms for the state and the commission came up with the idea of a state value added tax and George Bush supported it.

It died in the legislature and they ended up doing something else, but I think this is an idea that's been kicking around at least since the Nixon administration and I just think every other country that didn't have a VAT including countries like Japan and Australia and Switzerland have all adopted one, and we're the only ones that don't have one. I just think that at some point the stars will align and that's the way we'll go.

DAVID CAY JOHNSTON: I just want to make my observation about the question that I think is an important point. I think when we talk about taxes, it's important to think about more than the narrow economic issue. Thank goodness the economy has grown. I'm glad I was born in 1948 and not 1910 when my father was. But if we only think in terms of what is the effect on GDP, I think we make a serious mistake in tax policy. You know, you can choose to spend the dollar educating your child so that we have a smarter core of people in the future, as we did with the GI Bill, which has paid unbelievable economic benefits to this country, or you can choose to say, gee, we want to increase GDP right now in some way in the short run.

And so in thinking about tax policy, one of the things that I tried to do in the book was to say, you know you can't think about this in a vacuum. You need to think about the overall economy and what kind of society you want to have and where you want to put your money.

JANE GRAVELLE: Jane Gravelle, Congressional Research Service.

If you had a handful of things that you say had the power to enact into law to attack all these tax shelters and evasion, avoidance by high income people, what would they be? Would they be things in the bills right now like your economic substance doctrine or particular things or what?

DAVID CAY JOHNSTON: Well, nowhere in the book do I advocate either raising taxes on anybody or any particular tax system. What I'm trying to do is provide people with a way to understand what's happening, and I've actually had some readers call me and say, oh, I sort of get it now, I get it now. Clearly, I believe that the tax police -- we need to have more of them.  The simple fact is that if you pull all the cops off the bank robbery squad to write parking tickets, which is what the IRS has done, guess what, bank robberies go up. I'm shocked. I'm absolutely shocked. So we need to do that.

And there is no principled argument for tax cheating. It does not exist. I don't think anybody anywhere in a public policy position will say tax cheating is okay, and yet there are lots of politicians who certainly imply that well, it's really okay because the system isn't fair. It's not fair, it's wrong. If you're a tax cheat on a serious level you should be living in a cage. I clearly believe that, I am a very strong advocate of obedience to the law, in prosecuting people who calculatingly violate the law.

Secondly, tax simplification is absolutely important. The complexity primarily benefits the rich and big corporations. You know, there's a famous picture in Fortune magazine of one of the senior executives of Chrysler, standing next to the company's tax returns, almost as tall as he is, do some of you remember this iconic image? And Fortune presented this as, oh look how complex the Tax Code is. Of course this is mostly computer generated accounting reports, but I looked at that pile and I thought, you know I bet you that pile of paper made them more money than all the Plymouths they built last year.

Thirdly, Bruce is absolutely correct, marginal rates matter. And they affect behavior, and I'll give you a very practical example of that. I suddenly have a great deal of money. I got a lot of money for this book, okay? And I needed an office chair to sit and read in because I have a knockoff used chair -- each chair, actual Eames chair -- I've been in the Eames home is $3,000.  I live in a house designed by a student of Frank Lloyd Wright, so I particularly remember these sorts of things, and I go $3,000 and the government will pay 40 percent of that this year if I buy this for my business and put it in my office. It affects behavior. Marginal rates are important, but marginal rates and effective rates that I discuss a lot in the book being different, those are very important.

We clearly need to reexamine our international tax regime as it applies to corporations. I do want to point out that if we went to a territorial system, corporate taxes as Bob McIntyre has taught me, would rise on corporations. And, in fact, I've called some big companies and said, what do you think, should we go to a territorial system? We'll get back to you.

JOHN BUCKLEY: Yeah --

DAVID CAY JOHNSTON: They never get back to me.

JOHN BUCKLEY: And let me enthusiastically agree with that. A tax exemption for the active business operations of our multinationals overseas would be a tax increase under current law. And --

DAVID CAY JOHNSTON: But on the other hand, our tax system is clearly encouraging people to reinvest their money overseas --

JOHN BUCKLEY: Absolutely.

