My latest book review is for Perfectly Legal: The Covert Campaign To Rig Our Tax System To Benefit The Super Rich - And Cheat Everybody Else.

When I first heard that Perfectly Legal was written by someone who works for the New York Times, I was hesitant to waste my time, fearing that the book would have the same liberal bias that makes the paper hardly worth a glance. I was pleasantly surprised that author David Cay Johnston largely succeeded in presenting a balanced view of the issues surrounding the tax system. In fact, I only thought “what a load of crap” a few times throughout the book, and only yelled it out once. Even the sections with which I did not agree were valuable because they presented an alternative view and inspired consideration. I can imagine that the author would be open to debate the issues, giving respect to those with differing opinions. The entire book was well presented, well written, and seemed to present the issues in a completely unbiased manner.

I particularly enjoyed the sections regarding the death tax and alternative minimum tax. His chapter on cheats who make outrageous claims that the government isn’t authorized to levy taxes will probably be the subject of a future post here as well.

The basic premise of the book is that the tax system is configured to benefit the super rich. The fact that these same people provide practically all financial support for politicians, both Democrats and Republicans, means that the rules are unlikely to change. Another major point was that the middle and upper-middle class were largely the ones who get screwed the most by the system because, unlike the poor, their relatively large incomes can be taxed enough to somewhat make up for the breaks to the rich. A few points and reactions that I would like to make are as follow:

Over the researched period of time, inflation adjusted wages increased the most for the wealthiest Americans. When using inflation adjusted numbers, should we really see an increase in wages at all? An individual might expect their income to increase over time, as they gain experience, but on the average it should take a technological or productivity improvement to increase average wages. Which group is more likely to have these improvements, the higher or lower wage earners? Clearly, those with more education, who are probably in the higher earner categories to begin with, are most likely to take advantage of technology and productivity advances to command even higher wages. Should a factory worker with a GED and 5 years experience expect more money (inflation adjusted) than someone in the same situation 30 years ago? Certainly not. In fact, increased overseas competition and automation technology mean that worker should probably expect to earn much less.

The wealthiest Americans also have a lot of their income from non wage categories like capital gains. First, the fact that long term capital gain rates have been cut dramatically should cause the amount of income in this categories to go up. Second, the author talks about how these cuts unfairly allow the richest Americans to get ahead. What he doesn’t say is that those wealthy Americans are investing a much higher percentage of their wealth. Obviously poorer people cannot invest as many dollars, but on a percentage basis, they should be able to get close. If they invested more, or any at all, they too would be able to take advantage of this non wage income at a reduced tax rate.

My main objection to the book was that the author seemed to imply that there is something wrong with people taking legal tax breaks, particularly when using loopholes in the tax code. We don’t complain when people deduct their mortgage interest or claim the children as dependents, so why should we demonize people who take advantage of other legal methods to reduce their taxes. If there are mistakes in the tax code, which clearly there are, we should focus on fixing those problems. Until such time as we do, it is only natural for tax payers to take advantage of these situations. Until they do something that is illegal, such as take an action only to avoid paying a tax, you really can’t blame people for legally reducing their taxes.

For those interested in which point in the book caused me to shout an objection, here it is:
The author lamented (as others have) that the Bush tax cuts were limited to what people had paid. In doing so, he thought that the cuts unfairly limited the benefit to the poor. To think that people should get more back from a tax reduction credit then they paid in taxes is absolutely ridiculous. That would be like going to a restaurant with a coupon for a free dinner, ordering a steak for $20 and asking for a $30 refund because there was a $50 Lobster meal on the menu.

Overall, I enjoyed the book, though it may be a little bit dry for those who don’t enjoy the subject of taxes. I know what you’re thinking, people actually enjoy taxes? Like all the aspects of money and our economy I actually enjoy learning about subjects like taxes.

My copy of this book will be given away to one of my readers on June 22nd.