Book Review: 'The Gatekeeper'

DATE January 7, 2004 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Interview: David Cay Johnston of The New York Times discusses
taxes
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

Taxes have become one of the most politically divisive issues in America.
Yet, the details of tax plans can be too arcane and confusing to comprehend.
My guest, David Cay Johnston, is a New York Times reporter who considers it
his job to translate that arcane language into plain English. His articles on
tax inequities and loopholes won a Pulitzer Prize for beat reporting in 2001.

After nine years of reporting on taxes for The New York Times, he has a new
book about inequities in the tax system. He says the majority of Americans
are supplementing the incomes and extravagant lifestyles of the rich and
powerful. Johnston's new book is called "Perfectly Legal."

David Cay Johnston, welcome back to FRESH AIR.

You say in "Perfectly Legal" that our tax system was designed in a bygone era
and that it's kind of outdated. What was it designed for, and how have we
changed?

Mr. DAVID CAY JOHNSTON (Author): We adopted the income tax in this country in
1913, and the economy back then was radically different. A significant
portion of people, for example, worked on or owned their own farms. And when
we began the income tax, it applied only to a narrow slice of people, those
who made more than what was then $4,000 a year, which was a very substantial
income.

The income tax since World War II, when we expanded it to be a mass tax, has
been effectively designed to capture wage income, as well as income from
dividends paid by publicly traded companies and interest. But the world
around us is changing, and instead of having a national industrial wage
economy, we are moving into a global services asset economy. And the tax
system has to keep pace with that or it won't work.

GROSS: So what are some of the things in the global service economy that
aren't being taxed or aren't being taxed to the same extent that our wages are
being taxed?

Mr. JOHNSTON: Well, people who have a lot of assets are able to organize
their affairs in ways that are not recognized by the government. When you get
your paycheck, the amount of money that you get is reported to the government,
so you can't really cheat about how much money you earned and the government
takes the money out of your check every week or month when you get paid.

If you're very wealthy, you can organize yourself in a way using a variety of
partnership devices, limited liability companies, offshore accounts, so that
what you recognize as income and have to have reported to the government is
substantially smaller than your real income. And the system, which is highly
effective for wage earners, is not at all effective for those at the top, in
large part because, while there is this minimal reporting, there's almost no
inquiry by the IRS. The IRS primarily engages in this trivial pursuit of
looking at income tax returns where people's income, deductions for mortgage
interest and state taxes are all reported to the government, trying to find
people who've chiseled a little bit here and there. It doesn't look for
people who don't file and it doesn't look for people who don't have to report
their income through third parties like employers and banks.

GROSS: Now you say that the trend for the past few decades has been this:
Elected leaders have adjusted the tax system to shift the tax burden on to
those with good incomes and little political power. Who are you talking
about?

Mr. JOHNSTON: Me, you, most of the people listening to this show. There's a
group of people I call the politician donor class. There are about one in 800
Americans who account for a very large portion of campaign contributions in
this country, and those people get access to politicians. Now every
politician will say, `You can't buy my vote. All you get for your
contribution is access.' Well, basically, the only people who get access are
the contributors.

Surprise, surprise, members of Congress go around thinking a lot about the
concerns of the people who have access to them. On the other hand, people who
make $50 to $500,000 a year generally are not involved in politics, they're
not generally campaign contributors and certainly not substantial
contributors. They're not people who can produce the corporate jet so a
congressman can go give a speech somewhere. And those people just don't have
a lot of political influence, but they have enough income that they're very
attractive to squeeze for taxes.

GROSS: Are the people who make between $50 and $500,000 a year paying more
taxes than they used to?

Mr. JOHNSTON: Yes, and those people--the fundamental shift that's going on
goes primarily to these people. Let me give you two numbers that'll sort of
illustrate that. In the year 2000, of all Americans, 15.3 cents of every
dollar of income reported to the IRS was paid in federal income taxes. The
top 400 taxpayers--now these people had an average income of $174 million
each--they paid 22.2 cents in federal income taxes. That's not a lot more
than 15.3. And had the Bush tax cuts been fully effective--and they weren't
enacted at that point, but had they been in effect in the year 2000, those
people would've paid about 17 1/2 cents of their income in income taxes.

GROSS: Is this because they're hiding a lot of their income?

Mr. JOHNSTON: No, this is actually the reported income. This is without
dealing with the unreported income that's either unrealized because of the way
the law works or isn't reported at all.

GROSS: So can you explain why the 400 wealthiest are paying so comparatively
little?

