Culture » March 13, 2004

Mind the Gap

By Paul McLeary

Americans have had a long, uncertain history with taxation. A full national income tax wasn’t established until 1862, and it was declared unconstitutional by the Supreme Court 34 years later. In 1913 the 16th Amendment to the Constitution permitted the income tax to be made a permanent fixture in the U.S. tax system.

For years, taxes generally were aimed at the wealthy as a way to ensure a measure of equality, but in the second half of the 20th Century this concept was turned on its head as the wealthy invented schemes to exempt themselves from these federal levies. As David Cay Johnston points out in Perfectly Legal, this trend intensified in the last 30 years and American families and the middle class have seen their average income stagnate as their tax burden has risen. At the same time the wealthy keep making more money while paying less and less of their yearly earnings to the government. And it’s all done by the books.

Johnston fingers two culprits, the Social Security tax and the Alternate Minimum Tax, as the two most telling examples of how the tax burden has shifted onto the shoulders of middle-income Americans. Social Security has become, in recent years, the primary tax paid by most Americans. The maximum has climbed sharply, from $327 in 1970 to about $4,700 in 2003, while median income for Americans has climbed only from $36,573 to $40,330 between 1970 and 1999. The tax caps out at $87,000, meaning anyone earning more pays the same rate. In other words, a married couple earning a combined income of $87,000 pays the same amount of Social Security tax as, oh, say, Bill Gates. Not a bad deal for Gates.

Speaking of bad deals, many don’t fare better when it comes to the Alternative Minimum Tax (AMT). Introduced in 1969 as a separate tax system aimed at wealthy tax dodgers, it recalculates the value of a taxpayer’s exemptions and deductions, charging whatever is more. Unfortunately, the tax doesn’t take into account increases in interest rates, so now many of those making between $50,000 and $100,000 are being added to the rolls of the AMT. About 3 million are expected to get hit this year, and if the Bush tax cuts become permanent that number will jump to more than 35 million by 2010. Families making between $50,000 and $100,000 will see their share of this tax jump from 3 cents per dollar to 21 cents per dollar over the next few years, while those making more than $1 million will see their share dip by 3 cents to 19 cents per dollar.

The irony here is that last year’s tax cut lowered the tax rates on most capital gains and dividends to 15 percent, and taxes paid on investments are not subject to the AMT. The upshot? The wealthy now get out of paying this one, too.

But I can throw figures at you all day, and in the end the fact that last year the average income of the country’s top 400 earners was $174 million is just that—a fact. Over the past four years Bush policies have slashed taxes for the wealthy while stealthily sticking it to the middle and upper-middle classes. As a New York Times reporter and Pulitzer Prize winner, Johnston knows how to dig up sources and lay out the facts, but keeping an engaging narrative going for 300-plus pages is a different story. The book is a policy wonk’s dream, and there’s enough here to make you pull out your hair over the amount of graft and outright cheating going on in the open. But the repetition of numbers, data, charts (some of which may be a bit selective in their sources), and newspaper-style prose becomes dreary after awhile, and the reader longs for a break from the steady diet of bad news Johnston forces them to digest.

That said, Perfectly Legal is important in a way that many other screeds only wish to be, and, in an easily perfectible world, would serve as a rallying cry for tax reform. The fleecing of the American taxpayer is an issue that cuts to the very heart of our democracy, and deserves the single-minded attention of our greatest policymakers. But the reality is that those in charge of making the changes are too busy courting the corporations and wealthy individuals who benefit most from their anti-democratic sleights of hand.

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• Reader Comments

  why ? when i find an article that i think my friends should see ,when i attempt to email them it is refused. the only way to successfuly get thru is to submit one name at atime.it becomes so onerous i finally give up.this is the only site where i encounter this.cant this be corrected

  Posted by walter miller on Mar 13, 2004 at 5:30 PM

  The tax code desperately needs simplifying, but any change meets resistance from unexpected quarters. The sad fact is that the middle classes will always bear the largest buden, they are the engine that drives this country. I’ve seen the math, and even if all the rich folk were taxed to the bone, the resultant amount is still nothing compared to the tax revenue from the middle class. I’m not saying a certain amount of progressivism in the tax rate is bad, but fleecing the rich does little except make those less fortunate feel better.

  Posted by Jon on Mar 14, 2004 at 8:32 PM

  The point is well taken, but the comment concerning Gates is inaccurate.  The $87,000 is a per person cap.  If within a married couple the husband and wife are both employed then they are each subject individually to the 87,000 cap not combined into one cap.  No doubt countless others wrote back on this point.  Furthermore if they are self-employed but still Middle or Upper-middle Class they are subject to even a higher rate.

  Posted by Eric Gerber on Mar 16, 2004 at 4:34 PM

  Excellent book. Exposes some of the corruption in Washington. Sneaky under the table deals by the rich, for the rich. 

  Posted by Thomas Dowling on Mar 18, 2004 at 12:12 AM

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