Perfectly Legal | David Cay Johnston

Summary of: Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich–and Cheat Everybody Else
By: David Cay Johnston

Introduction

In “Perfectly Legal”, David Cay Johnston explores the intricate and controversial workings of the US tax system, exposing tax loopholes that benefit the super rich while the middle class and the poor bear a larger share of the costs. The book examines several schemes by which the wealthiest Americans, with the help of tax attorneys, minimize their tax liabilities, leading the nation toward greater wealth inequality. Through case studies on tax deductions, social security taxes, executive pay, hedge funds, and corporate jets, Johnston breaks down complex concepts to offer readers a comprehensive look at the tax system’s inadequacies and the political mechanisms that perpetuate them.

Flaws in Tax System

The US tax structure is flawed, allowing the wealthy to avoid paying their fair share of taxes, and the IRS lacks the resources to pursue them. This results in the rich getting richer while the middle class and poor pay more for societal benefits.

The Middle Class vs The Wealthy: A Taxing Comparison

The wealthiest Americans pay less in federal taxes compared to the middle class due to loopholes and tax shelters, according to a book. In 2000, the top 1% earners paid only 25% in federal taxes despite earning 21% of the reported income. Meanwhile, the middle-class faced a higher tax bill, and the wealthiest Americans enjoyed non-wage wealth benefits from investments in real estate partnerships and other sources that are easy to shelter from taxes. The IRS audits a higher percentage of working poor taxpayers and small business owners than multimillionaires, painting a picture of a rigged tax system. The tax cuts dating back to the George W. Bush era have mostly helped the super-rich amass more wealth, and the middle-class has seen little growth since then. The book concludes that when governments set tax rates, they decide who will thrive and by how much.

Skewed Tax System

The mortgage interest tax deduction is a case in point of how the tax system tends to favor the rich. This deduction was intended to promote homeownership, but it’s turned into a subsidy for wealthy homeowners. The deduction benefits those who can afford more expensive homes and pay more in tax-deductible interest. As a result, the tax break is more attractive to high earners. In 2000, taxpayers earning $500,000 to $1 million saved an average of $6,678, in contrast to those earning $50,000 to $75,000, who saved $1,128. Some argue that ending the deduction could cause significant drops in property values.

The Rich’s Hidden Tax Breaks

The Social Security tax system unfairly burdens the working poor and middle-class to the benefit of the rich. While three-quarters of taxpayers pay more in Social Security taxes than income taxes, those earning above $87,000 are exempted, providing a massive tax break. Consequently, someone who makes $100 million a year is only charged $10,788 in social security taxes the same as a couple making $87,000 annually. This system is just one of the many ways the wealthy receive tax breaks that remain unknown to the average citizen.

The Ugly Truth About Executive Pay

Executive pay has reached unprecedented heights with CEOs taking advantage of tax-deferred compensation packages. This has hurt shareholders who end up footing the bill by paying higher taxes while CEOs receive multimillion-dollar salaries. Board members, who also benefit from this arrangement, make it difficult for shareholders to challenge executive pay levels. The situation is dire, and policymakers need to take action to protect shareholders from being exploited by top executives.

Tax Havens and Hedge Funds

Hedge fund managers can save huge amounts in taxes by deferring their income in offshore tax havens. These funds cater to wealthy investors and are unregulated. American corporations also use foreign countries to accrue costs and build up profits in tax havens. Additionally, they can reap tax benefits by nesting intellectual property in other countries.

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