Beware the ides of April

If you have no idea what the alternative minimum tax is, and whether you’ll pay it on April 15, you’re not alone. It’s Line 42 on your federal form -- and even your trusted CPA may tell you it’s too complicated to explain, and not to worry about it. (Ours did.)

But ignore this stealth tax at your own future peril, says Pulitzer Prize-winning tax reporter David Cay Johnston in his book “Perfectly Legal” (Portfolio).

In the next few years, if you’re middle or upper-middle class, “it can make you lose your deductions for yourself, your spouse, your children, your state income tax and local property taxes.” Enacted in 1969 and meant only for those with the highest incomes, the AMT was never adjusted for inflation so it is slowly creeping to include everyone in the middle, he says.

Sound outrageous? Almost everything in Johnston’s book about the U.S. tax system is. It’s got enough shockers to induce hives and palpitations in those who simply had no idea how different the rich really are when it comes to the tax code.

And people are starting to pay attention. Johnston just won the top Investigative Reporters and Editors award, which called it a work “that should make every citizen angry.” Publishers Weekly said it was “a thoughtful overview for any citizens willing to educate themselves on the issue.” He’s spread his message on CNN’s “Lou Dobbs Tonight” and PBS’ “Now With Bill Moyers.”

Sen. John F. Kerry bought the book last month in Boston and recently offered a plan -- to capture huge untaxed corporate earnings now being sent offshore -- that could have been taken straight from Johnston’s playbook.

Indeed, overhauling U.S. corporate tax laws seems likely to emerge as a key presidential campaign issue, particularly after a General Accounting Office report released this week showed that more than 60% of U.S. corporations didn’t pay any federal income taxes for 1996 through 2000.

It’s good to be super rich

The author’s passion for reform goes way beyond that. He believes there’s a “great national myth” that America has a progressive tax structure, that the highest income earners pay the highest taxes, that the more money you make, the larger the share of it you pay to the U.S. government.

He believed that too until nine years ago, when he started writing about taxes for the New York Times, he says. That’s when he learned that the graduated system only exists for those who earn roughly between $50,000 and $500,000. Above that, watch out.

The multimillionaires, billionaires and big corporations may be paying the same proportion in taxes as you are -- or even less.

In Johnston’s view, the vast sums of money that should be collected but never are would enable our country to sustain and upgrade itself, to stabilize Social Security, improve healthcare, education, police, homeland security. He shows how tax laws are unnecessarily brutal to middle- and upper-middle-income taxpayers -- and excessively indulgent toward the rich.

The result? A shrinking tax base. Middle- and upper-middle-income earners are increasingly being squeezed for more tax dollars to cover all the benefits and services the nation needs. “As we tax fewer and fewer dollars, the government either has to raise tax rates or reduce services,” he says. “Our tax system is out of whack with our economy. And throughout history, every civilization that has lost its tax system no longer exists.”

“There are two tax nations right now within the United States,” he adds. “They are separate and unequal.” How much so? Here’s Johnston on one small aspect:

“Imagine you’re the CEO of a big company. You were paid $105 million last year. You take $5 million of that in cash. You pay the taxes on that, which is $1.7 million. Now you have more than $3 million left to live on.

“You leave the other $100 million with the company, deferring receipt of it. What companies typically do is reinvest that money on their executives’ behalf, so it grows to earn many more millions.

“Now, when the company doesn’t pay out that $100 million in executive salary, it has to pay taxes on it, because they report it as a profit. So it costs millions for the company to let that one executive defer his money. But he’s not the only one doing it. The CEO, the CFO, the COO and all the senior managers do it. Pretty soon, the company has a billion dollars-plus in these accounts -- and every year, executives defer more.

“The company has to pay all these taxes on the money. So the company goes to the rank-and-file workers and says, ‘Workers, we can no longer afford your healthcare plan, your pension plan, all your good benefits -- there’s just too much competition.’

“But it’s not the competition from the guys down the street. It’s the competition from the guys in your own executive suite, who are taking all the money in the pay pool. There’s a special law that allows executives to save unlimited amounts of money by leaving it on deposit with their company. It’s an interest-free loan on the taxes.”

Johnston draws a deep breath after his tirade, stares intently at his interviewer: “But you, you get a salary, right?

“Congress only lets you -- and millions of workers like you -- save a tax-deferred maximum of $13,000 a year in a 401(k) plan. If you could afford to defer more, they wouldn’t let you.”

The subtitle of Johnston’s book (“The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everybody Else”) just about says it all. But it is a bit misleading because it makes the author sound like a conspiracy theorist or a barnstorming liberal.