DAVID CAY JOHNSTON: -- and have jobs overseas. And in a world in which capital moves freely and labor doesn't and cannot -- even if we changed the rules labor can't move the way capital can. We really do need to think about that in terms of what kind of a society we want to have and these -- I don't pretend to have the solutions to this, these are complicated questions...but I really do believe in democracy and I think if we have people who understand the principles of things that we will get out of the collective wisdom of all of us a better tax system that serves us and helps make us a healthier and a wealthier society.

BRUCE BARTLETT: Let me just say something about tax cheating, because I think sometimes people on my side of the fence don't speak out on this issue. I think he's exactly right about tax cheating, it's not right. And you've probably had the experience I have of being on radio shows and having these kooks call in who think the income tax is illegal and that they have no constitutional responsibility to pay the taxes and all that sort of stuff. And I've just always cut them off. I say I don't want to hear that. It doesn't matter. I don't care. If you don't pay your taxes you're going to go to jail, and you're an idiot if you -- even if everything you're saying is exactly correct, it doesn't matter, it's settled law, it's settled issue.

DAVID CAY JOHNSTON: Bruce, there's one unfortunate part of this. I want you to imagine you picked up your Sunday morning Washington Post, since you live here in Washington and there's a front page story by Athelia Knight, one of their best reporters, and the lead says, "The Washington Post has identified 15 major drug dealers in the Washington area who openly sell drugs and say that the laws against selling drugs are invalid. Here are their names and their street corners." Now, do any of you doubt that before you finish reading that article, the DC police would be at every one of those street corners rousting these guys?

Well, I wrote that story in the New York Times, on November 19th, 2000. Here are 15 business owners, some of them wealthy men, a guy with a 50 foot yacht, and a lot of sports cars, who do not pay taxes, do not withhold taxes from their paychecks and who say 'I don't have to'. One of them said "I dare you to come after me". Some of these guys have written letters to John Ashcroft daring him to indict them. I had to write 15 articles on this in the New York Times before they finally indicted one guy who was convicted two nights ago in Dallas, Texas. One -- and they now know there are at least 1,500 businesses doing this, that's what the IRS knows about.

There are lots of guys who aren't telling anybody, they read their books on how to drop out of the tax system and how to disappear from the IRS radar screen and stop paying taxes. And you cannot have a system continue when people who are lawbreakers thumb their nose at the law. And if there's anything that this United States government and the previous administration and this administration are seriously doing wrong, it is ignoring people who thumb their nose at the law. They need to go out and make cases against these people. They need to arrest these people. They need to loudly, publicly arrest these people and they need to get long prison sentences for them or this problem will get out of hand.

JOHN BUCKLEY: And let me add one thing too. I think one of the things we've done in the tax administration is the notion of being efficient. It is more efficient to settle for 80 cents on the dollar without penalties. It saves a lot of government expense, but it sends absolutely the wrong message because what it means is even if you get caught, you keep 20 percent of what you shouldn't have had, and there's no penalty, there's no down side. So that we do have to change the thought as to what's efficient and actually, I would argue litigating seriously these tax cases and inserting the maximum penalties is efficient. It is not efficient to settle as people are now arguing is efficient to do. It's efficient only in the very short term.

DAVID CAY JOHNSTON: Let me tell you the event. By the way I'm just waiting to see it happen. In my book I name two billionaires who have never filed a tax return. I hope those of you who work for the government are listening. There are two billionaires who have testified under oath that they've never filed a tax return, okay? They run a business. They claim they live off gifts from daddy. Well, if you go to work every day, it seems to me that's not a good case. I am -- my home telephone number is 585-473-8704 and my desk is 212-556-3605. Please call me the day before they're arrested so that we can be there with a camera and shoot a picture of this. Somehow I just don't think I'm ever going to get that phone call, I have to tell you.

LEONARD BURMAN: I think you need to hear from an IRS commissioner.

Mr. SHELDON COHEN: A couple of things. Number one, I'm sure that when I was working around the tax shop I was as frustrated with some of the people that flaunt a claim that they never pay taxes and they're never going to pay taxes. And sometimes those claims are true and sometimes the claims are not true at all, as you know. Secondly, poor old IRS is directed by Congress to try to administer the earned income credit, which it should have never have been given that job, but I lost the debate way back in the early '70s and IRS got stuck with it.