Mr. JOHNSTON: The single largest reason is reductions in capital gains rates.
When we began the income tax system and we started taxing capital gains as
well as wages, the model used for Congressional hearings was the life cycle of
a cow. That says something about how different the American economy is today.
And the argument was made back then by Republicans that you should tax capital
gains at a higher rate than wages.

In 1997, Congress passed what was advertised as the Middle-Class Tax Relief
Act. It had a child credit in it. It turned out, however, that tens of
millions of people didn't qualify for that credit because if you paid little
or no tax--that is, you were poor or working class--you didn't get it. If you
were prosperous, if you made more than essentially $100,000, you didn't get
the credit. It was targeted at a rather narrow group.

The real important provision in terms of government revenue in the 1997
Middle-Class Tax Relief Act was a reduction of capital gains tax rates from 28
percent to 20 percent. That lower rate had the effect of being, in effect, a
sale. There were people who thought, `Well, this won't last, it won't be
permanent,' and so a lot of people harvested capital gains. They sold stocks,
which would be publicly reported and other assets and realized capital gains.
Of the people who made the $174 million average in 2000, about 70 percent of
their income came from capital gains.

GROSS: So this is because capital gains taxes have been cut, and they're
going to be cut more.

Mr. JOHNSTON: Right now the rate's 15 percent for very wealthy people. It's
as little as 5 percent for poor people when they have capital gains. And the
clear goal and stated goal of the administration is to reduce capital gains
taxes to zero.

GROSS: If you're just joining us, my guest is David Cay Johnston and he
reports on taxes and investigates taxes for The New York Times. His new book
is called "Perfectly Legal: The Covert Campaign to Rig Our Tax System to
Benefit the Super Rich and Cheat Everybody Else."

Now you were saying that the people who are really getting hit now with a
disproportionate amount of taxes are the people in the $50 to $500,000 income
category. That's a big difference, you know, people who are earning $50,000
vs. people earning $1/2 million. That's...

Mr. JOHNSTON: No question, that's a big swath of people, but that's the group
that is most affected by something called the stealth tax or the Alternative
Minimum Tax. I need to go back in history a little bit here.

In January of 1969, at the very end of Lyndon Johnson's term, there was a guy
named Joe Barr, who was Treasury secretary long enough to have a cup of coffee
and make one appearance on Capitol Hill. And he told Congress three days
before Johnson's term ended that 155 American couples had made more than
$200,000 in 1966 and paid no federal income tax. That's the equivalent of
about $1 million today.

I remember--I was a police reporter for the San Jose Mercury in those days,
and I remember going to the Sunnyvale Police Department and the watch
commander raging about this, he was furious about it, and then going to the
Mountain View, California, Police Department and the desk sergeant saying,
`Did you read this story in the paper?' Congress that year actually got more
letters on that issue than it did on the Vietnam War, according to Professor
Michael Graetz at Yale University.

So Congress quickly enacted a tax designed to make sure that high-income
people could not pay zero income taxes. They changed it over the years, but
the net result is that today, instead of 155 people, about 2,400 people pay no
federal income tax or any income tax anywhere in the world.

At the same time, Congress has allowed this law to morph into something quite
different than it was. It now applies to very few people who make
multimillion-dollar incomes, but it can apply to a single mother who only
makes $30,000. And by 2008, according to the Tax Policy Center in Washington,
which is run by the Urban Institute and Brookings, if you are a married couple
with two children and you make $75 to $100,000 a year, there is a 97 percent
likelihood that you will lose some of your Bush tax cuts to the Alternative
Minimum Tax and a 42 percent likelihood that you will lose all of your Bush
tax cuts to the Alternative Minimum Tax. So what we're doing explicitly is we
are taking money from this group of people, 50,000 to 500,000, and using it to
finance tax cuts for the super-rich.

GROSS: Can you explain a little bit more what the criteria are for paying the
Alternative Minimum Tax? At what point does it click in for you when you're
filing?

Mr. JOHNSTON: Well, the Alternative Minimum Tax is a parallel universe. It
has its own rules on what is deductible from your income and its own rate
structure. But for the middle class, what makes it important is that Congress
decided in 1986 so that it could balance out the revenue from the old tax law
and the 1986 reforms to treat as tax shelters your exemption for yourself,
your exemption for your spouse if you're married, your exemptions for your
children, your state income tax and your property taxes on your home. And if
you fall into this universe of having what the government considers to be too
many exemptions and deductions for these things, it begins taking them away
from you and moving you into the alternative tax system. And it's a gradual
process. You slide from one area to the other. If you look at line 43 on
your tax return, it may have a number in there that will indicate how much you
are paying in Alternative Minimum Tax, which is essentially how much you're
losing out, in most cases, because you took these deductions.

