Book sheds light on taxing issue

by Stephen Butler

David Cay Johnston is a Pulitzer prize-winning New York Times reporter and author of the book "Perfectly Legal" that chronicled the way in which the wealthiest U.S. citizens have avoided taxation. He's back with a new book, "Free Lunch -- How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill.)"

Johnston and I happened to sit together back in 1998 before my testimony at the U.S. Labor Department hearings on (you guessed it) hidden fees in 401(k) plans. We have stayed in touch over the years, and he is now well-known for having uncovered so many tax dodges that he is described as the nation's "de-facto chief tax enforcement officer."

The focus of his new book is corporate welfare, if not government graft and corruption, that costs taxpayers a fortune while enriching the lives of the super rich. There are 35,000 lobbyists in Washington today -- a number that has doubled in just seven years. "Free Lunch" reads like a novel and drills down to explain the fundamentals that have led to the many rip-offs taxpayers are stuck with today.

Some problems go way back. For example, President Nixon and John Erlichman are recorded on Oval Office tapes talking about the threat of national health care. Then, Erlichman mentions Kaiser Permanente and the fact that "Edgar Kaiser makes money because ... all the incentives are toward less medical care, because -- the less care they give them, the more money they make." Nixon says, "Not bad."

He went on to sign a bill that would refer to "health maintenance organizations" -- a stroke of word craftsmanship right up there with "death taxes."
At the time, new HMOs were, by law, nonprofit companies that were barred from making money since they received huge government subsidies. It didn't take long, however for companies such as Maxicare (and later Blue Cross) to morph from nonprofit to profit-making organizations that then changed the entire dynamic of our nation's healthcare delivery system.

The law of unintended consequences has forced a for-profit business model into an environment where only a few large companies survive as an oligopoly (an informal monopoly). There are only six health insurance carriers operating in California today, and they operate in a cost-plus-profit environment.

Little in the way of traditional market forces motivates them to operate efficiently on behalf of patients. Instead, they operate on behalf of stockholders and struggle to bring as much money as possible down to the bottom line. Try filing a simple claim today and you will see what this means in the way of service.

Then there's the IRS. Apparently, there's a widespread practice of former IRS officials who go to work for major accounting firms. That's fair enough.

The problem, however, is that they represent taxpayers who have used abusive tax shelters, and on behalf of these clients, former agents effectively lobby their colleagues back at the IRS for negotiated settlements. This practice is simply disgusting. The rest of us don't get to negotiate. We just have to pay what we owe.

Moreover, the settlements are confidential, so we never know what they have cost the country in lost revenue. One estimate I read was $150 billion per year. I have some knowledge of salary levels in the service sector, and I would guess that the average former agent would be paid $400,000 to $1 million at any "big three" accounting firm. Those former colleagues back at the IRS undoubtedly hope to have a similar job offer someday when they "retire."

The IRS gives some of its own whistleblowers shabby treatment if they threaten the super rich.

Remy Welling, a 55-year old career civil servant from San Jose, first uncovered the practice of back-dating options and was told to keep quiet by both the IRS and the Securities and Exchange Commission. She was later threatened with jail, forced to resign after 22 years and barred from working as an enrolled agent -- until a lawsuit and public uproar resulted in a reinstatement of her license.

We have this lone, tough individual to thank for the fact that, today, people like Steve Jobs don't get away with arbitrarily picking a past low point of a stock to determine the value of some options. The persistence of that practice was costing the rest of us a fortune as taxpayers and stockholders.

Johnston's partial solution to these problems is to pay legislators whatever they need to do their job effectively and make it absolutely illegal to take a gift of any kind. Take a gift, go to jail. Zero tolerance.

In today's political climate, a $1,000 gift often leads to a $1 billion taxpayer cost. "Free Lunch" is an important book. If you suffer from hypertension, however, be sure to get your doctor's permission before reading.

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