Review of the Book:
Perfectly Legal: The Covert Campaign to Rig our Tax System
to Benefit the Super Rich -- and Cheat Everybody Else

by David Cay Johnston

H. William Batt

[Reprinted from GroundSwell, September-October 2005]

September-October 2005

Two trade books have come out in the past four years on the corruption of the U.S. federal income tax system, both written by journalists and both carrying the same thesis -- that the current structure as designed by Congress is totally compromised, and by its loss of legitimacy undermines the support of government itself. Bartlett and Steele were both journalists with the Philadelphia Inquirer until recently and David Cay Johnston covers the tax beat for the New York Times. They argue that the costs of compliance are enormous, both to individual taxpayers and to government, and that the system is perceived to be so unfair that an increasingly proportion elect to cheat if they can -- as many as half the public believes that is OK to do so.

The authors point out further that there is a significant proportion of Congress that has sought to undermine the income tax, either because they want to bring it down or because it offers further opportunities for favors to special pleaders -- who are serviced in exchange for campaign contributions. The lack of adequate staff and equipment in the IRS to audit returns and the increasing opportunities to evade taxes through offshore havens mean that the rich are often paying a far lower percentage burden than the middle class. All the while political leaders of both parties pander to anti-tax sentiments of a jaded citizenry.

Both books offer solutions of sorts, but they don't give the reading audience much hope. The major reason for their inability to offer any real answers is that they are dependent totally upon the conventional wisdom that prevails in mainstream fiscal policy circles. Their alternatives are to tax income or consumption, and then offer cursory variants upon each theme -- a flat tax or a graduated income tax, or else a general sales tax versus a value added tax. Bartlett and Steele devote a last chapter (three pages) to "starting over" but still consider only the income tax. To use the phrase now too much in vogue, neither can think "outside the box."

To the credit of reporter Johnston, he recognizes that there are some lessons to be learned from the three millenia of world tax history: that tax designs ought to be measured against the standards of fairness, efficiency and effectiveness. It is not until twelve pages before the end of the book, however, that these words are mentioned, and even then without any elaboration of their meaning. If he had explained at the start the guideposts available by which to measure tax structures, his book would have had far more cogency.

But even then, he never asks a fundamental question: not who should we tax but what? Had he recognized that there are three options: labor, man-made capital and natural capital, he might have come to understand that taxing resources to discourage their profligate use, or taxing those values with an inelastic base, would lead not only to greater economic efficiency but to such other benchmarks of a good tax -- equity, neutrality, simplicity, stability, administrability, and certainty. The venerable tradition that grows out of 19th century classical economics culminating in the arguments of Henry George has seen a revival of interest worldwide. Also one can now get a doctorate in Ecological Economics, a paradigm totally at odds with the mainstream Neo-classical school. The literature abounds had he been willing to draw on it -- recent editorials in The Economist, Governing Magazine, and the professional serial Tax Notes. The internet has some thirty sites expounding the virtues of the Georgist approach, and Ecological Economics is a journal now twelve years old… Yet only twice in his book does he mention rents, and then only in passing enumeration, never elaborating. The availability of data and the increasing power of computers now make it possible to demonstrate the validity and administrability of ideas that for a century were only theoretical and plausible claims. Taxing rents on natural capital and untaxing other factors, it appears now, could finance all government services without depressing the economy one bit.

The lessons to be taken from books such as these are 1) that proponents of alternative tax approaches such as those embodied in heterodox economics need to make their ideas better known and understood in the popular discourse, and 2) that journalists have a responsibility to reach beyond the conventional debates to bring to light solutions that for the moment remain outside the mainstream. It is disappointing that such well-established journalists from such well established media have failed in this regard. Only perhaps as circumstances continue to deteriorate will solutions be sought from what alternative schools of thought have to offer.

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