In truth, he is neither. He is a registered Republican. On a recent visit to promote his book, Johnston proved to be nothing more sinister than a man who knows too much about something most Americans know too little about: taxes.

In a coffee shop at the Airport Hilton hotel, Johnston spits out words like bullets. His passion to explain overrides his ability to do so. He is an expert on a subject that is, quite frankly, boring. Who wants to worry about alternative minimums when “The Bachelorette” and “Average Joe” are on TV?

Johnston, on the other hand, can’t seem to stop worrying. He has actually read the tax laws, seen firsthand the dozens of bills passed by Congress that proclaim to help the middle class but are larded with tax cuts for the richest. In his years on the tax beat, he has developed Deep Throat sources within the corporate culture, the IRS, the houses of Congress and the society of the super-rich and their high-powered tax attorneys.

He is filled to the exploding point with statistics: “In 1993, the richest Americans paid 30 cents on the dollar in federal income taxes. That’s a lot less than most people would imagine, because a lot of middle-class families pay that. At the end of the Clinton administration, they were paying 22 cents on the dollar. And when the Bush cuts come in, they go down even further -- to 17 1/2 cents on the dollar. That means the super-rich have gotten a 41% reduction in their tax burden. Did you get that reduction? No, you didn’t. What happened to everyone else in America is that their taxes went up.”

And that’s not the half of it.

Buried within his book are priceless morsels of information that you too could use to maximize your wealth -- if only you had a few dozen million dollars. They might not be fair, but they’re perfectly legal.

“Imagine you’re a chemist at a big drug company. You think you’ve discovered a chemical that can make everybody beautiful. Imagine what people would pay for that pill. Before testing the drug, your company will sit you down with lawyers, gather all your paperwork and create a subsidiary in Switzerland that will buy all the material you’ve put together on this drug. Because it’s still speculative, they will place a very low price on it. Let’s say, $1 million.

“The Swiss drug company now owns all the rights. That’s when the company actually tests it. Let’s say it works, and the FDA approves it. The company gets $100 per pill -- and pays a royalty of $50 to the Swiss firm. That royalty is a tax-deductible expense in the United States. It is money sent overseas.

“The company tries to reduce the U.S. profit on each pill as close down to zero as possible and take those profits offshore. As long as they don’t repatriate it, they don’t pay taxes on it. So the royalties go to the Swiss account, and the company reports to our government that it made a very tiny profit on each pill in the U.S. -- because there are lots of other costs and expenses that can be deducted from the remaining $50. But it reports to its shareholders that it made an enormous profit on the drug.”

Johnston, who was once a Los Angeles Times reporter, says companies “are making billions offshore, money never taxable in the United States, money reinvested elsewhere, creating jobs elsewhere,” all to avoid taxes. He can spew dozens more examples, each with a different tax avoidance twist that is perfectly legal.

Johnston says our 101-year-old tax system was adopted when one-third of Americans were connected to farms, when America was a wage-based industrial economy.

Fomenting rebellion

As it stands now, most Americans have no idea what’s inside the 55,000-page book of federal tax laws, and they are easily manipulated to think that laws good for the super-rich are good for them too, he says.

President Bush’s campaign to “save the family farm by killing the ‘death tax’ is a good example,” Johnston says. “I have interviewed people with virtually no assets, who literally believe that when they die, the government will come in and take half of whatever they own. That’s absurd. America doesn’t tax death. It’s an estate tax. And it only kicks in for a married couple at $2 million. We can’t save family farms by killing the estate tax because almost all family farms are worth less than what the tax starts at. That whole campaign was really about people in the billionaire class. The only farmers in America who will pay estate taxes under the current law are people like President Bush and Ted Turner.”

He crisscrosses the country, lecturing “to anyone who’ll listen,” about the skewed tax structure and what it is doing to our nation. He’s an engaging raconteur, spreading blame like manure on both political parties with power-packed anecdotes.

But he doesn’t want to leave the wrong impression. He says he “doesn’t want to soak the rich” and does not advocate a rise in taxes. For anyone. He just wants reform that will close some loopholes, stop the money hemorrhaging out of the U.S. and stop what he calls the subsidy of the rich by the middle class. He says his book proves that’s been happening and does it by using the government’s own data. “And not one significant criticism has been made of that data since the book came out.”

That’s correct. Some reviewers look askance at the tilt of Johnston’s work but not its accuracy. High-powered tax attorneys, writing for their peers, find little new in the loopholes Johnston exposes. But the bulk of reviews reflect astonishment: How could our system have gone so wrong without us knowing it?

That’s what Johnston says he’s trying to fix. “I’m attempting something audacious: to explain the flaws in the tax system in a way everyone can understand. If enough people read it, maybe they’ll rise up and demand change.”