The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  According to the now dominant narrative, lower taxes are the only path to prosperity. Americans have been told for more than three decades that higher taxes equal less money to spend, that lower taxes equal more. As President George W. Bush liked to say about his tax cuts, “With my policies, you’ll keep more of your money in your pocket.”

  That higher taxes are inherently bad has become the default rhetoric of politicians from both parties, an unassailable truth trumpeted by network and cable television news personalities. The best newspapers and opinion magazines implicitly embrace the belief that higher taxes must always cost individuals more. The result is that almost everyone accepts that the only way to keep more of their money is to cut taxes.

  That narrative is so utterly false one might call it economic garbage. The people spewing it both in Congress and on the political trail, as well as in the news media, are largely people with less understanding of the economics of taxation than vote-getting savvy. So let’s take a fresh look.

  Higher taxes can make you richer or they can make you poorer; ditto for lower taxes. What matters in both cases are three factors:

  What is taxed.

  How the tax is applied.

  What the tax money is spent on.

  The story from my neighborhood about taking out the trash illustrates how a well-designed tax can save you money.

  I live on Council Rock Avenue in the Town of Brighton, five blocks outside of the city limits of Rochester, New York, the home of Kodak and, back in the 1820s, the town whose rapid growth made it the place first described as a “boomtown.”

  The asphalt of Council Rock Avenue runs for two long, wide blocks lined with leafy trees; it is named for a big pockmarked boulder at one end. The boulder was deposited by the last of several dozen mile-thick glaciers that covered the area in eons past. Our rock is one of several “council rocks” where, long before the Europeans came to the New World, delegates to the first known democracy met. According to some of the Haudenosaunee people, better known as the Iroquois Indians, who occupied much of what is now western and northern New York state, their democracy began three thousand years ago—five centuries before the democracy of ancient Athens. Because of a solar eclipse told of in Iroquois history, we know for sure that their democracy existed on August 31, 1142, long before self-governance in Europe.

  For today’s Council Rock Avenue residents—mostly doctors, lawyers, executives, and other professionals—the higher taxes that save them money started after Melinda Goldberg bought her dream home there in 2005. Rochester is one of the lowest-cost housing markets in America. Spacious homes here sell for about a tenth of what an identical property costs in the fancy communities of the Boston-Washington corridor or urban West Coast. While much of America is house poor, Rochesterians tend to be house rich because a smaller share of their money goes to buying shelter.

  Goldberg chose a sturdy blue-gray, center-entrance colonial built decades ago on a large landscaped lot with graceful shade trees. It came with a bathroom for each of the five bedrooms and a home office big enough for her husband, Ron Turk, who sells the cab portion of tractor-trailer rigs.

  “I was searching for my perfect Donna Reed neighborhood,” Melinda Goldberg recalled. “Sidewalks, streetlights, family life. Pleasantville.” But on their very first morning in their dream home, the couple was awakened by a diesel engine revving and metal clanging as a garbage truck mashed a neighbor’s trash.

  In the years after a century-old wheat field became Council Rock Avenue in 1926, families hired their own trash haulers. There were white trucks and green trucks, red ones, even lilac ones named for the lilac gardens in a city park designed by Frederick Law Olmsted. Every weekday was trash day for someone. Trash cans and recycling bins lined the curbs, along with bundles of flattened cardboard boxes and the occasional old chair or worn-out appliance. In spring and summer, the trash detracted from the colorful flowerbeds and neatly trimmed hedges; in winter trash piles marred the white mantle of fresh snow.

  Goldberg could not stand it. “The early morning clanging noise in my perfect neighborhood that awakened me five days a week, along with the ugly aesthetics of the trash cans that lined our otherwise beautiful street, led me to make a few phone calls.” She found out that the neighborhood could create a taxing district to finance trash collection on a single day of each week. When she met another resident, Tess McFarland-Porter, and found common cause in the noisy, smelly garbage trucks, they decided to act.

  “I had lived in four other houses in town and all had refuse districts,” Goldberg said. “So I thought we would benefit from creating one. We talked to people and explained the benefits. Everyone was for it except two neighbors, who were just against paying any more taxes.”

  They recruited a third neighbor, retired judge Dick Rosenbloom, to notarize signatures on a petition to create the Council Rock Refuse District and, despite the minor opposition, the neighborhood dumped the individual market system of buying trash removal retail and replaced it with one harnessing the collective buying power of the tax system for common benefit. For trash companies, stopping at every house on a street meant more efficient use of labor and equipment. A company could charge less and profit more. In 2012 dollars I had been paying about $575 annually for trash collection. The winning bid for the new system came in so low that my trash-hauling cost for 2010 fell 62 percent to $221.

  So much for the rhetoric that higher taxes are always and everywhere a bad idea. Those higher taxes mean nearly a buck a day more money in my pocket. The $221 more in taxes my wife and I pay means we are buying improved service and spending only thirty-eight cents for each dollar we used to spend privately.

  The winning bidder, currently Waste Management, must be making enough money to justify this piece of business because the price we pay has been going down, dropping by 12 percent from 2009 to 2010—even as Waste Management and Republic Services were jacking up prices elsewhere in America.

