Journalist David Cay Johnston

DATE January 23, 2002 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Interview: David Cay Johnston talks about corporate tax loopholes
and other tax inequities
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

My guest, New York Times reporter David Cay Johnston, is great at explaining
the inequities and loopholes of the tax system. In fact, he won a Pulitzer
Prize last year for his articles investigating those inequities. In a few
minutes, we're going to examine the current tax debate, which should be
heating up following the report released this morning by the Congressional
Budget Office. The report projects that federal surpluses over the next
decade will plunge 71 percent from last year's estimates. That's about $4
trillion less than last year's prediction. The report also predicts annual
deficits for the next two years, ending a four-year run of annual surpluses.

But first, we're going to talk about Enron. Last week, David Cay Johnston
broke the story that Enron paid no taxes in four of the past five years and
was actually eligible for $382 million in tax refunds. I asked David Cay
Johnston how he discovered Enron avoided paying taxes.

Mr. DAVID CAY JOHNSTON (The New York Times): Well, one of the thing I spend
an inordinate amount of time doing is reading footnotes in financial
statements, and you know, companies organize their annual reports to make it
appear that they are very heavily taxed, but if you know how to read the
footnotes, and you go in and start examining them, you can figure out how much
they actually wrote a check for and how much they deferred into the future and
how much they got in a refund.

And in this case, after I had done a rough analysis of it, I went to Bob
McIntyre at Citizens for Tax Justice. He is from a labor-funded group that
believes the tax system is unfair to the poor in this country, but his
analysis is accepted by everybody I know in Washington, across the political
spectrum, as being honest on the numbers. There's people who totally disagree
with his view of the world, agree that his numbers are all honest. And it
turned out he had run the numbers that very afternoon when I called, and he
came up with the figures that we used, that in four out of five years, Enron
paid no taxes and was eligible for refunds of $382 million during that time
period.

GROSS: Where were those refunds coming from if they hadn't even paid taxes in
the past four or five years?

Mr. JOHNSTON: Well, you and I have to pay our taxes each year, based on our
income, whether it's from a business we have, from capital gains, or in the
case of most people, their salaries. Corporations, however, are allowed to
average their income over an incredibly long period of time. There are
different rules that apply, but in some cases, companies can reach back 15
years and say, `Oh, we had this deduction we weren't allowed to take in 1989,'
and they get to use it now to even out their income over a long period of
time.

The one result of this system is, however, that corporate taxes as a
percentage of corporate profit have been steadily falling now for a number of
years, and they continue to fall as corporations take advantage of tax
deductions from the past and bring them forward.

GROSS: There was a time when individuals could do income averaging in the way
that corporations still do it. Individuals could take a big windfall that
they got and instead of paying a lot of taxes on it that year, they could
spread that income over a number of years. Why don't you explain how that
would have worked?

Mr. JOHNSTON: Well, you're exactly right. Individuals who had a big surge
in income were allowed to average over a period of time. Remember, though, we
used to have 15 or so tax brackets. Now we have five tax brackets. But part
of the reforms in the '80s that broadened the base and lowered rates overall
took away that opportunity for individuals.

Now in the last 15 years, Congress, whose members are out constantly raising
money from corporations, have been busy giving little rules here and little
rules there and little breaks there to corporations to the point where they
have undone many of the reforms of the 1908s and corporations now are able to
engage in a whole variety of strategies. In addition, the development of new
products that computers and advances in math have made possible and the global
economy has made possible, have allowed companies to engage in a variety of
other strategies to reduce or eliminate their taxes, so that in 1998, about 10
percent of the Fortune 500 companies that year paid no taxes, and a few
companies managed to pay no taxes, as Goodyear did, for as long as three years
running.

GROSS: So corporations get all kinds of breaks that we individuals don't.

Mr. JOHNSTON: Correct.

GROSS: What are some of the other ways that Enron managed to avoid paying
income taxes?

Mr. JOHNSTON: Well, Enron's collapse grows out of distrust about its
partnership agreements, but behind those partnership agreements was a very
aggressive campaign by Enron to eliminate taxes. Now what they did is, they
created 881 subsidiary companies offshore in tax-haven countries, 692 of them
in the Cayman Islands, 119 in the Turks and Caicos, and others in various
places around the country.

Now to get an idea of how aggressive that campaign was, Dynegy is another
Houston company which is in the energy trading business like Enron. They had
no foreign subsidiaries. Chevron, one of the biggest oil companies in the
world, lists three of them. Exxon, the biggest industrial corporation in the
world, lists six.