There are also rules that apply to very wealthy people to deal with things
like oil depletion allowances and various exotic areas of the tax code that
only involve very wealthy people.

GROSS: So for some people, some years, they'll be paying the Alternative
Minimum Tax, and other years, they won't. What are the variables that might
affect whether they pay it in a specific year or not?

Mr. JOHNSTON: Well, one of the things that's going to affect it a lot is that
because the federal government has been cutting back on the money it provides
for various state and local programs, state and local taxes have been rising.
There's a tax shift going on here. The government saves you $500 at the
federal level and then your state taxes go up by $600 and your property tax
goes up by a thousand. If you then lose the ability to deduct those state and
local taxes, it causes your income tax bill to the federal government to go
up and effectively takes back what you got through the Bush tax cuts.

GROSS: So in other words, the more you pay in taxes, the more tax you owe
because...

Mr. JOHNSTON: Yes. That's exactly right, Terry.

GROSS: ...your taxes become a tax shelter and then you're taxed on the tax
shelter.

Mr. JOHNSTON: That's exactly right. And the idea that, you know, your
children or your spouse or your property tax on your house is a tax shelter is
just absurd and clearly was not what Congress intended in 1969 when this was a
big issue.

GROSS: So is there any movement to change this?

Mr. JOHNSTON: Oh, there have been a couple of congressmen who've introduced
bills and put copies of my story in the Congressional Record, but no, there is
no serious discussion of this. The Bush administration was asked by me and
some others right when they came in what they were going to do about this, and
they wouldn't answer and they wouldn't answer, and finally, the tax policy
director at Treasury, a guy named Mark Weinberger, said, `Well, the president
was elected on the promise to cut taxes, not to reform the Alternative Minimum
Tax. And after we've finished our tax cutting, we'll focus our attention on
this.'

The administration now says that beginning in February of next year, assuming
Mr. Bush is still in office, it will begin studying how to deal with this
issue. In short, no, it's not on anybody's real agenda, and it's going to
simply eat more and more into the incomes of people in the middle class and
the upper middle class.

GROSS: My guest is David Cay Johnston. He reports on taxes for The New York
Times. His new book is called "Perfectly Legal." We'll talk more after a
break. This is FRESH AIR.

(Soundbite of music)

GROSS: My guest is David Cay Johnston. He reports on taxes for The New York
Times. His new book about inequities in the tax system is called "Perfectly
Legal."

If you're just joining us, my guest is David Cay Johnston. He writes about
and investigates taxes and the tax system for The New York Times. His new
book about taxes is called "Perfectly Legal."

You also raise a lot of questions about Social Security, which you think the
way the system operates now, it's more beneficial for the rich than it is for
the middle class.

Mr. JOHNSTON: Well, Social Security is a subtle and complex issue, and let me
deal with one part of it first. If you are a very low-income person, the
benefit you get from Social Security is greater than what you paid into the
system relative to people who make more money. So in that sense, it is a
redistribution scheme to provide a minimum income in old age for poor people.

But there's another component that has been in effect since 1983 that makes
Social Security a subsidy program for the super-rich. You know, one of the
fundamental principles tax lawyers teach their clients is that a tax deferred
can be a tax not paid. If you can defer paying a tax for 30 years, in effect,
you haven't actually paid the tax because of the time value of the money.
Under the current Social Security law, many people are paying a tax 30 years
before it needs to be paid, and here's how that happened. In 1983, Congress
was persuaded of the idea that Social Security would run out of money in about
31 years, and so they began raising the rates on Social Security. Currently,
you pay, if you make a maximum, about $90,000, about $4,500 and your employer
puts up another 4,500 that could have gone to you in wages, so you're paying a
very substantial portion of your income to the Social Security system.

GROSS: So can you explain some more how people with high incomes pay
proportionately less for Social Security than people with lower incomes?

Mr. JOHNSTON: Right. Well, the Social Security tax stops at about $90,000
in income. So if you make a million-dollar income, it's an inconsequential
tax to you, and there are a quarter-million people in America who report a
million-dollar income or more. And that only applies to wages. It's what
happened to the excess Social Security money that's important. This year,
Americans will pay 50 percent more to Social Security than it will pay out in
benefits. When the law was passed in 1983, the explicit promise was that this
money would be used to pay off the federal deficit, so that when the
government got to the point that it needed to pay the boomers their Social
Security, it would have the borrowing capacity to do that without disrupting
the economy.