  Until 1998, Republicans outnumbered Democrats in my town. Yet counter to almost universal Republican rhetoric, we embraced higher taxes for decades when it saved money or made good sense for other reasons. Brighton taxes us for other services that many people in other towns pay more for because they buy them individually. The town picks up leaves, branches and other plant material left curbside and takes them to a municipal compost heap year-round. When the maples, oaks and birches turn yellow, orange and red and shed their leaves in the fall, the town quickly hauls them away. At year’s end, it takes away dried-out Christmas trees, too. All of that is paid for with taxes. Those taxes save us money compared to the cost of having to haul away this detritus individually.

  Our extra taxes also add convenience and safety beyond trash and yard waste removal. Goldberg and McFarland-Porter persuaded us to raise our taxes to start a second service, one particularly valuable to people who live in areas like the Finger Lakes region of New York where the snowfalls can be deep and the cold enduring. We created a sidewalk snowplowing district that, like trash hauling, is put out to bid.

  “I wanted to live in a suburb that had sidewalks,” explained Goldberg, who grew up a few miles away in a neighborhood of mid-century homes without sidewalks. When the first snow fell, she found she had to walk in the street because not everyone promptly shoveled their sidewalk. Some people never did. Goldberg thought to herself: “This is ridiculous, this is dangerous. There are cars in the street!”

  Sidewalk snowplowing cost me $35 in 2009, thus creating a double bargain for my bank account and my health. The price under the winning bid rose to $37 in 2010. Still, for a bit more than $7 per snowy month, I escape the drudgery of hours spent shoveling or the expense of an infrequently used snowblower. I also avoid the increased risk of a heart attack that comes with shoveling snow. (For men in top condition, that risk doubles after shoveling snow; it increases a hundredfold for men who are out of shape, according to a 1993 study in the New England Journal of Medicine.)

  Of course, raising ta
xes does not always lower costs or prevent heart attacks. Higher taxes can leave you worse off, depending on what is taxed and, more important, how the tax money is spent. But, as Melinda Goldberg and Tess McFarland-Porter showed their neighbors, paying well-structured higher taxes can drive down costs.

  THE OTHER KIND OF TAX SAVINGS

  The demonstrable fact is this: taxes are not an absolute economic evil, despite their simplistic portrayal as such by the antitax movement. Television personalities and actual reporters who lazily accept antitax comments without checking them help spread this lie; politicians who only know economics through talking-point memos reinforce the distortion. The truth is that, often, taxes harness the buying power of the many to save money and improve society through joint purchases. We may take these benefits for granted, but examples of money actually saved by taxes abound.

  Think about the cost of police we hire with our taxes. Now compare that with a society with few or no police, a society where citizens bear the individual expense and risk of guarding their property and their lives. Think of those third-world cities where people live behind high walls topped with broken glass or barbed wire, prisoners in their own homes. An extreme example is the wealthy in Rio de Janeiro: even cars with armor plating and guards in vehicles running in front and behind don’t always provide enough protection, so the very rich travel by helicopter. America is not immune to urban dangers: there are neighborhoods where thousands of homes are equipped with heavy steel security contraptions and iron bars cover ground-floor windows. Such ugly security measures are a warning sign about what happens when society fails to create enough jobs to keep people busy and fed, fails to fund programs that keep teenagers occupied and fails to instill in children a conviction that study and hard work will be rewarded.

  The urban dangers in America should remind us that taxes, per se, are no more dangerous than a gun in a locked box, no more helpful than a book sitting unread on the shelf. What matters is how we use our taxes. That is the crucial issue on which we need to focus: what we spend our taxes on.

  We need to look at taxes both for what they buy for us and the price we pay when we let others reduce or escape taxes. Known to economists as tax expenditures, tax favors are tax breaks and subsidies that encourage various behaviors, ranging from home ownership to charitable giving to spending on renewable energy. Tax breaks for independent oil and gas companies, gifts of tax money to Walmart and Warren Buffett, tax exemptions for new factories and office buildings, and lowered tax rates for golf courses and amusement parks are tax favors for the few—but a form of taxation for the rest of us. They shift the burden of taxes from those who get these deals on to those who do not. In short, lower taxes can cost you more money.

  The economic health of our society can suffer when we fail to properly fund basic services. Criminal and civil justice systems, for example, are central to a stable society. When we neglect to fund them properly and encourage people to turn to private vengeance instead of adjudication we add to our costs. We incur costs for more police and prosecutors and, especially, prisons, all of which consume tax dollars. And when we fail to achieve what our Constitution calls “domestic tranquility,” we pay in a reduced quality of life, as well as a risk of the loss of innocent life from stray bullets, drive-by gang shootings, and the inability to walk safely outdoors in some neighborhoods after sunset.

  Taxes spent to make sure children grow up to become productive adults who work for decent wages reduce the need for taxes to address social pathologies. This is by no means a new insight. Aristotle warned 2,500 years ago that extreme inequality produces strife and violence.