What you do in these partnerships is, Enron makes money from a trade or a
profit from one of the few businesses it operates. You send that profit to
your `partner.' Your partner is someone offshore who is not subject to US
taxes. He might be a division of a Dutch bank. He might be a pension fund
back here in the United States. Once the money is received by the other
entity, there's no tax owed on it. That untaxed organization then charges you
a little fee, in effect, and gives you back the value of that profit, minus
their fee, in a form that's not recognized as taxable under American law.

Now the structures of doing this are incredibly complicated and they employ
lots of $1,000-an-hour tax lawyers, but the principle is very simple: You
give your partner what would be taxable income, the partner's not subject to
tax, the partner gives it back to you minus their share of the pie, in a form
that's not taxed--Poof! Your taxes disappear.

GROSS: Now do you think a lot of corporations are using these kinds of tax
havens? I mean, how representative is what Enron did of what other
corporations are doing?

Mr. JOHNSTON: Well, Larry Summers, the president of Harvard, when he was
Treasury secretary, said that abusive corporate tax shelters were the biggest
enforcement problem that the Internal Revenue Service was facing, and for a
number of years now we have seen the share of corporate profits that are being
paid in income taxes go down while the share of income earned by individual
Americans going to income taxes has been rising. I think that the overall
trend goes beyond the ability to explain it without looking at abusive tax
shelters, many of which are offshore.

And remember, when you go to a place like the Cayman Islands, you don't just
get the ability to make taxes disappear, you get bank secrecy. The Cayman
Islands does not respond to subpoenas from grand juries in the United States,
or letters from the IRS for corporate records.

GROSS: Is there anything in the works now, either in Congress or in the
accounting world that might make it more difficult for other companies to do
the kind of thing that Enron did?

Mr. JOHNSTON: Well, on the accounting/lawyer side, that's a growing business,
and there are growing numbers of people who are devising different ways to
make corporate taxes disappear. On the congressional side, there are some
members of Congress who have raised issues about it, but no, fundamentally,
there is no significant pressure in Congress to reform this system or to blow
up the system and decide we're not going to tax corporations directly, we're
going to instead tax the owners of the corporations and operate the tax system
in a different way. This is not one of the problems Congress seems to be at
all focused on.

GROSS: When you were going the research for your article that broke the story
that Enron hadn't paid taxes in four out of the last five years, did you look
at the actual books? Did you actually get to see the books?

Mr. JOHNSTON: No. What you get to see are disclosure statements called
10-Ks. That's a very dry document that all publicly traded companies file
with the Securities and Exchange Commission. You can read them on the Web
site, www.sec--Securities and Exchange Commission--sec.gov. But just reading
them--you have to learn how to read them, and you have to learn how to go
through the footnotes. I can't prove that Enron actually got the refunds.
They reported to the shareholders numbers that indicate they got these
refunds, and the company has not disputed our story in any way.

GROSS: When you realized that Enron was eligible for a huge amount of
refunds, plus it had avoided paying taxes for several years, what was your
reaction? Did you realize that you were sitting on a really big story?

Mr. JOHNSTON: Well, I wasn't--frankly, Terry, I've been doing this long
enough on taxes that I wasn't surprised they were eligible for refunds. What
I was really struck by was 881 subsidiaries, and I think there's quite a story
in that. You have to think of Enron as a bank, an investment trading house,
not an energy company. They're trading contracts. You'll supply me with so
many kilowatts of electricity on Thursday, and I'll pass them on to somebody
else, and they're trading these contracts, and this product vanishes in a
matter of seconds--electricity. You can't store electricity, except in a
battery.

They have these incredibly complicated transactions going on to make these
trades, and investors in the company were never given a full picture of this,
because most of these trades were done through entities that were not directly
on the books at Enron, and many of them were done through these black boxes in
the Cayman Islands, where you have bank secrecy and no one really understands
what's going on. I think that's a very fundamental, important issue for
investors going forward, is how much information and how fully and
straightforwardly is it reported by the companies they invest in.

Now the accounting profession for a long time been selling its auditing
services on a lowest-cost basis. if I need brain surgery tomorrow, I don't go
around and see which brain surgeon will give me the lowest price. I find the
guy who'll do the best job, and so long as audits are treated as this `Oh, we
have to do this for the government. Let's get it done at the cheapest price
we can,' shareholders are not going to get the quality information they need
to avoid things like the scandals we've seen at Waste Management, Cendant and
Enron and others.

GROSS: What are some of the most interesting responses you got the day your
story was published?

Mr. JOHNSTON: Oh, a lot of people went, `Yeah, I just knew that had to be
true, something like that. Of course those guys weren't paying taxes.' And a
lot of people, I think, were very upset about the notion that they're having
money taken out of their check every week, and here's this big corporation,
busy lavishing campaign contributions all over Washington, and it's not just
not paying taxes, it's getting money back from the government. You and I
effectively gave Enron--every person listening to this broadcast, a buck and a
half out of their pocket.

