The Cheating Of America. - Review - book review

Washington Monthly, April, 2001 by David Cay Johnston

THE CHEATING OF AMERICA by Charles Lewis, Bill Allison, and the Center for Public Integrity William Morrow, $25.00

ON MY DESK AT HOME SITS A small faux rock, a flat black sheet with broken edges and a maze of tiny white symbols etched into its face. It is a replica of the Rosetta stone, famed as the key to unlocking the hieroglyphic language of ancient Egypt. Less well-known is the text on this stela, a convoluted and flowery pronouncement in which a pharaoh claims credit for the prosperity of the people and then makes a grant of tax relief to the priests on whom he relied for the flow of revenue to his government and for ensuring the fealty of the people to his administration.

As it says in Ecclesiastes, there is nothing new under the sun.

There are, however, always new stories, and the ones told in The Cheating of America were chosen to make your blood boil. They are tales of the rich and powerful who granted themselves tax relief and found themselves in battle with the IRS. Their schemes are available to anyone willing to dig through the mountain of paperwork at United States Tax Court and other government offices in search of nuggets of fact.

Through a lot of hard work, the authors and their team expose loopholes big enough for the late Larry Hillbloom to fly his DHL Worldwide Express right through. There are the schlock movie makers, best known for resurrecting Sylvester Stallone's star, who with a patina of legitimate accounting glossed over massive tax evasion, and bought a guilty plea to a mere misdemeanor. And there is the inept government pursuit of Joe Conforte, the taxi driver-cum-whorehouse entrepreneur whose Chicken Ranch made him millions of untaxed dollars, which he now enjoys in Brazil.

Oh, and the outcome of these cases? Mostly the tax avoiders won and got to go on, their pocketbooks nicked as much or more by their lawyers as the government.

While the book focuses on the way the law, and the IRS's budget and rules, are weighted in favor of rich tax evaders, there are also a few stories of big-time losers in the game of moving symbols around on a piece of paper to make tax bills vanish. One of them is Gary K. Bielfeldt, a speculator in Treasury-bill futures from Illinois corn country who amended his tax returns to label himself a dealer, rather than a trader, in the government debt markets. He asked for a refund of $81 million and ended up paying $50 million extra and now says the world would be a better place if someone would eliminate the IRS.

As an expose, this book is a first-rate read. Unfortunately, while it is superb at turning up the heat, it is less good at throwing light on the forces at work beyond the court records.

Take the tale of George B. Kaiser, an Oklahoman who drives around in jalopies and who in 1989 reported a taxable income of just $11,669. The authors note that his taxable income was less than what the typical full-time bank teller earned in adjusted gross income. Despite using different measures of income, the comparison is apt; that same year Kaiser bought himself a bank for $61 million.

The bank had been run into the ground when he was on its board and then was resuscitated by the Federal Deposit Insurance Corporation. After Kaiser bought it, he returned it to such glowing financial health that his investment quickly ballooned 15-fold to nearly a billion dollars. Meanwhile, from 1986 through 1991, he reported an average of $860,000 in negative income. Amazingly, five of those six years were after the 1986 Tax Reform Act, which demolished tax shelters.

Unexamined, however, is whether the government rules that let rich folk like Kaiser get by have any economic or social rationale behind them. Is there any justification for these ploys that the rich exploit? Kaiser, for one, appears to be obeying the rules, although he has used the considerable political power his wealth brings to get some of those rules refashioned to his liking. Still, is there a rationale for the rules that have so richly rewarded Kaiser, made Ken Dart a resident of Belize, and moved so many manufacturing jobs overseas? Or, like the designated-hitter rule, are these tax rules pure abominations? Lewis et. al don't say.

In John O. Fox's book If Americans Really Understood The Income Tax, we get insight into the issues that underlie the outrages articulated in The Cheating of America.

Like the Center for Public Integrity's investigative team, Fox thinks politicians have unfairly tilted the tax code for the rich. Laws have been crafted that dribble out benefits to the many while reserving the big grants of tax relief to those with the resources and skilled advisers to navigate through a rough sea of complex rules and into a safe harbor of legal tax avoidance.

Fox, a Washington tax lawyer, throws a great deal of light, and virtually no heat, on these issues even though he makes it clear that he has an agenda not much different from that of Lewis and Allison. Fox sees a tax code overwhelmed with inequities. But he also sees the reasons those inequities got there, including the economic theories at work.