Instead, the money was spent on tax cuts for the rich. The way that we have
financed these tax cuts, I contend, in good part, has been by using the Social
Security surplus. The Social Security surplus was not invested in stocks and
bonds or anything else. It was used to finance the operations of the
government at a time when we were cutting taxes on the rich. In the summer of
2001, Paul O'Neill, who was the Bush administration's first Treasury
secretary, went to a meeting at the top of the World Trade Center with a group
of Wall Street types who want to privatize Social Security so they can collect
fees for managing those accounts. And he entered the room and said, `I am
here today as the chairman of the Social Security Trust Fund. We have no
assets. All we have are the future promises of the American people to pay the
taxes to cover Social Security.' So if you make $90,000 or less, this year,
you will pay 50 percent more than needed into the Social Security system, and
that money will go to finance tax cuts for the super-rich.

GROSS: Of course, that's not the way it's being presented to us.

Mr. JOHNSTON: Oh, not at all. Not at all. And what's being presented is
there's this coming disaster where we won't be able to pay Social Security.
Well, given the enormous budget deficits that we are running right now, that's
true. We're going to run up an enormous amount of debt far into the future
under our current spending policies. The government right now is spending a
half a trillion dollars a year more than it is taking in. Now in the short
run, that's classic Keynesian economics. And the current president is the
biggest Keynesian of all times, and the current economy is probably doing much
better than it would otherwise but for the government spending all this money
it doesn't have. But you cannot go on forever spending money you don't have
without serious consequences, and those serious consequences are likely to
come to about the time that the boomers start retiring, large numbers of them.
And when that happens, the boomers may discover that there's not enough money
there to pay Social Security.

GROSS: Boomers are going to be ready to retire in a few years. And that will
put a lot of stress on the Social Security system. At the same time, I think
coinciding with a lot of the boomers retiring at the end of this decade, there
are new tax cuts that are delayed to go into effect until close to the end of
the decade. Yes?

Mr. JOHNSTON: Well, most of the Bush tax cuts are now in place. The one
exception is the estate tax, which is eliminated for the single year of 2010
and then reinstated unless Congress takes some other action on it. But
because of these tax cuts, unless there is enormous economic growth of a kind
that we've never seen before that leads to new tax revenues because of
economic growth, there simply is not going to be enough money out there to pay
the interest on the federal debt, fund the normal operations of the
government, pursue this war which may go on not just for your and my lifetime
but forever, if it's a war on terrorism, since I can show you examples of
terrorism in the Old Testament, and provide for the retirement of the boomers.
I mean, we just do not have a sound fiscal policy relative to taxes.

GROSS: David Cay Johnston reports on taxes for The New York Times. His new
book is called "Perfectly Legal." He'll be back in the second half of the
show. I'm Terry Gross, and this is FRESH AIR.

(Soundbite of music)

(Credits)

GROSS: Coming up, rock historian Ed Ward tells us about the east LA band, The
Midnighters. Maureen Corrigan reviews the new memoir by the British literary
academic superstar Terry Eagleton. And we continue our discussion about
inequities in the tax system with journalist David Cay Johnston.

GROSS: This is FRESH AIR. I'm Terry Gross, back with David Cay Johnston.
He's been reporting on taxes for The New York Times for the past nine years.
In 2001, he won a Pulitzer Prize for beat reporting for his articles about
tax loopholes and inequities. Now he has a new book about inequities in the
tax system called "Perfectly Legal."

One of the main issues that you write about in your new book is the ways in
which the very wealthy can avoid paying taxes on their income and you write
that just as there's an underground economy for the people who are very poor
and have to work in kind of the illegal part of the American economy, there's
also an underground economy for the very rich, an underground economy that
allows them to hide a lot of their income. Can you give us some of the
examples that you find most egregious of this upper upper-class underground
economy?

Mr. JOHNSTON: Sure. Well, one of the biggest is this issue of using offshore
accounts. You take untaxed income, you put it into an account in the Cayman
Islands or the Bahamas. There are banks that advertise this. You then get a
MasterCard or, if you're really smart, a debit card, and you use it to tap
that account and draw money out of it. Here in Manhattan, Robert Morgenthal,
the district attorney, who's been very aggressive in pursuing tax cheats,
found a fellow who used a debit card to withdraw $800,000 in less than a year
by going around to various banks to tap this money. It's very--they've been
unable to find that particular guy, by the way. So that's one example.