GROSS: And what was the fact-checking process like at The New York Times when
you reported this information?

Mr. JOHNSTON: Oh, the fact-checking process is, every time you write a story
like that, you put your job on the line.

GROSS: Yeah.

Mr. JOHNSTON: I mean, literally, Terry. I mean...

GROSS: Tell me more.

Mr. JOHNSTON: I mean...

GROSS: Yeah.

Mr. JOHNSTON: Well, I mean, literally, if you have, in your career, a big
skin-back--I mean, let's say Enron had come out the next day and said, `Here's
copies of our tax returns--we paid a $1 billion in those five years.' I at
least couched the story in terms of `Here's what the public record shows,' but
you know, there would have been a lot of trouble about that. I mean, that's
the fundamental fact-checking system that you employ at the big newspapers.
People have track records. They either get it right or they don't get it
right.

GROSS: David Cay Johnston is my guest. Last year, he won a Pulitzer Prize
for his reporting for The New York Times on tax inequities and loopholes.
Last week, he broke the story that Enron had not paid any income taxes in four
of the past five years.

Let's take a short break here, and then we'll talk some more. This is FRESH
AIR.

(Soundbite of music)

GROSS: My guest is Cay Johnston. Last year, he won a Pulitzer Prize for his
reporting on tax inequities and loopholes; he writes for The New York Times.
Last week, he broke the story that Enron had not paid any taxes for four out
of the past five years.

Let's look at what's happening in the tax debate now in the post-September
11th world. When we last spoke, you and I, a few months ago, it was before
the president's tax cut plan had been passed. The plan was since passed.
It's like $1.35 billion--trillion dollars...

Mr. JOHNSTON: Trillion.

GROSS: I'm sorry, trillion dollars of tax cuts, and when that plan passed,
there was a surplus in the budget. Let's look at what the Republicans and
Democrats are saying now about tax cuts in the light of the fact that we no
longer have a surplus; what we have is a deficit.

Mr. JOHNSTON: President Bush and those who agree with him would argue that
the most effective way to grow the economy are permanent, long-term tax cuts.
Critics of that would argue that companies base decisions on whether to invest
and expand and hire more people on whether they can sell their goods and their
services. In a recession, where the demand for goods and services goes down,
you're not going to have investment, the critics would argue, even if you have
these long-term cuts. The president has taken the position, however, that his
stimulus package to bring the economy back up primarily should deal with more
tax cuts and more benefits.

Now the Congressional Budget Office--that's a bipartisan group of people on
Policy Hill--has done an analysis of the potential effectiveness of various
elements of the stimulus package the president put forward in December--it
died, but he's expected to bring it back in February--and they found that
lowering the tax rates on individuals, as this plan would do going forward,
particularly for high-income individuals, gives you very little economic
stimulus effect, that some favored tax treatment sought by multinational
corporations doesn't have any big effect, that what would have the biggest
effect would be to not collect Social Security and Medicare taxes for a
period, say a month; let them have that money that would be deducted from
their paycheck. Make the companies still pay their side of it, but let the
employees have that money. That's the single biggest stimulus, according to
the CBO. Now that's not what the president is proposing.

GROSS: So what's behind that theory, the theory that a temporary moratorium
on Social Security taxes is actually the best stimulus?

Mr. JOHNSTON: Well, every worker in America, on dollar one of their income,
pays 6.2 percent of their salary in Social Security taxes. If you suddenly
give people that money in their paycheck for a month, they have a little more
spending money in their pocket. It's like getting a little bit of overtime, I
suppose, whereas if you give people a check, a rebate check as we did last
year, people may not do things that stimulate the economy. They may pay down
their credit card, pay off their mortgage, put the money in the bank, save it
for the kids to go to college. Those are all perfectly good things to do, but
they're not things that stimulate the economy.

GROSS: Why assume that if you get the extra money in your paycheck, you'll be
running out and buying things with that extra money?

Mr. JOHNSTON: Well, there's behavioral research about that, that shows that
if people have a few more dollars in their pocket, they tend to spend it.

GROSS: OK. So basically, the president is saying that when there was a
surplus, the best thing to do would be to have tax cuts, and now he's saying
now that there's a deficit, the best thing to do is to have even more tax
cuts. Is that contradictory?

Mr. JOHNSTON: Well, not when you look at it the way he does. The president
is in that segment of society who fundamentally believe that you want to lower
taxes, and that this will lead to more investment in the long term, and that
you want businesses to plan in the long term and you want to lower their taxes
and you want to lower the taxes on incomes.