They also totally need to dedicate certain resources to the earned income credit. I think that's a very bad thing. I think that if we do have 33 percent non-compliance with the earned income credit, that's very small compared to the non-compliance that you've mentioned in your articles and I'm sure I will read in your book.

Third, value added tax. Remember Chairman Orman (ph)? Chairman Orman made a strident speech in favor of a value added tax just before he became non-Chairman Orman. (Laughter). It would be -- a credit invoice value added tax would be great. IRS could administer that very easily, just as Inland Revenue does and just as the tax departments of other countries do. If we get one, I hope it's credit invoice not subtraction method for the reason that it's awful hard to administer the latter, very easy to administer the former.

Finally, it takes two to bring a criminal case. It takes the IRS, and I share your frustration, it also takes the Department of Justice. And I would suggest that some of the problems might rest on their side as well as a large part of the problem on the IRS side and its use of resources. In your article that you've just written, you say that certain of the IRS criminal investigators were assigned to drug work. Guess who assigned it?

DAVID CAY JOHNSTON: No, the Congress.

Mr. SHELDON COHEN: Right. They ought to be pulled off work that they shouldn't be doing, that Justice should have been doing all along or the FBI should be doing if it were willing to get its hands dirty and let them go after the tax cheats.

BILL GALE: Thanks, Bill Gale with the Tax Policy Center. A question for David. There are vertical equity issues like the cut in top tax rates to the repeal of the estate tax that are sort of above board. They're out there in the open. They're publicly discussed. Then, there's this whole constellation of issues that you've raised in this book, which you might think of as in tax terms as below the line or off the radar screen. How big are the revenue losses or the shift in progressivity from all the below the radar screen scheming? How big is that relative to the shift in progressivity from cutting marginal tax rates five to 10 percentage points or abolishing the state estate tax?

DAVID CAY JOHNSTON: You've raised a really important question that I did not try to answer, Bill, because I, number one didn't think I had necessarily the skill to do it, and we really don't have the data to do it. I hired my own economist for the book, and he and I spent a lot of time lining up different sources of government data to see if we could find some clear signal somewhere, a flow of funds chart, laid against something else, to see if we could do that. There were areas where we were able to do this. We could take this Micatti-Sayer study and put it against the IRS statistics of income and go, oh my goodness look at this. And if you look at page 37 you'll see one of the key findings in the chart there.

But we don't -- I don't know how much money is the tax avoidance money. I know only anecdotal things. I know from people who have handled the paperwork that there are at least two men in America in their 30s who run hedge funds who have more than $1 billion in offshore accounts growing deferred, and so long as they maintain those businesses they will grow. It's one thing to have $1 billion when you're cashing out in your 60s, these guys are in their 30s.

There's a real problem with realization of income, with how we define income for realization and it's very significant and it permeates our tax system, all the way through, but I don't know how big it is. I think that it is reasonable to believe on the limited data we have that the official numbers on taxes paid by people in the top one percent and the fractiles of that -- the effective rates they're paying, significantly understate the truth, that they are paying much lower effective tax rates than we see, because of the way the system works.

BRUCE BARTLETT: Can I make a point here? Just as some of my friends on Capitol Hill had a lot of fun bashing the IRS, picking extreme cases and pretending that they're generalized, I think sometimes that happens in other areas too. I think it really does take a serious analysis before you can make a real generalization. The only serious data I know to -- on which you can get a time series anyway of measuring tax compliance, is to compare the Bureau of Economic Analysis's personal income data against the IRS's measure. And I haven't looked at the data lately, but my memory is that it is fairly stable. It hasn't been rising over time. It's been a fairly large number and it's always been a fairly large number. So I don't know that the situation is getting worse, which is sort of what this book implies.

DAVID CAY JOHNSTON: But just as there's dynamic scoring, Bruce, there's dynamic responses to the tax system.

BRUCE BARTLETT: Well perhaps. I don't know. I'm just raising a question.

SHELDON COHEN: I'm Sheldon Cohen. What makes us think that we could enact a VAT that's pure, simple and is designed on your drawing board? I mean, we're not living in a vacuum. Income tax didn't start that way. So we do have the Congress, we do have the lobbyists, we do have -- and I'll give you an illustration.

