General Assembly 2008 Event 4039
Speaker: David Cay Johnston
David Cay Johnston believes if you're under 45, you're probably confused.
"I've done over 500 public talks," he said at his General Assembly appearance late Saturday afternoon. The audiences have varied from universities to small colleges, from civic groups to government leadership conferences. "And I always ask: What are the reasons we created this country?"
"The modal answer—the one given more often than any other is: So we can get rich."
We shouldn't be surprised that so many Americans have lost touch with the six basic purposes of government—society, justice, peace, security, commonwealth, and freedom—laid out in the preamble to the Constitution. "If you were born after 1962, all you have ever heard in your adult life is that the purpose of government is to make people rich." This idea has been embedded in the rhetoric of every president since Ronald Reagan; younger Americans believe it because that's all they've ever heard. As a nation, he says, we have failed them by not giving them a different, stronger message about the purpose of civic life.
Johnston, who recently retired from the New York Times after a long career covering the beat of taxes, tax evasion, and the IRS, provided a brisk tour through some of the themes in his new book, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill). The talk was sponsored by the Unitarian Universalist Association Committee on Socially Responsible Investing. While understanding the mechanics of taxation can be hard even for experts, Johnston says that the basic concepts and principles are easy to understand—and that despite that, the media has done a very poor job of helping people understand them.
"Politics is the method by which we divide scarce resources," said Johnston. He pointed out that all the capital investment Broward County made in the convention center, and all the investments the hotels made in land and buildings, are worthless until they hire employees to make it all run. "But we treat the people who do the work that makes the investment valuable like they're a cost—a bad thing. Since the late 1970s, we have been seeing rising returns to capital, and decreasing returns to labor"—in other words, the capital owners keeping more of the profit, rather than sharing it with the people who make their businesses go.
Using inflation-adjusted data gleaned from income tax returns—"the only form of reporting people attest to under penalty of perjury," notes Johnston—he showed a variety of charts and figures demonstrating the widening gap between the country's haves and have-nots. He cited income growth figures showing that the bottom 90% of Americans saw their annual income increase by $12,438 between 1950 and 1975, while the top 10% got a $45,609 increase. The rich do grow richer; but in the postwar years, they did it at a leisurely pace—the ratio between the two groups' gains is about one to four.
Contrast that with the era of Reagan—1981 through 2005, the last year figures are available. Over this same 24-year period, the bottom 90% lost an average of $7 per year in total income, while the top 10% saw an average income gain of $719,779 per year.
That's a 1:5,000 ratio. And it's indicative of a lot of inequity.
The upshot of this is that the upper 10% are capturing more of America 's wealth than at any time since the Depression. In another chart, Johnston showed that in 1973—the year income levels peaked for the bottom 90% of Americans—that group got two-thirds of the annual wealth pie, while the top 10% got the remaining one-third. By 2005, the bottom 90% were getting 51%, while the top 10% was getting 49% of the total wealth created.
One factor in this has been the decline in unions. In 1973, more than one-third of private production workers were unionized, which drove up wages. And the presence of unions drove up wages elsewhere as non-union shops competed for talent. Over the past 25 years, unionization has dropped to less than half its former strength, taking wage pressure off employers and reducing wages across the board.
There's also been a high social cost to this re-ordering of things. Johnston presented statistics from the CIA World Factbook showing that the US now ranks 183rd among the nation's countries in real domestic product growth rates. Our income distribution (gini) index number puts us well under several dozen countries (including all the world's social democracies)—all of whom are now more equitable than we are. "A high index number always means an exploding rich, a struggling middle class, and a desperate group of poor," Johnston noted.
How did this happen? People are working just as hard—actually harder, if you take into account work done off the books. They're working longer hours. Large corporate employers like Wal-Mart and restaurants like KFC, Pizza Hut and Taco Bell have recently gotten in trouble for locking people in and making them work off the books, under the threat of losing their jobs. Some companies are refusing to pay overtime. When workers go to labor authorities to lodge complaints, budget cuts have ensured that there's nobody's there to listen, let alone act.