The other side of that equation, however, is that there's a cost to that.
People want and use government services, so if the government doesn't have as
much money as it did, it may not have as many FBI agents to hunt for
terrorists, it may not pay as much for medical services for the elderly, it
may not build as many roads that help commerce because you can move goods
about and people can move about an engage in economic activity. So there's no
free lunch here, but clearly the president believes that lower taxes are the
number one important economic goal he wants to be known for.

Now the president's tax package has already given most Americans--about 60
percent of all Americans--most of what they're going to get out of this tax
cut package. This tax cut package passed last summer was front-end loaded for
people of middle class and moderate and low income means, and back-end loaded
for people who were very wealthy.

GROSS: So individuals got their rebates in the mail really quickly, but over
the course of several years, corporations and very wealthy people get more and
more tax cuts.

Mr. JOHNSTON: That's correct, and then there's a second, subtle factor here,
and that is, the design of these tax cuts--both sides of the debate agree
about this--mean that over time, the kinds of cuts being given to the
wealthiest Americans become more and more valuable because of the inflationary
effect, whereas the kinds of tax cuts that were given to people of modest
means become less and less valuable.

GROSS: And why is that?

Mr. JOHNSTON: Middle-class families got, as their biggest tax break under the
Bush plan, the child tax credit. That child tax credit is going to grow over
the next several years, but it's not worth the $1,000 that was advertised,
because inflation will erode its value, and then it's fixed at $1,000. It's
not scheduled to increase above that. That's an example of where over time,
inflation reduces the value of the tax cuts to people who are not in the top 1
percent. But if you're in the top 1 percent, the last dollar that you earn is
going to be taxed at a lower rate, so if your income's $1 million a year, and
your income goes in the next year to $1.1 million, and then to $1.2 million,
you're going to save increasing amounts of money over time because your income
is rising and the rate is lower. And both sides of the debate agree that the
design of these tax cuts makes them more valuable to the high-income people
over a long period of time, and less valuable to other people because of the
effects of inflation.

GROSS: David Cay Johnston writes about tax inequities and loopholes for The
New York Times. He'll be back in the second half of the show. I'm Terry
Gross, and this is FRESH AIR.

(Soundbite of music)

(Announcements)

GROSS: Coming up, the current debate in Congress about taxes. We continue
our conversation with David Cay Johnston of The New York Times. He won a
Pulitzer Prize last year for reporting on taxes, inequities and loopholes.
Also, Ken Tucker reviews the new CD by Hank Williams Jr.

(Soundbite of music)

GROSS: This is FRESH AIR. I'm Terry Gross, back with New York Times reporter
David Cay Johnston. Last week, he broke the story that Enron avoided paying
taxes in four of the past five years. Last year, Johnston won a Pulitzer
Prize for his reporting on tax inequities and loopholes.

When we left off, we were talking about the current debate over the Bush
administration's tax cuts now that projected budget surpluses have turned into
deficits for at least the next two years. The president would like to
accelerate the tax cuts to stimulate the economy. Many Democrats would like
to slow them down. Bush's critics also ask, now that there's less tax money
coming in and no surplus to draw on, do we have enough money to fund current
and projected federal programs?

Is the Bush administration considering tapping into money in the Social
Security fund to compensate for the tax cuts?

Mr. JOHNSTON: Well, the administration is already borrowing money from the
Social Security Retirement Fund to finance the government. In fact, much of
the money that the government gave back in rebates last year was borrowed
money in order to pay the bills. And that's a very important issue if you
think about it for a moment. The Social Security tax applies to about the
first $80,000 that you earn. Money above that level is not subject to the
Social Security tax. The government is collecting more Social Security than
it currently needs to pay out in retirement benefits. When the government
borrows that excess tax to pay its current bills, effectively what's happening
is people on their first $80,000 of income--and that's 90 percent of the
public--are subsidizing the tax cuts for people who make more than that.

If we treated Social Security as a completely separate budget item, which we
did before the Vietnam War, and accounted for it separately, the government
wouldn't be able to borrow that money in that way, and you would have a much
clearer set of issues about the choices made between lowering taxes,
particularly on the wealthiest Americans, and reducing government services to
people, particularly the elderly.

GROSS: Do Democrats and Republicans agree on how we lost the budget surplus
and ended up with a deficit?

Mr. JOHNSTON: I think there's pretty general agreement that the economy
slowed down and the budget surpluses were based on this overheated economy we
were going through where people were reporting huge incomes. I mean, the
world is full of people who were $350,000-a-year dot-com employees two years
ago and have now run through their unemployment benefits and are back making
$60,000 somewhere.

GROSS: And what about the war on terrorism? How has that affected the
surplus turned deficit?

