David Cay Johnston Interview
HARRY SHEARER INTERVIEWS DAVID CAY JOHNSTON
HARRY SHEARER: This is Le Show, and it’s not tax season, but on the other hand it’s always tax season, and I can imagine that that has several people reaching for their dials. But don’t do that. A gentleman who has been making taxes and the games played with them comprehensible to mortals like me for many years, going back to his days as the tax writer – he didn’t write the tax law, he wrote about it for the New York Times – is now unveiled as a columnist for Reuters, and I wanted to catch up with him because he’s an expert on something that’s been catching my eye more and more. David Cay Johnston, welcome to Le Show.
DAVID CAY JOHNSTON: Well, thank you for having me on.
HARRY SHEARER: My pleasure. And the subject that I wanted to tackle with you, and it’s complex but you’re good at making the complex comprehensible, is this whole idea of offshoring, which you’ve written about. Can you explain in less than half an hour what offshoring is?
DAVID CAY JOHNSTON: It’s actually quite simple conceptually. What you do, if you’re a business, is you take your expenses here in the United States and then you arrange to collect your profits in a place like the Cayman Islands, Panama, Bermuda, where you will not be taxed on them.
A simple example of that is the Viagra tablet. They sell for about $18 each now, and there’s a huge profit in that.
Well, when the researchers at Pfizer were working on what became Viagra, it was intended to be a heart drug, a cardiovascular drug, and some of the male researchers noticed an unusual property. The Pfizer corporation immediately packaged up the information it had at the time, which wasn’t worth very much because it was still experimental, and Pfizer America sold it to Pfizer Switzerland, which in turn licensed it to Pfizer Lichtenstein, and every time somebody buys one of these $18 tablets now, the cost of manufacturing them is a tax deduction in the United States and the royalty paid on it for the ownership of the intellectual property is tax-free, collected by Pfizer in its Lichtenstein pocket.
The result is, they pay very little tax, they build up all this money offshore, and you and I have a heavier tax burden.
HARRY SHEARER: I’ve grasped that sort of basic scenario. But then does that money forever live in Lichtenstein?
DAVID CAY JOHNSTON: Well, seven years ago Congress passed something called the American Jobs Creation Act.
HARRY SHEARER: Well what could be wrong with that?
DAVID CAY JOHNSTON: Right. With a name like that, how could you not be in favor of it, right? And right now there is a proposed new American Jobs Creation Act. And it said, if you have offshore profits, you may repatriate them to the United States and instead of paying the 35% corporate tax, you only have to pay 5¼%.
The biggest beneficiary of this law back then was Pfizer. And Pfizer saved 11 billion dollars in taxes.
And what happened the day after they repatriated this money for very little tax? They started firing people. And they kept firing people until they fired 40,000 people. I’m not sure that they’re through firing people at Pfizer.Now, not all companies did this, but they got 1/3 of the benefits and it was clearly an American jobs destruction program.
So the new bill, like the old one, actually doesn’t require you to create jobs, despite its title. You can do all sorts of things with the money. You can use it to finance buybacks of your company stock. And executives, of course, like that because if there’s less stock out there and the company is buying it, it tends to push up the price of the stock, and that means their stock options are worth more money – all thanks to the generosity of you and I as taxpayers.
HARRY SHEARER: Now, about a year ago there was a piece I think in the Washington Post that went into some detail on this, and I gather this is related to what we’re talking about. The Double Irish with a Dutch Sandwich?
DAVID CAY JOHNSTON: (laughs) Harry, there’s an enormous number of devices out there. I wrote about ones many years ago. Peter Whoriskey at the Washington Post wrote about some of these. But there’s a couple of simple basic concepts. You take advantage of tax treaties.
So, I’ll give you one example: An American corporation – I hope I can remember the name of it, that I wrote about years ago – legally moved its headquarters to Bermuda. All they did was rent a mailbox in Bermuda and they pay the Bermuda government $26,000 a year for the privilege of on paper being a Bermuda company.Nobody works there. They have a mailbox. And they pay some local lawyers very nicely. In order to get money to Bermuda, they take advantage of a tax treaty in Barbados, another British island down in the Caribbean. And lo and behold, to take advantage of that tax treaty, once a year the directors of the company must fly to Barbados and hold a meeting.