Enforcement is a joke these days, because there simply are no cops. Johnston said that, while the number of US taxpayers is growing rapidly, the number of IRS auditors is down by a third—and, not surprisingly, cheating is on the rise. The story is the same at the Department of Labor, OSHA, and other agencies tasked with keeping America 's economic and employment rules fair and equitable.
Johnstone then boggled the crowd with a blunt assertion: "We pay billions of dollars in taxes that never get to the government." Much of the sales tax we pay at big box stores and shopping centers is diverted to the large companies that own the stores. It's just one of the many swindles these chains have learned to perpetrate against city and county governments. This is so effective that the Cabela family, which owns a chain of big-box sporting goods stores, receives 137% of its profits from taxpayer subsidies. If they couldn't work this scam, they wouldn't be in business at all.
The heart of the wealth transfer is tax increment financing (TIF). Store owners come to town leaders and offer to build a new store that, they promise, will "create jobs." In exchange, the city gives them the land, builds the store to their specifications, and finances it all with tax-free municipal bonds (which are usually held by associates of the store owners). To cap it all, the store keeps the sales tax generated in the store to pay off the bond holders. If the store is built on government land, it's also exempt from paying any property taxes.
Why do city governments take such a blatantly bad deal? Many of them are struggling, and believe that a new Wal-Mart will bring in shoppers from all over—shoppers who will stick around and shop in their town. It never works out that way. Under stiff competition the small shops go out of business, taking the town's tax base with them. Schools, parks, recreation programs, and libraries are starved. Almost always, these city councils would be far better served putting the money in upgrades to local Main Street businesses, rather than financing the competitor that will kill them.
Johnston also noted that as a result, the nation is losing mom-and-pop businesses that are often more efficient in real terms than the big box stores, which carry tremendous overhead in management and distribution. He suggested that audience members do an experiment: first, eat at a chain restaurant like TGIF—and then go the next night to a local family-owned place. Not only will you spend half as much in the family place—the people working there are probably making more money. That's what real efficiency looks like.
Other scams Johnston noted:
- Market electricity, which is now the policy in 28 states and the District of Columbia—and causing prices to rise higher and faster than in non-market states.
- George W. Bush's personal fortune, almost all of which came from the deal he fronted to buy the Texas Rangers, build a new stadium using public funds, and then sell it at a profit. (Oh: and when it came time to pay the taxes on his windfall from the deal, he shorted the government $3 million on his tax returns.)
- The use of legislation to override large court awards granted to victims of corporate misbehavior. Our own legislatures and Congress are relieving corporations of these debts, and accepting them on behalf of the taxpayers.
- The use of court decisions to limit liability. Johnston cited the recent Supreme Court case affirming that discrimination claims can only be filed within six months of the incident—which is useless if you don't find out until years later that the company was paying you less because of your race or gender.
- CEOs being paid vast amounts of money—even if their companies' performance declines. Much of this extravagant compensation comes right out of the pockets—or, more likely, the benefits packages—of the people on the shop floor. "They say they have to cut benefits to stay competitive," said Johnston. "But the competition is not coming from the shop down the street—it's between the executive floor and the shop floor."
Johnston says that the media doesn't explain this because reporters these days don't really know how government works. Without that watchdog on duty, he said, "we now live in a society where it is the de facto policy of our government to take from those who have less, and give it to those who have more." Ironically, the politicians who do this often invoke religious texts in which the most consistently denounced evil is taking from the poor to give to the rich.
In conclusion, Johnston said, it's time for us to step up and do our piece of the work of democracy. "If we don't address these problems peacefully, we will do it violently—like the world has never seen," he predicted. "But we started this country with the thesis that we didn't need King George to tell us what to do—and we can solve any problem, if we want to."
David Cay Johnston is a Pulitzer Prize winning investigative reporter for The New York Times, author of the best-selling book Perfectly Legal. His new book is Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill).
Reported by Sara Robinson; edited by Jone Johnson Lewis.