Secondly there are the use of offshore non-profit entities called 501c27s.
These are tiny mutual insurance companies. One man in New York City, Peter
Kellogg, who's one of the biggest forces on Wall Street, has two of these
companies, and through them he earned more than a half billion dollars in
investment profits on which he paid no taxes. These little entities, these
little mutual insurance companies are supposed to be tax-exempt so long as
they don't have revenues, insurance premium revenues, of more than $350,000 a
year. Well, Mr. Kellogg's companies had revenues of about $30,000 a year but
he deposited a hundred million dollars into it and then allowed the money to
grow through investing offshore.

Then you have hedge funds. Hedge funds are basically unregulated mutual
funds that operate offshore. There are several managers of hedge funds who in
their personal accounts have built up more than a billion dollars. And some
of these guys are in their 30s. And they can--as long as they keep the hedge
fund going, that money will sit there untaxed. To think that it will ever be
taxed, that the IRS will pursue it and know about it years from now is I think
just a fantasy.

GROSS: And you also think that we should be rethinking how corporations are
taxed. What are some of the hidden profits in corporations now that you think
should be taxed that aren't?

Mr. JOHNSTON: Well, I think we need to address fundamentally the issue of
whether we're going to tax corporations at all or not or have the tax
attributes of corporations flow to the owners. This is a really complex
problem. The tax system is sort of like a game of pick-up-sticks. If you
move any one stick, the whole dynamic of the pile can shift in ways that you
don't expect. So this is not a simple question. And in a world in which you
can own stock for one minute, how you deal with the tax attributes of it is
different than someone who say owns their own corporation. But we allow
corporations in a multinational world to earn profits overseas in places where
they appear to be taxed but are not really taxed by the governments there
through very complicated structures. And so long as you reinvest that money
offshore, you're never taxed here in the United States.

Furthermore, you can do a really neat little trick. Let's say you've built up
a billion dollars of profits offshore and you don't have any new factory you
want to build so you put that money in cash and you invest it in--let's say
you get 5 percent on it. Then you go to your bank and say, `We want to borrow
here in the United States a billion dollars, guaranteed by the billion dollars
offshore.' And you pay 6 percent on that money. Now you get a tax deduction
in the United States for the interest that you're paying, and there are just a
million schemes that are so complicated that make your head explode that are
all designed to earn profits as reported to shareholders but not earn profits
as reported to the IRS.

Now the fundamental reform I think we should examine is eliminating this
system that requires two sets of books, one for the IRS and one for the
corporation.

GROSS: Now another technique for avoiding paying taxes on income that you
write about is this, that a lot of companies are moving their intellectual
properties to offshore addresses. Would you explain how that works?

Mr. JOHNSTON: Well, imagine that you're a chemist at one of the big drug
companies and you're working on some project and you suddenly discover you
have a product that is going to make everybody unbelievably beautiful if they
just buy this pill. The first thing that's going to happen is the
company--you'll tell your boss, your boss will tell the lawyers, the tax
lawyers will be brought in, they'll sit you down in a room and they'll say, `I
want every scrap of paper connected with your research,' they'll put it in an
envelope and send it to Switzerland where they will create a little entity
that will own this intellectual property. Now they have to pay the American
company for that so they'll funnel money to this paper entity they created in
Switzerland. It'll write a check for, say, a hundred thousand dollars to the
US company which will report it as income.

The product finally gets on the market. Imagine the price you would pay for a
pill that makes you beautiful. Right? The pill costs a hundred dollars a
pill and $10 of that is the royalty for the intellectual property. That $10
or maybe it's $50 or $90 then becomes a tax-deductible expense of the drug
company in America which is sent to the Swiss entity which in turn sends it to
a Luxembourg entity where it sits as untaxed profits that can be reinvested
anywhere in the world.

GROSS: Now logos you say are being moved to--is it...

Mr. JOHNSTON: Copyrights, logos, patents, any kind of intellectual property
that you can, you know, write down on a piece of paper and send offshore.

GROSS: Now with logos--I mean, a company's logo appears on the packaging of
just about everything it sells. So does that mean for many companies, there's
a percentage of every product that's sold that goes to this offshore account
because of the logo that's on it?

Mr. JOHNSTON: Yes, and, in fact, some of the companies when they've moved
offshore have changed their logos. So if a company simply moves offshore,
there's a tax rule that requires them to take a relatively small royalty for
their brand name of their products or the symbol that they stamp on their
products. If they then instead modernize that logo, you know, they give it a
new look, then they can charge a much higher rate on the royalty and that
royalty payment becomes a tax-deductible expense in the US and is transferred
offshore. Similarly when you move a company offshore, you loan money back to
the United States. So that the US company ends up having no capital of its
own or very little. There are some rules that require them to have some
capital. But you borrow money offshore and loan it to the US company and
those interest payments that are paid then back to the parent company offshore
become tax-deductible expenses.

