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Revive the Middle Class Book Reviews

Perfectly Legal, by David Johnston.

David Johnston, a Pulitzer prize winning tax reporter for the New York Times, has written "Perfectly Legal - The covert campaign to rig our tax system to benefit the super rich - and cheat everybody else" (Portfolio, 2003). He makes the following points:

Increasing disparity between rich and poor. The income of the 1% richest taxpayers doubled from 1977 to 1999. The top 10% went up 88.6%. The bottom 90% stagnated, slipping slightly (all inflation adjusted).

Decreasing tax on wealth. The capital gains tax (capital gains are 2/3 of the income of the 400 richest people) fell from 28% in 1987 to 20% in 1998 to 15% in 2003. The 2003 dividend tax reduction primarily affects the wealthy, since the middle class usually own stock in 401K plans that aren't taxed. The 2001 act increased the estate tax exemption in increments to $3.5 million by 2009, with the tax completely repealed for 2010.

Increasing tax share on middle class wages. The top income tax rate decreased from 70% pre-Reagan to 39.6% in 2000 to 35% in 2003. Meanwhile, social security taxes, which only apply to the first $87,000 of wages in 2003, increased 82% faster than incomes (most social security revenue is diverted to the general budget, so this is another income tax). Looking at all income (not just reported income), in 2001 all taxes (not just income taxes) were 18% of income for the poorest fifth of Americans, and 19% for the richest fifth.

Lack of enforcement. Tax schemes cut taxes for those who can afford lawyers and accountants. Heiress Leona Helmsley famously said taxes are for "the little people." Because of recent cutbacks and restrictions on the IRS (sold as protecting the average person) it is estimated that $300 billion in tax revenue is now lost annually. Because it is easier, the poor are three times more likely to be audited than the rich.

Corporate Tax avoidance. Corporations have benefited from reduced rates, tax shelters, and tricks such as reincorporating in tax havens or moving intellectual property to shells overseas. While they report low income under the tax rules, they report high profits to shareholders (under general accounting rules). In 2002, 10% of federal revenues came from corporations, down from 33% in the Eisenhower years.

Alternative Minimum Tax. The AMT, enacted in 1969, is a parallel tax calculation using different rates (26% and 28%), with a limit on deductions, to insure the rich can't eliminate all their taxes through shelters. The higher of the regular tax or AMT is paid. The AMT is not indexed to inflation like the regular tax brackets. Many of the middle class will not see the recent tax cuts because the AMT applies to lower wage earners each year. By 2010, most people earning over $75,000 will pay the AMT and almost 50% of those earning over $50,000 (compared to 1 in 110 before the tax cuts).

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