My first trip to Chile during the Alliance for Progress was -- I was driving from the airport, and there was a small Citroen driving by us, and it had a three foot by four foot platform on the back with a little fence around it and a couple of boxes on it. And we drove a couple of miles and there was another one, and then I saw a third one, and I finally turned to the economic counselor and I said, what's that? And he looked at me and laughed and said, that's a truck. The value -- excuse me, the excise tax on the importation of trucks was 50 percent, the excise tax on the importation of cars was 300 percent.

BRUCE BARTLETT: Well, it goes without saying that legislation is like a --

SHELDON COHEN: The system is what I'm saying.

BRUCE BARTLETT: Yeah, making sausage, but as I said there's not a serious proposal, I don't think there's been a serious proposal for a VAT since Sam Gibbons retired. I just think the logic is moving us in that direction and I mainly say that because of all the squawking I hear from the corporations about the non -- or inability to get a rebate on...

(Question off mike.)

BRUCE BARTLETT: Oh yeah, yeah sure.

JOHN BUCKLEY: Can I just say a couple of things because I have more personal experience in this than I actually want to admit. I was a participant in the drafting of Oman's. There's two bills. The first bill was exactly the ideal value added tax -- tax food, healthcare, housing, the whole gamut of issues. It was quite simple.

That bill was introduced and then the next Congress he introduced a completely different bill that exempted all of those items from the tax. So, now Sam Gibbons' bill which is the bill that I'm painfully familiar with, attempted to do exactly what you are suggesting, and that is to replace the corporate income tax with a value added tax. And I would argue it's a fairly credible effort, I mean it, and I argue that because I was a participant in the development of it, but it ignores the fact that we do have an integrated system.

You cannot repeal the corporate income tax and maintain an individual income tax. And if you think you can do that you're really kidding yourself. So that's where I think you should think of is how. One thing David does here is shows the inter-relationships of the various taxes. You cannot have an individual income tax if you don't have a corporate income tax, it just simply doesn't work. All the income stays at corporate level, it doesn't get paid out in dividends and interest. So you do have an integrated system. I don't think there is any way you can replace the corporate income tax with a value-added tax, period. You can add a value-added tax on top of the corporate income tax or on top of the individual income taxes.

And I think, again -- I hate to take this thing too far, but it's surprising, the agreement here. I think both you and I are more than willing to agree that we need more revenues, and we both are willing to agree there are tremendous problems in the systems. Our responses may be different, although I must say my response five years ago might have been very consistent.

BRUCE BARTLETT: Well, it is true that to my knowledge, no country has introduced the VAT and used it to replace a corporate income tax or even to replace any previous existing tax, unless it was like some sort of manufacturers' tax or something that was similar distribution. So in all likelihood, if we do end up with a VAT, we will keep the corporate income tax, even if not for your reasons, well, then perhaps just for general revenue reasons. I don't know. We probably would not be able to introduce a VAT at a high enough level initially to fully replace the revenue. I think that would scare too many people. And so they'll probably introduce it at a rate that's probably inefficient because of the startup costs and things like that, and then it will just ratchet up because that's what's happened in every other country.

LEONARD BURMAN: The best tax reporter in America.

(Laughter.)

RYAN DONMOYER: Ryan Donmoyer with Bloomberg. David, it's interesting to listen what John just said and Bruce on the importance of raising -- agreeing to raise revenue in other ways.  One chapter of your book that really jumped out at me that hasn't been discussed here dealt with Social Security, and again, a different way of looking at Social Security, not necessarily as so much a regressive tax on the poor but as a tax subsidy for the rich.

It's interesting even more so because Howard Dean got himself into a bit of a political squabble this week or last week over the notion of repealing the income tax and being attacked by Democrats -- I'm sorry, repealing the Bush tax cuts and getting attacked by a Democrat. So now the Dean camp is suggesting that they may come in with some sort of tinkering with the payroll tax. Would that achieve effectively what you're getting at if they go back and repeal the Bush tax cuts, which would arguably be that income tax increase on the wealthy? And at the same time, preserve that middle class tax cut by cutting -- reducing in some way the payroll tax?