Mr. JOHNSTON: Well, it clearly is costing money to pursue the war. You
know, B-52 bombers cost almost $1,000 a minute to keep up in the air, partly
because they're all 40 years old or so. There are tremendous costs to
pursuing this campaign, and we don't know how long this campaign will go on.
I mean, you can argue there are acts of terrorism in history going back 5,000
years. The administration said its policy is going to be to eliminate
terrorism that has any potential for a global reach into the US. So the war
may go on, on that standard, for a very long time and chew up a great deal of
money. We use very sophisticated weapons and take very few casualties. That
costs a lot of tax dollars.

GROSS: Is there a lot of precedence for tax cuts in wartime?

Mr. JOHNSTON: No. That's one of the things that's very unusual about this.
If you read histories that deal at all with taxes, as I've wasted time doing,
you go all the way back to the times of the pharaohs. Governments raise taxes
in times of war. This is a very unusual move, to reduce taxes in time of war.
And I am not aware of--there may be a precedent out there for it somewhere,
but I'm not aware of it. In some cases, in some of the wars that went on in
Europe in the middle of the last millennium, taxes were essentially doubled in
order to pay the costs of war.

GROSS: What are the arguments that both Democrats and Republicans are making
about homeland security and how much money we need, where the money should
come from, and what role tax money should have in funding that?

Mr. JOHNSTON: Well, the idea of homeland security actually has raised and
brought to the fore a number of interesting tax issues. Starting February
1st, every time you get on an airplane, you're going to pay $2.50 as a fee to
check your baggage and your person to make sure that you're not likely to blow
up that airplane. That's an interesting change by government. We've now
essentially said call a cop and pay a fee. Imagine what would happen if we
said, `If you dial 911 to report a burglar in your house, you're going to have
to pay the police department a fee.' We're moving from using general tax
revenues to user fees for some of these security costs.

GROSS: So is this happening in other areas besides air travel?

Mr. JOHNSTON: This is the first place we've seen in happen, but I think
there will be--if you want to pursue an agenda of lowering marginal tax rates,
particularly on the highest-income Americans, the political donor class, then
you're going to have to try and find ways to shift fees. And we've seen it in
other areas. I mean, you now pay much higher fees to go, for instance, to
national parks than you did 20 years ago. You pay higher fees for a variety
of government services. Passports are now--What?--$75. There are some
immigration areas where you can be charged $1,000 by the government for simply
mailing your form to the wrong address. And I think we'll see more pressure
as the costs of homeland security are apparent to move to some kind of fee
system so that it doesn't appear on the income tax.

GROSS: You used the expression `the political donor class,' and you said the
political donor class is, you know, the class that's getting a lot of the tax
breaks right now. I wonder what impact you think the Enron scandal is going
to have on campaign finance reform.

Mr. JOHNSTON: Well, Enron scandal is a very, very important issue on lots of
different levels because people get it. They understand what's going on here.
Enron was a huge political contributor to both parties. I think 71 of the 100
members of the Senate got money from Enron.

The idea of campaign finance reform was pretty much dead in Washington, and a
lot of the reforms we've seen in the last 30 years have been reforms that, in
some cases, have made the system even less responsive to ordinary, everyday
Americans. If you have to go out and constantly raise money every day that
you're in office in order to stay in office, surprise, surprise, the thoughts
running through your head tend not to be the concerns of some family that
makes $40,000 a year and is trying to raise two kids and buy a house. Your
concerns become those of the people who are around you all the time and who
you need to appeal to for money. And so the political system has been moved
in that way.

But Enron represents on a lot of levels a fundamental change in this country.
It's going to refocus debate about the whole nature of regulation and how far
the government should pull back on regulation; on investors and
shareholders--how well are they being protected and informed by the system of
audits and government oversight of these companies? On retirement plans and
on why Congress allows a company to put 100 percent of a worker's retirement
in the stock of the company they work for when no financial adviser anywhere
would call that even prudent? They would call that crazy. And, finally, in
the area of campaign finance reform, the enormous amounts of money that Enron
lavished on both parties and its incredible access to politicians at a time
when it was trying to get out of all sorts of regulatory requirements so that
it could engage in the business it wanted to and come to the point that it
did, I think this is a real watershed event that will lead to fundamental
debate about the nature of regulation of businesses, taxes, campaign finance
reform and retirement policy.

GROSS: My guest is David Cay Johnston of The New York Times. We'll talk more
after a break. This is FRESH AIR.

(Soundbite of music)

GROSS: David Cay Johnston is my guest, and last year he won a Pulitzer Prize
for his reporting on tax inequities and loopholes. He writes for The New York
Times. Last week he broke the story that Enron had paid no taxes in four of
the past five years.