When the Ingersoll-Rand Company--they make the jackhammer and refrigeration
equipment and heavy industrial equipment--moved to Bermuda, they paid the
Bermuda government a $26,000-a-year fee to have a mailbox there to accept mail
and have it as their tax headquarters. And they estimated that in the first
few years, they would save $40 million a year in US corporate income taxes.
So they get all the benefits of operating in the US: access to the US market,
the courts to enforce their contracts, the labor laws and access to this
incredibly rich market. But they don't pay for those benefits. Instead, they
pay the Bermuda government $26,000 a year.

GROSS: And one of your points is that you can't get away with anything when
it comes to your taxable income, but when corporations make these huge profits
there's all kinds of schemes of hiding it.

Mr. JOHNSTON: Yes. The tax system is very efficient and effective for
wage-earners. It is not for everybody else. And we have radically reduced
the number of auditors at the IRS. We've reduced the number of criminal
investigative agents, and we've diverted many of those to working on the war
on drugs and the war on terror instead of on tax crimes. And then Congress
has imposed a whole variety of new procedural rules that slow down the audit
process. And it is simply a completely unmatched game in which those who are
smart and have lots of lawyers and accountants can pay what they choose to pay
in income taxes.

GROSS: David Cay Johnston is my guest. He reports on taxes and the tax
system for The New York Times. He's won a Pulitzer Prize for his work. His
new book about taxes is called "Perfectly Legal."

You have analyzed the Bush administration tax cuts in the past on FRESH AIR.
But I'm interested in hearing now what you think the effect of these tax cuts
will be while coinciding with the new expenses that we've taken on in Iraq.

Mr. JOHNSTON: Well, there's no period in our history before where we have
entered into a war and then, at the same time, rather than demand some
economic sacrifice from people, cut their taxes, particularly at the top.
When World War I was being fought, the war to end all wars, the estate tax was
implemented. And the political argument of the day was that if you were going
to conscript the lives of young men to protect America, then you should also
conscript the fortunes of the wealthy to protect America. So this is an
extraordinary change in public policy. And it's not economically sustainable
over a long period of time because the government is spending currently a
half-trillion dollars a year more than it's taking in. And in the long run we
just cannot sustain that, and we will pay a price for it. I'm not going to
tell you how we're going to pay the price. That's going to be one of those
shocks. But if we continue on this road, it is going to hurt and it's going
to hurt for a long, long time.

GROSS: What would you predict is the time when it's going to start to hurt?
When...

Mr. JOHNSTON: When the markets conclude that the United States government is
behaving like a Third World, you know, as Ronald Reagan used to say, `tin horn
dictator.' When the markets lose confidence in the United States, there will
be an abrupt withdrawal of our capacity to borrow money from overseas. And
how the results of that will play out, you know, nobody knows, but it will
happen.

GROSS: And you think this loss of confidence would come when overseas markets
realize that we are so in debt?

Mr. JOHNSTON: Correct.

GROSS: OK.

Mr. JOHNSTON: When the debts become just too sustainable--I mean, it's just
like if you're an individual and you keep borrowing and borrowing and
borrowing, there comes a point where you can't even sustain the minimum
payments on your debt and you fall into economic collapse.

GROSS: A lot of people are going to be angry and frustrated because of what
you've said about some of the inequities in the tax system. And they might
feel, `Well, jeez, if the corporations are cheating, if the wealthy are
getting away with a lot, I'm going to try to get away with more on my taxes.'
You say in your book that you urge people not to cheat on their taxes.

Mr. JOHNSTON: I think--first of all, you can't cheat very much because your
income and your principal deductions are all reported to the government. All
you can do is chisel, but you can overstate your charitable gifts, you can
overstate your property taxes. You can't do anything of any consequence. I
think, therefore, if you resist the temptation to do that, it's going to make
you angrier; it's going to make you more involved in thinking about the
government and taking the time to call your congressman's office, to write
letters, to say to your neighbors--to talk about public policy issues. You
know, it's unfortunate in this country more people seem to be concerned with
which movie star is sleeping with who than about how we're financing our
democracy. And so I think the first step is that reform has to begin with you
and with your personal integrity about the system because it puts you in a
mental frame and an emotional state and a position of integrity to really
complain about this.