DAVID CAY JOHNSTON: The short answer is I don't know. You know, that's for other people to do. Clearly I think the way we've talked about the Social Security tax and the decision when the Democrats were in control of the Congress in the '80s to overtax people has had unintended consequences. And as the Social Security tax has risen, the two sides of it, the one you see and the invisible side, the savings rates of Americans who are subject to that tax have been falling.  And there's a fairly good match up on that, so I make the argument that the government has taken away the savings capacity of a lot of people as a result.

It is a curious system that says we will not require you to pay income taxes on the first dollar you earn because that's not fair, you need sustenance, but we will charge a 15 percent tax on the first dollar you earn for a benefit you'll get if you live to be 62 or older. Or, in some cases your children will get it if you're unfortunate and die along the way, or your spouse. So we haven't thought through carefully about how to do that, and that's one of the things that I hope we get around to doing.

All wealthy societies have both relatively high tax rates, because wealth requires a lot of common goods, and all of them have some kind of old age retirement system. And if I were writing a book about what I want in the world, I would be arguing we should be doing something about guaranteeing healthcare for children and saying, why are we investing in our oldest human capital with Medicare instead of in our children, which would be a lot cheaper, by the way.

JOHN BUCKLEY: Let me slightly disagree with David here.

DAVID CAY JOHNSTON: Well I don't mean children, I have a little bias on that.

JOHN BUCKLEY: Well, I'm only half as lucky as you. You know, the part of the -- on the payroll tax, I think you have to take into account -- and I would argue you should use the same theory that David does, is that there is a spending -- you have to take into account the progressivity of the benefit that's being bought here. And therefore if you look at the overall system, I would -- I hate to defend payroll taxes because they are regressive when you're looking at them by themselves, but their regressivity is really overstated if you don't take into account the benefit that is, in effect, being purchased by it.

And it is not just the benefit that you have to wait until you're age 65 to get. I went through college on a survivor benefit myself. There are survivor and disability benefits that you enjoy throughout your entire life. And in the --

DAVID CAY JOHNSTON: Or hopefully don't enjoy.

(Laughter.)

BRUCE BARTLETT: Or you don't enjoy, yes. They are insurance benefits. Now, the only point that I think can be made is, the only way the argument has validity, in my opinion, is if you believe that these monies will not be spent on the Social Security benefit. I'm firmly convinced they will be. There is no Congress that will ever cut Social Security benefits because of the fact that the general fund cannot redeem the benefits that are -- the debt obligations held in the Social Security Trust Fund. If they do, we'll have a new Congress fairly quickly.

Those moneys will be spent on a benefit. Your book makes an eloquent case, we need more defined benefit plans. The only one left is the Social Security, and it's funded by the payroll taxes.

BRUCE BARTLETT: It's an interesting day. I agreed with 100 percent of what you just said.

JOHN BUCKLEY: We're going to ruin both of our reputations.

(Laughter.)

BRUCE BARTLETT: I often disagree with my right wing friends on this point. You can't look at the Social Security tax in isolation. You have to look at it as part of a benefit system. And I think it's politically unrealistic to think about tinkering with the tax, given the magnitude of the fiscal problems we have in that area that are looming very near on the horizon.

I think it's also worth remembering there's a reason why the system was set up the way it was. And it was set up by Democrats. It was FDR and a Democratic Congress. And they wanted to make sure that there was a direct linkage between the tax and your labor. They wanted it to be viewed by workers as like a contribution that you make to your 401(k) as a forced saving mechanism. Because, for one thing, that reduces the disincentive effects on labor, among other things. And it also politically makes it extremely difficult to make any changes in the system because it's not welfare, it's an earned benefit. And once you start lowering the rates or screwing around with the tax system, there's a danger of breaking that linkage.

For example people at the high end right now get a very, very low rate of return, and at some point, they have no incentive to stick with the system and you create a class of people who have a very strong interest in undermining the Social Security system. So it seems to me you don't fix what ain't broken in that area unless you have a really compellingly good alternative. And just tinkering with the rates to change the distribution of taxes because you can't do anything on the income tax side I think is a very poor reason to mess with it.