I want to read you this. I'm sure you know about this. This is reported
recently that a Democratic pollster named Selinda Lake warned that, you know,
Democrats have to be very careful in what language they're using in discussing
the tax reforms. She said the word `rollback,' as in `We have to have a tax
rollback,' did very badly in focus groups and polls, but saying, `We want to
temporarily postpone tax cuts' did a lot better. I wonder what you're
noticing in the language that Democrats and Republicans are using when they
make their case to the American public.

Mr. JOHNSTON: Well, the Republicans have an agenda: lower taxes and
particularly eliminate taxes on people who own capital and rely on investments
rather than salaries for most of their money. The Democrats, for 20 years,
haven't had a clue. They haven't understood that the percentage of people who
do own stocks, whether it's in a retirement plan or on their own, has changed;
that lots of middle-class people now own their retirement assets and have to
think like business owners did in the past. That the Democrats now are
beginning to think about, `Well, how do we say this to appeal to people
politically?' is the same kind of thinking the Republicans have refined very
well when they did things like take the estate tax, a neutral and the
literally legal description of the tax, and call it the death tax, a political
term that had great resonance with people.

So I think you'll be seeing a more sophisticated effort to understand how to
appeal to people. I'm not sure, in the long run, that that will turn out to
be any better in terms of the tax policies. It will simply mean that there
will be slicker and smoother ways used by both parties to get what they want
out of the tax system without people really understanding the nature of how
they're being taxed and of the choices that could be made.

GROSS: David Cay Johnston, you won a Pulitzer Prize for your reporting on tax
inequities and loopholes. And, I mean, you really do have a gift for
explaining a very complicated subject. Is there anything else that you think
we should be thinking about, or learning about, to better understand the
current tax debate?

Mr. JOHNSTON: Well, there's a really important issue that has not gotten
much attention yet, but I am very confident will become a major issue in this
country. There's a second income tax system in this country, a sort of
stealth tax, called the Alternative Minimun Tax. There's one for individuals
and there's one for corporations. There is a movement in Congress to repeal
the corporate Alternative Minimum Tax, which makes sure that companies can't
go for long periods of time, if their earning profits, and pay no taxes.
There is no movement under way to repeal it for individuals.

Now 10 years ago about 100,000 Americans paid this tax. This year more than a
million will pay it. In 10 years it'll grow to 40 million people, or about
one in three taxpayers. And if you make about 60,000 to $200,000 a year, you
have three children or you live in one of the high-tax states, one of the
industrial states where the tax revenue really comes from--California, New
York, New Jersey and Massachusetts, Georgia--you will pay this tax; probably
80 percent of you will pay this tax.

GROSS: Can you describe what the tax is for individuals?

Mr. JOHNSTON: The Alternative Minimum Tax for individuals is like a separate
universe. You know, like a "Star Trek" episode, there's a parallel universe
over here. And in this universe you don't get to deduct your children. You
don't get an exemption for yourself. If you have big medical bills, you don't
get to deduct all of them. And most importantly, you don't get to deduct your
state income tax and your property tax on your house. All of those are either
reduced or removed to make sure that you pay some income tax.

Now when Congress passed this 34 years ago, the intent of it was to make sure
that very wealthy people could not get away with paying no income taxes. It
was passed because 155 families, who had $200,000 in income in the mid-'60s,
didn't pay any income taxes. Well, it didn't work. About 2,500 families a
year now don't pay any taxes who make more than $200,000 a year. But more
importantly, because Congress hasn't adjusted this parallel universe of taxes
to reflect the universe we all live in, it now applies primarily to people who
make 60 to $200,000 a year. It can apply to a single parent who only makes
$28,000 a year and has the misfortune to live in a high-tax state and have
three children. And it basically doesn't apply to anybody who makes over
$600,000 a year.

And Congress doesn't want to move to fix this because as we go forward over
the next 20 years, it's going to bring in hundreds of billions of dollars of
revenue, and Congress can say, `Well, we didn't raise your taxes. We didn't
vote to raise your taxes.' They just leave this mess over here alone and it
brings in all this money. And the members of Congress and senators can say,
`We voted to cut your taxes' when, in fact, on people who are in the 60 to
$200,000 income class, they're going to take away your tax cuts, in some cases
all of your tax cuts, under the Bush plan through the Alternative Minimum Tax.

GROSS: Now how do you get bumped over into this alternative world where you
have to pay the Alternative Minimum Tax?