GROSS: David Cay Johnston, thank you so much for talking with us.

Mr. JOHNSTON: Well, thank you, Terry.

GROSS: David Cay Johnston reports on taxes for The New York Times. His new
book about inequities in the tax code is called "Perfectly Legal."

Coming up, rock historian Ed Ward on The Midnighters.

This is FRESH AIR.

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Profile: The Midnighters
TERRY GROSS, host:

Although the usual way to think about rock 'n' roll in America is to dwell on
the tension between black and white music, in some parts of the country there
was another color: brown. East LA was a hotbed of musical activity in the
1960s, and no band was as popular back then as The Midnighters. Today, 40
years after they began, they still draw huge crowds to their reunion shows.
Rock historian Ed Ward has their story.

(Soundbite of song)

THE MIDNIGHTERS: (Singing) I know you've come to tell me that it's over,
whoa-oh. Well, all right, I'll let you go free. But, baby, though it may be
over for you, it will never be over for me. Make up my mind...

ED WARD reporting:

There's a philosophy of band leading that says you have to be able to play it
all: the hits, the standards and a touch of your own stuff. This philosophy
usually leads to a band that's making lots of money playing wedding receptions
and teen dances but never gets to record or tour. But it's different when
you're working in a tightly knit ethnic community, like East Los Angeles was
in the '60s. And The Midnighters' continuing success is proof of that.

The band sort of fell together around 1963 and became known as an all-purpose
unit that could play anything from Mexican standards to Las Vegas show tunes,
which is how they picked up a gig backing Cannibal & the Headhunters, East Los
Angeles College in 1964. Cannibal and the boys were also from East LA, and
their big number was a cover of Chris Kenner's hit "Land of 1,000 Dances."
The Midnighters had rehearsed Cannibal's whole set, but his bus had gotten
lost on the way to the gig. So after their opening set was over, The
Midnighters stayed on and did the headliner's show. Someone recorded it, and
the next thing they knew The Midnighters had their first record out.

(Soundbite of song)

THE MIDNIGHTERS: (Singing) I said na, na, na, na, na, na, na, na, na, na, na,
na, na, na, na, na, na, na, na, na, na, na, na, na, na, na, na, na, na, na,
na, na, na, na, na, na, na. You got to go out and pony like Bony Moronie. Do
the jerk. Let me see you work. Do the tango.

WARD: As you can hear from this 1966 re-recording, lead singer Little Willie
G., Willie Garcia to his parents, had a voice that could belt but could also
croon. This was the side of The Midnighters that the parents loved and got
the band plenty of work.

(Soundbite of song)

THE MIDNIGHTERS: (Singing) This is not the first time. It's happened before.
Oh, the girl that I love doesn't love me anymore. So I've had it. Forget it.
Don't want it. You've got it. I'm giving up on love before love gives up on
me.

WARD: But the side that made them immortal was a throwaway intended for the
B-side of a single. It emerged as they were jamming on a Rolling Stones tune
and became an East LA anthem.

(Soundbite of song)

THE MIDNIGHTERS: Let's take a trip down Weir Boulevard!

(Soundbite of horn tooting)

THE MIDNIGHTERS: Arriba! Arriba!

(Soundbite of screaming, laughing; music)

WARD: It was this sort of proto-punk music that began to widen their appeal
outside of the barrio and which has continued to cause people to seek out
their three albums because even though Cannibal & the Headhunters' version of
"Land of 1,000 Dances" had outsold theirs, The Midnighters had a career that
far outlasted Cannibal's.

(Soundbite of "Jump, Jive and Harmonize")

THE MIDNIGHTERS: (Singing) You got the soul, baby. I got the faith. You've
got the soul, baby. That's all it takes to jump, jive and harmonize, to jump,
to jive and harmonize. Come on! Come on please! Come on, baby! Baby,
please! All right! Take everything out of sight! Oh, yes, I do...

WARD: That said, even with great workouts like "Jump, Jive and Harmonize,"
the band never cracked the national market. Given the size of Los Angeles,
they played out a lot, did well, appeared on radio and television and toured a
bit in the surrounding areas. But after six years things were changing, and
in 1969 The Midnighters called it a day. They left, however, with a bang.

(Soundbite of "Chicano Power")

THE MIDNIGHTERS: (Singing) ...(Unintelligible). Whoo! Chicano power,
Chicano power, Chicano power, Chicano power. Whoo!