LEONARD BURMAN: I want to just change the subject somewhat. One of the things I guess is most troubling to me is how people respond when they get information like what's in this book, information that all of us have tried to convey. If you remember, the reason we got the alternative minimum tax was because the Treasury Secretary reported that 155 high-income people weren't paying any taxes. And the obvious thing to do would be for Congress to say, well, they're not paying taxes because we created these tax breaks and they're doing exactly what we intended, or to say, well, these tax breaks were unwarranted, and eliminate them. And they didn't do either of those things, they created this awful, complex alternative minimum tax that nobody thinks makes any sense outside of a political context.

But it was a band-aid instead of actually solving the underlying problem. And it has morphed into this monster. We had a forum a couple of weeks ago on misperceptions with the income tax, and Joel Slemrod and Larry Bartels presented different papers that said that when people understand that the tax system isn't progressive and that it's actually not consistent with their own views of progressivity, they tend to support repealing the estate tax and enacting a flat tax, both of which would shift the tax burdens from high income people further onto middle income people.

The question is how do you convey information: you get information across as well as anybody does, but how do you do it in a way that actually results in better policy?

DAVID CAY JOHNSTON: Well, I fought the news media a great deal in this area, okay. The first function in journalism is to give you a stenographic report of what happened yesterday, the official version of events. But there are too many reporters who don't understand numbers and who practice what I call "he said" journalism. Da da da da da da, comma, he said. And they may accurately quote you, but I'm sure many of you had the experience of reading quotes where I literally said that, but the way it comes out, it's not what I meant. And as somebody who's had many stories written about him in his career, believe me, I've been through this.

There is also a terrible problem going on in our society that worries me deeply about civilized society. This morning when I was on C-SPAN, a caller called in and said, "Well, it's obvious where you come from. You're some liberal who wants to tax the rich." And I just cut the guy off and said, first of all, you don't know anything about my politics. I didn't tell him at that time, but it's a matter of public record, I'm a registered Republican. But I said that saying 'I don't want to hear what you say because you're from some other place' is one of the worst things happening in this country.

I have known people in my life who were members of the Communist Party, and I have known people who were complete fascists, people who just loved Hitler and have found that there are things you can learn from all sorts of people, all across the spectrum, with different views, if they are rational people. I'm not talking about the loonies, of which there are more than a few. But there are lots of good ideas and we need to be thinking about ideas and not saying, I don't want to hear what you say because you're not like me.

America won't work. This country will not endure unless we start recognizing that it's okay for everybody to be promoting their point of view. That's what the marketplace of ideas is about. I expect some people are going to read my book and come to very different views about it. I know that John, whom I respect, has parts of it where he thinks I'm wrong. I know a couple of people in the audience have said to me, either factually or interpretationally, they disagree with me on this point or on that point. You're all smart people. I figure you can read things and come to your own conclusions, and it is really important that we do that.

And I fault the news media terribly for encouraging and rewarding people who come up with quick lines. There was a discussion about Frank Luntz and manipulating the news media that I hope all of you read. Frank Luntz, a hired gun. He told us, well, if I were working for the Democrats, here's what I say, but I was running for the Republicans, so here's what I said. And I think that we need to listen to ideas and sort them through and not put an ideological lens on them.

BRUCE BARTLETT: Can I make a point? I think one of the reasons for this problem that you were just discussing is a severe breakdown in the tax policy process in Washington since I've been working on this stuff. It used to be when the administration had a tax proposal, they'd publish a book, a big fat book with lots of data and lots of analysis. And we all remember -- there was a big one that Carter put out in '78 and there was a big one that Reagan came out with in '84 or '85 that led to the' 86 act. And there was some material there that you could work with.

And also back in those days, Congress used to hold hearings, substantive hearings, on tax policy. And now they just don't hold any hearings on anything. I mean, these guys are not that smart. I've talked to them -- believe me. (Laughter.) And it's frightening sometimes. But there's a reason why you have hearings. It's to get outside expertise, to get people to explain things to you so you don't make mistakes. And now they seem to be just obsessed.

The administration says, you read what we said during the campaign, now you just go do it. And they didn't send any kind of document to the Hill that carefully explained what they wanted to do, either in 2001 or 2003, and they just let the Congress do its own thing. And the Congress holds no hearings. They send bills to the floor while the ink is still wet on them, and hardly have committee reports anymore. There's no information out there upon which a rational person -- even a specialist -- can base an intelligent decision.