Mr. JOHNSTON: Well, you get bumped into it because you have children. So,
you know, Catholics and Mormons who have lots of kids are going to be hit by
it. You get bumped into it because you have a big property tax bill. You
live in a state--you know, it's not uncommon for people in New Jersey and New
York and Massachusetts to have an eight or $10,000 property tax bill on a
middle-class house. You get bumped into it because you have high state taxes
because you want to pay for good schools and law enforcement and whatnot.
That's how you get bumped into it, is through large deductions for things that
people usually don't think of as tax shelters: children, themselves, medical
bills and state and local taxes.

GROSS: So what determines whether you get to deduct your three children or
not, or whether you get to deduct the taxes on your house or not?

Mr. JOHNSTON: Well, almost all tax returns are done on software. That's why
people don't see this. But what happens is the software calculates your taxes
under both systems, and you pay the higher amount. And I live in New York. I
have children. And last year I had to pay $16,000--that's $300 a week--in
Alternative Minimum Tax, which made a huge increase in my tax bill, and I was
like really unhappy about that.

And I suspect that as more producers of broadcast programs and editors of
newspapers discover that they're paying this tax that there will be a lot more
attention paid to it. And by the time we get to a point where 40 million
American households are paying this tax, I'm sure it will be a political
issue. It will then also be enormously expensive to fix.

GROSS: Why would it be so expensive to fix the Alternative Minimum Tax for
individuals?

Mr. JOHNSTON: Because it brings in a lot of revenue to the government. When
40 million people are paying it, it'll be bringing in tens of billions of
dollars a year in revenue. And if you're going to fix that tax, the
government either has to make up that revenue somewhere else or it has to cut
services. And it hasn't been cast as an item where politicians can say, `I'm
cutting your taxes;' therefore, it's not likely to get a lot of votes.

GROSS: It seems that part of the conclusion that you've reached is that taxes
on the middle class are often getting raised in these stealth kind of ways
while taxes on the rich and on corporations are getting lowered.

Mr. JOHNSTON: It's absolutely an explicit outcome of the tax cuts that
Congress enacted last year that taxes on the very wealthy will come down, that
taxes on the people just marginally into the tax system will come down, that
corporate taxes will come down, that taxes at death on the wealthiest
Americans will disappear for at least one year--2010--and that tax cuts for
people in the middle class and the upper middle class, 60,000 to about
$200,000 a years, will not be cut nearly as much, and in some cases not at
all, because of the individual Alternative Minimum Tax. Clearly, government
sees that this is a group of people who aren't particularly politically
active. They're not donors. And they can be squeezed. And the government
typically tries to squeeze the goose for as much gold as it can without
killing it.

GROSS: What are some of the things on your agenda now for the next few weeks
or few months?

Mr. JOHNSTON: Well, Enron is a big story, and there is an enormous amount we
don't know about Enron. And there are a lot of things that I work on that you
don't see my name on in The New York Times 'cause I know how to noodle around
in obscure documents and things. I'm continuing to look at the failure of the
IRS to go after people who thumb their nose at the tax laws, business owners
and individuals who don't pay taxes, don't file returns and publicly declare
that they're not required to do so, and none of these people have been
arrested. It's been, I think, 15 months since we named some of them on the
front page of The New York Times.

We'll get data soon on audits and we'll find out whether the audit rates have
fallen further, as I suspect that they have, in the year 2000. If you didn't
apply for the earned income credit--that's for the working poor--your odds of
being audited are only one in 370. And we'll find out soon whether the IRS is
continuing to audit the poor more than the rich, which doesn't make any sense
at all just because the amount of tax dollars you can collect for the audits.

GROSS: Well, David Cay Johnston, I want to thank you very much for talking
with us.

Mr. JOHNSTON: Well, thank you for having me on.

GROSS: One last question before I let you go. Have you done your tax returns
yet?

Mr. JOHNSTON: No. I've got a weekend set aside for that misery, but I have
not yet done my taxes.

GROSS: Do you do your own? You know so much about taxes.

Mr. JOHNSTON: Well, my wife did them until her job as the president of a
charity has just overwhelmed her, and I unfortunately got it shifted back to
me on the theory that this was equitable.

GROSS: OK. Well, have fun.

Mr. JOHNSTON: Thank you.

GROSS: David Cay Johnston reports on tax inequities and loopholes for The New
York Times.

Coming up, Ken Tucker reviews the new CD by Hank Williams Jr. This is FRESH
AIR.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Review: Hank William Jr.'s new album
TERRY GROSS, host:

These days Hank Williams Jr. is probably better known for singing the theme
song to TV's "Monday Night Football" than he is for his country music hits.
The contemporary country music industry's emphasis on new young stars has left
the middle-aged son of country music pioneer Hank Williams without much
presence on the radio. But rock critic Ken Tucker says on his new album,
"Almeria Club," Hank Williams Jr. is again making music that deserves to be
heard.

