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How You Can Have a Billion-Dollar Income in America and Pay No Taxes

Tax journalist David Cay Johnston explains what's so rotten about our taxation system and the distribution of wealth in this country.

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TM: The corporation existed at the pleasure of the sovereign in England, and, of course, in the U.S., the sovereign is "we the people."

DCJ: At one time New Jersey was the state of choice for corporations; now it's often Delaware. Corporations have figured out how to take all their expenses in the states where they actually make a profit and claim all of their profits in states that don't tax them. By exploiting differences among the states, large corporations have figured out how to get all the benefits states provide -- like infrastructure, education, health care, and the criminal justice system --while bearing very little of the cost.

TM: We usually think of those services as existing for the good of a state's citizens, but they are absolutely essential for a corporation to function.

Let's frame the conversation in terms of three big questions. How is the tax system broken? What's the evidence? Second, how did it get broken? What's the history, what are the causes? Finally, how do we fix it? What are the solutions? What's the evidence that the tax system in the US is broken?

DCJ: Tax revenues have been falling even as the population and the economy expand. Even if you start with 2001 -- the first year of the Bush tax cuts and a recession year -- per capita income taxes in this country fell 32 percent by 2010. While the population grew by 8 percent, the total amount of money collected in individual income tax has fallen 27 percent.

The corporate income tax went from $187 billion in 2001 to $191 billion in 2010 -- adjusted for inflation. It grew 3 percent, but corporate profits in real terms grew about 25 percent during that time. Take into account population growth, and the corporate income tax fell 5 percent per person.

We live in a world in which knowledge is the most important driver of economic growth. Yet the state of New York just announced they're going to cut $800 million from schools. The state wants to save a few tax dollars today and forego huge amounts of tax dollars in the future, because the population will not be as well educated and won't make as much money.

TM: From a New York Times editorial March 20th: "Governor Cuomo [is] refusing to impose any new taxes or even continue a current surcharge on New York's wealthiest and least vulnerable citizens."

DCJ: Enormous fortunes are made in Manhattan, yet New York's top state income tax rate is half what it was a generation ago. It's been cut from 15 percent to about 7 percent, and the highest rate kicks in at a half a million dollars. People who make a half a million dollars a year pay the same tax rate as people who make half a million dollars a day -- and there are lots of them in New York.

TM: We now take in less taxes and grumble about it more while we face huge deficits for which most people's only solution is to make cuts.

DCJ: You will hear that the top 1 percent pay 40 percent of the taxes. It's not true. The federal individual income tax is only about one out of every five dollars of all taxes raised in America. We have federal taxes, state taxes, local taxes, payroll taxes, and I'm ignoring all the things that used to be covered by taxes that are now paid by fees -- three different fees for using the airport, surcharges when you rent a car, etc.

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