Oftentimes, I would find out about really important things in tax legislation -- I'm sure you did too -- after the bill had already passed. It's just an insane system and something, somebody has to take the responsibility to kind of restore some decorum to this situation and slow the process down instead of just racing ahead. I think that's a big source of the problem. I really do.

JOHN BUCKLEY: And having been involved with the process for over thirty years, let me say I agree with you. There were hearings. A typical tax bills took two years to enact. The House considered it the first year, the Senate considered it the second year. I think you would be surprised the level of the understanding of members of Congress at that point.

DAVID CAY JOHNSTON: Isn't there a movie out about you guys being joined?

(Laughter.)

JOHN BUCKLEY: No, no. Neither of us want to join. (Laughter.) But it really is quite a different process and it's not a process that I think is good. There are errors made. There are unintended consequences.

DAVID CAY JOHNSTON: How long does it take before the Technical Corrections Act to every tax bill is --

JOHN BUCKLEY: Well, I mean --

DAVID CAY JOHNSTON: Days, months, weeks?

JOHN BUCKLEY: -- these are issues we all have sensitivities to.

(Laughter.)

LEONARD BURMAN: We have time for one more question. Jim.

JIM KLUMPNER: Jim Klumpner, Senate Budget Committee. Getting back to your point about public attitudes, not the breakdown of the political system, but is it not the case that some countries make tax returns public information?

DAVID CAY JOHNSTON: We used to do that in the United States of America. I have news clips I've gone and found in the microfilm of the New York Times that say, "Chicago, April 15th, Julius N. Rosenwald, founder of the Sears Roebuck chain, went to the Government Revenue Office yesterday and gave district manager so and so his check for $1,714,211."

It is the adoption of 6103, a subject dear to the heart of Don Alexander because of the many misunderstandings of it. And there is shortly a report coming out that will give a better explanation of what went on that time, I think Don will find is a really interesting issue. I think we at a minimum, and I recommend in the book, that we go back to the system that says whether you filed a tax return and whether you paid the tax you said you owed should be public record. And that if that happened, you could find out, are your neighbors paying taxes.

And we know that people do this. When the GuideStar Organization put 990s up on the website, they thought grant seekers were going to be the big users, and I had told them before this that that's not who's going to use it. Who do you think the big users are?

LEONARD BURMAN: People like me who check to see what my peers are being paid.

(Laughter.)

DAVID CAY JOHNSTON: That's exactly right. How much are your peers making. And my wife, who's the president of the Community Foundation up in Rochester, I know that the first time she went to GuideStar, she went, what does this guy make over here, looked up his tax return and people look up her salary. I think that if the IRS really paid rewards -- instead they pay 11 percent and they find all sorts of ways to get out of paying rewards -- and we made those two -- minimum, those two facts public, that we'd find all sorts of people who aren't paying their taxes.

And you know your property taxes are public record, so it seems to me it's perfectly reasonable to say, whether you filed a return and whether you paid what you said are public record, and I think it would lead to improvements in the system. We certainly ought to debate that issue.

BRUCE BUCKLEY: I don't agree with the idea of having individual returns made public, but I do think there's a strong case for having corporate returns made public, certainly those above a de minimis level, say $50 million a year or something like that. I think that would solve a lot of this tax shelter business.

DAVID CAY JOHNSTON: And the suggestion I make in the book, by the way that we ought to debate is should we have tax accounting rules and shareholder accounting rules. I'm not advocating either one as correct, but I suspect over the lifetime of corporations, if we said -- whatever you tell your shareholders is your profits, we tax those, and if Congress wants any exemptions, differences, there are specific lines that are reported to shareholders in the return -- we would have a much more efficient system. And this big picture here in Fortune Magazine would go away. And I just am confident that big corporations would not like this idea.

(Laughter.)

AUDIENCE MEMBER: Nor rich people.

LEONARD BURMAN: I want to thank our panelists, especially Bruce, who pinch-hit at the very last minute, and just give everybody a round of applause.

(Applause and end of event.)