(Soundbite of music)

Mr. HANK WILLIAMS Jr. (Singer/Musician): (Singing) I want a suit just like
Hank's. I want a voice like Johnny Cash. A big Gibson guitar with air holes
in the middle, a girlfriend like Dolly and a huge bass fiddle. I'm
ex--ex--ex--extremely country.

KEN TUCKER reporting:

Hank Williams Jr. has always been a big, blustery character, one whose
bragging has always undercut his achievement. To put it bluntly, he's always
seemed like a bit more of a jerk than his best music proves he isn't. No
doubt about it, this guy's had the kind of hard life that would lead one to
jerkiness. He grew up literally living in the shadow of his father,
unquestionably the greatest single innovator in country music history. Hank
Sr. used to bring Hank Jr., or Bocephus, as he nicknamed his son, on stage
during his shows and either forced or encouraged the kid to perform, depending
on what version you believe. It's a moment Hank Jr. acknowledges on his new
album on this nice, bluesy shuffle.

(Soundbite from album)

DOTTIE: A great big hello to you and all your wonderful listeners. And I
have a real big surprise for you. Hank Jr. will be on the show. Yes, Hank
Jr. will be with us. He's now nine years old.

Mr. WILLIAMS: Hello, Dottie. Like my daddy said, `If the good Lord's willing
and the creek don't rise, I'll see you...'

Mr. WILLIAMS and DOTTIE: `...that's right.'

(Soundbite of music)

Mr. WILLIAMS: (Singing) If the good Lord's willing...

Unidentified Group of Men: (Singing in unison) If the good Lord's willing...

Mr. WILLIAMS: ...and the creek don't rise...

Unidentified Group of Men: (Singing in unison) ...and the creek don't
rise...

Mr. WILLIAMS: I'll be looking into my baby's eyes. When the sun comes up in
Tennessee, I could tell you right now where I'm gonna be. I've been ramblin'
'round from place to place...

TUCKER: Since this new album "Almeria Club" is steeped in nostalgia, he
recorded some of it in an Alabama schoolhouse-turned-nightclub where his
father used to go to hear R&B and country acts. It bears reminding that Hank
Jr.'s breakthrough came in 1975. A few years before, when he was 27, he'd
fallen off the side of a mountain in Montana and cracked his head open.
Extensive facial reconstruction, followed by a period of shaking a few
addictions, cleared his head and resulted in an album called "Hank Williams
Jr. and Friends," an artistic triumph that led to a commercial one, a string
of hit singles that lasted well into the late '80s.

Nowadays, shut out of country radio by slicker, young acts, he's trolling for
a hook, something that will snag him some attention, such as this announced
affiliation with the Southern rapper Kid Rock.

(Soundbite of music)

Mr. WILLIAMS: (Singing) Well, I've been hanging out with my rebel son Kid
Rock. And I don't really like the stuff they call hip-hop. But he's sure
been good to me. And I'm still trying to make him see in country music you
just can't say the F word. My son...

TUCKER: If it seems hypocritical of Williams to say in that song that he
doesn't like rap, but he still hangs out with Kid Rock, well, Hank Jr.'s
always been a weird opportunist. This is the guy, after all, who eeked out a
hit in 1989 by taking a rare cut by his late father called "There's a Tear in
My Beer," and singing along with his dead dad on it. It's a relief to say
that Williams doesn't sink to that here. In fact, the songs on "Almeria Club"
come from a now middle-aged man with his own history to plunder, rather than
his namesake's. And one thing Hank Jr. has always liked more than his daddy
did was bluegrass music.

(Soundbite of music)

Mr. WILLIAMS: (Singing) I'm an outdoor kind of man, and I really love the
land, from the mountains of Montana to the Alabama sand. I don't care much
about TV for there's country yet to see. I'd rather be on the lake with a
fishin' friend. I'm an outdoor kind of man. Give me a plain pole and a
shotgun and I can have a whole lot of fun.

TUCKER: I doubt whether "Almeria Club" will make Hank Jr. a hot property
again, but I'll tell you, his own son, Hank Williams III, has just put out an
album called "Lovesick, Broke & Driftin'" that's so god-awful I won't waste
time playing it here. The tables have turned. Now Hank Jr.'s the father with
a kid who has to try to match his daddy's legacy.

GROSS: Ken Tucker is critic at large for Entertainment Weekly.

(Credits)

GROSS: I'm Terry Gross.

(Soundbite of music)

Mr. WILLIAMS: (Singing) There's a cross on the highway where the tragic
wreck occurred, and I lost my two good friends, taken to a better world. Oh,
there's stop signs and there's curves, but the one we've got to observe,
always bow your head and pray anytime, night or day, whenever you see a cross
on the side of the highway.
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