WARD: "Chicano Power" was the band's last single, and it signaled Willie G.'s
departure from the band. Some of the guys regrouped in 1983, but it wasn't
until his old high school was in trouble and was holding a benefit that Willie
G. came out of retirement and joined his former band mates for a reunion show.
It worked just fine, and today they get together a couple of times a year just
to show East LA what it was like when The Midnighters owned the place.

GROSS: Ed Ward lives in Berlin.

Coming up, book critic Maureen Corrigan reviews the memoir by British academic
superstar Terry Eagleton. She says it's horrifying and hilarious. This is
FRESH AIR.

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Review: Terry Eagleton's "The Gatekeeper"
TERRY GROSS, host:

Across the country colleges and universities are gearing up for the start of a
new semester. To mark that occasion, book critic Maureen Corrigan decided to
review the recent paperback edition of a memoir called "The Gatekeeper" by
superstar scholar Terry Eagleton, who's been called the last Marxist literary
critic. Here's her review.

MAUREEN CORRIGAN:

British academic superstar Terry Eagleton made his name as a cultural
theorist. In fact, his genial, best-selling, 1983 book "Literary Theory: An
Introduction" is still the text most English graduate students and their
professors consult when they need to brush up on the difference between
secular humanism and hermeneutics. So it's big news in a small pond that
Eagleton has now renounced cultural theory as `beside the point in this age of
terrorism.'

In his latest book called "After Theory," which is being published in the
United States this month, Eagleton laments that literary scholars are
preoccupied with relativistic meditations on their navels and other body parts
instead of big moral questions, like truth and the nature of evil. No
argument there. But let's not talk about theory or after theory. In my own
small way, I anticipated Eagleton's recantation years ago when I became
disenchanted with high literary theory and its members-only linguistical
Platonists.

I want to vault over the whole scholarly slingshot fight that "After Theory"
has already provoked and take cover in another and undoubtedly more
entertaining and probably more important recent book Eagleton wrote. "The
Gatekeeper" is Eagleton's memoir. It came out in paperback late last year,
and I've just gotten around to reading it. It's by turns horrific,
reluctantly moving and so packed with go-for-the-jugular, hilarious, academic
anecdotes that it makes perfect sense that, as Eagleton tells his readers,
he's been asked for his autograph by people at lectures thinking he's Terry
Jones of "Monty Python."

As he acknowledges, Eagleton's life story corresponds to that most archetypal
of British postwar tales: the climb of the promising scholarship boy out of a
working-class valley of the ashes. These angry young men make good stories.
All follow the same broad plot. But the special ones, like Eagleton's,
distinguish themselves through the pitiless intelligence of their vision, the
very thing the angry young man in question struggles to attain through an
elite education.

Eagleton's death in life dump was Manchester, England, in the late 1940s and
'50s, where he grew up a sickly child in a large family of Irish Catholics.
He says, `We led a cowed, daunted existence, socially sophisticated enough to
be conscious of our social inferiority. Our aim in life was to have the words
"we were no trouble" inscribed on our tombstones.' The title of Eagleton's
memoir derives from his Catholic schoolboy duty of escorting the weeping
families of newly cloistered Carmelite nuns out to the gate of the convent,
never to see their daughters again. Eagleton was the only kid in his grammar
school class to own a coat. But before he can be accused of stooping to
melodrama, he describes how he and his hungry classmates so stuffed themselves
with cheap beet root that they would regularly vomit up the maroon mess all
over their desks.

That reflexive need to undercut, not to take oneself or one's life situation
too much in earnest is, as Eagleton recognizes, a mixed-blessing legacy of
growing up working class and Irish Catholic. His wit is most overpowering
when he's describing the endlessly self-fracturing socialist groups he joined
as a young man and his purgatorial stint as a scholarship student at
Cambridge, a place then populated with professors who taught by declaiming
poetry out loud. `Studying English,' Eagleton comments, `seemed largely a
matter of the stomach muscles.' The mood shifts again, though, when Eagleton
ends his memoir with a stunning anecdote describing how he got that Cambridge
scholarship, almost literally by stepping over his factory-worker father's
dead body.

`What if others win for you by their sacrifice the very largeness of mind
which might tempt you to betray them?' That's how Eagleton elegantly poses
the moral conundrum of the up-from-the-working-class memoirist. The fact that
throughout his career Eagleton has been sensitive to moral conundrums has
always elevated him some notches above most of his fellow theory heads.

GROSS: Maureen Corrigan teaches literature at Georgetown University. She
reviewed Terry Eagleton's memoir "The Gatekeeper."

(Credits)

GROSS: I'm Terry Gross.
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