  Consider another area where socializing a cost through taxes saves us money. Getting rid of your local fire department would reduce your taxes, but the loss of general fire protection would soon enough cost considerably more in both property and lives. Politicians and pundits who complain that taxes make us poorer seldom mention how successful socialized fire departments have been at saving everyone a lot of money.

  One community in Tennessee learned a lesson about the wrong way to finance firefighting in September 2010. A teenager burning trash in a barrel was not attentive and the flames spread. First his grandfather’s shed caught fire; pretty soon the house was ablaze. But the firefighters in nearby South Fulton, Tennessee, would not put out the blaze because homeowner Gene Cranick had not sent in his $675 annual fee. Cranick insisted he had always paid and that this nonpayment was just an error of omission, but the firefighters stood by and watched his house burn, killing a dog inside.

  Once fires routinely burned down whole cities or blackened vast neighborhoods. People acting individually could do little to stop it. The fire that legend attributes to Mrs. O’Leary’s cow knocking over a kerosene lantern on the evening of October 8, 1871, destroyed a big swath of Chicago and took about 250 lives. That same night a much greater fire several hundred miles to the north engulfed the Wisconsin town of Peshtigo, killing as many as 2,400 people.

  During the nineteenth century, most fires were fought by volunteer brigades. Some scholars attribute the original organization and training of such brigades to the inventive Ben Franklin. Today in rural and suburban areas, where buildings tend to be just one or two stories high and not very large, a volunteer fire department may be sufficient. But not so in urban and industrial areas where construction is dense and buildings rise many stories. Without taxpayer-financed fire fighting, urban life would at times literally be consumed by infernos.

  Imagine the costs today had we not socialized fire-suppression measures and mandated preventive ones. We taxpayers invested in training and studying how best to put out all sorts of fires in all sorts of buildings. We bought fire trucks and installed water mains. We invested in research that transformed building codes, making buildings less likely to catch fire and slower to burn. Some of those codes imposed private expenses, such as requiring sprinklers in large buildings, more costly construction materials or an end to central staircases that acted as chimneys when a ground-floor fire broke out, spreading flames quickly. Those regulations can be seen as a form of tax because the spending is mandated for those putting up structures. But the savings in lives, in property and in heartache is a huge social dividend made possible by taxes and well-designed government regulation.

  How about schools? Parks? National defense? Bridges across mighty rivers and tunnels beneath bays?

  Taxes are also a key reason why people are less likely to die in accidents than they were a century ago. The rate of death from accidents today is less than half what it was in 1902, despite the remarkable mobility that characterizes our lives. Exclude automobiles, and the accidental death rate in our time is about a third of what it was a century ago. Back then a greater share of the population worked in factories and on farms. That meant more people used equipment that could crush hands or whole bodies, relied on unsafe wiring that caused electrocutions, and were forced to work using dangerous construction and mining techniques. That accidental death toll has been slashed because we spent tax money on safety rules and regulations and on research and development for safer manufacturing, construction and mining techniques.

  The idea of requiring employers to invest in safety equipment was denounced a century ago as morally and politically wrong, just as it is today. Business owners said the government had no role in deciding what equipment they bought or how they used it. But as unions, progressive politicians and engineers who believed in safety worked on these issues, laws were enacted to address worker safety. In time both accidents and deaths declined.

  The 1911 Triangle Shirtwaist Company factory fire in New York City helped advance the idea that worker safety was a problem to be addressed through taxes. Just before closing time one Saturday afternoon, fire spread through the top three floors of a Manhattan building where immigrant women labored at sewing machines in a sweatshop. The workers had been locked in to make sure none slipped away early. When the fire broke out, some women jumped to their deaths
rather than wait for the flames. In all, 146 workers died; the photographs of their bodies laid out on the sidewalk provoked public outrage. The workers’ compensation tax on your paycheck is one of the legacies of that unnecessary tragedy.

  Taxes have advanced the benefits of specialization, which improves efficiency. Adam Smith tells the story in The Wealth of Nations of how pins—ordinary straight pins, like the ones that come stuck into a new blouse or shirt—went from being the province of the rich to cheaper than cheap, providing the classic illustration of this principle. The trick was to switch from having each pin maker fashion a complete pin to breaking the work into eighteen or so separate tasks. Smith wrote:

  One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations.

  The result? Ten workers who could not hope to make 200 pins in a day churned out 48,000 pins every day. The price of pins plummeted until even the poor ceased to worry if they lost a no-longer precious pin.

  That same principle of specialization applies to government services. Instead of workers leaving the mill or assembly line to become volunteer firefighters and shutting down production, the workers kept to their tasks. Taxes were levied to pay firefighters, who could be highly trained, more efficient, and more effective. In education? Instead of parents teaching their children as best they could, taxes paid for teachers who were trained in what and how to teach at what were known as “normal schools.” This vastly improved reading, writing, and arithmetic skills. More taxes were spent to develop public universities, advancing human knowledge and fueling economic growth. With an educated workforce, the United States led the world in developing new technology and services. But maintaining that lead depends on continued investments of tax dollars in education and research.