HARRY SHEARER: Oh the poor things!
DAVID CAY JOHNSTON: And as we all know, that’s one of the worst possible places in the world to want to go, say, in the middle of January when your company’s headquartered in the Northeast.
HARRY SHEARER: Yeah.
DAVID CAY JOHNSTON: And they pay effectively a 1% tax on their profits.
HARRY SHEARER: Wow. But now this Double Irish with a Dutch Sandwich – Google and a lot of companies who are heavy with intellectual property were domiciling their IP property in Ireland? And then somehow moving it – paying an affiliate in the Netherlands and then went back to Ireland and then ended up in one of the Caribbean islands – was that sort of – ?
DAVID CAY JOHNSTON: Correct. And the Dutch and Dutch banks and German banks like Deutschebank and Swiss banks are all very big players in this.
Harry, here’s the fundamental difference between now and when you and I were little children, in terms of taxing businesses. When you and I were born, America was a country of big manufacturing enterprises. There were automobile factories and television factories, and in Southern California where you and I grew up big huge agricultural organizations that had oranges and whatnot.
HARRY SHEARER: And aerospace factories.
DAVID CAY JOHNSTON: Oh yes, aerospace. LA was forever and maybe still is the real center of the American war business. And when a company has a big factory, you can tax that company. It can’t get up and move. That’s when we made things like that.
But today in America what we principally manufacture are numbers. That’s what a software is. It’s an algorithm. It’s a series of numbers. CDs. All sorts of things are numbers.
The other thing we manufacture are molecules. That’s what the drugs we get are.
Well, the ownership of those things, and in the case of the numbers, the representation of them, you can move outside of the U.S. with a push of a button.
And so our tax system still operates as if we lived in a national industrial wage economy, when we now live in a global digital services world. And we need to have a fundamental reform of our tax system.
HARRY SHEARER: You mean like the kinds of meetings that we’ve been watching in recent weeks between Democrats and Republicans to craft a fundamental reform of our tax system?
DAVID CAY JOHNSTON: First of all, there’s no way to fundamentally reform the tax system the way they’re doing that. It’s an enormous project that will take a number of years to work out. That’s a game of chicken.
HARRY SHEARER: Well, chickens got to eat too. We’ll be back with more of our interview with David Cay Johnston moments from now, here on Le Show.
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HARRY SHEARER: Now let’s return to our conversation with tax expert David Cay Johnston.
Let’s get back to offshoring. If the repatriation bills didn’t pass – and I’m not enough of a naïf to think they won’t pass this time, as they did last time – but if the companies can’t repatriate their profits from, you know, poor old Bermuda or Cayman Islands, are they able to assert operational use of the money, even though it’s never been repatriated in the United States?
DAVID CAY JOHNSTON: It’s a little complicated. If you have 100 billion dollars in your offshore account, you can’t go to your bankers in America and say, “Loan us $100 billion here and we’ll pledge that as collateral.”That’s what you do when you buy your house, right? Let me live in this house and I’ll pledge the house as collateral through a mortgage.
But, when you go to your banker and you say, “Look, we need to borrow some money, and by the way, you know perfectly well we have 100 billion dollars sitting over there in this tax haven, and we need to borrow 50 billion dollars to do X or Y, you can get the loan on pretty good terms. So they certainly have access to this money.
HARRY SHEARER: Well, let me just pursue that for a second. If it’s so simple to just rent a mailbox and have a subsidiary in Bermuda if you had the telephone number or the e-mail address of a Bermudan lawyer, why couldn’t, you know, Jim’s Drug Store do that?
DAVID CAY JOHNSTON: Well, because in order to do that you’ve got to have, first of all, enough scale to afford the costs of it. Many of the tax shelter devices that I’ve exposed over the years, and they literally have totaled many hundreds of billions of dollars on a 10-year basis – in theory you and I could go do, but to do it you really have to have a huge amount of money. I mean, some of them come with, for example, a million-dollar up-front fee just for an opinion letter from a lawyer that will keep you from going to prison if the government finds out about it.
HARRY SHEARER: That’s an expensive Get Out of Jail Free card, in other words.
DAVID CAY JOHNSTON: Exactly.
HARRY SHEARER: So the table stakes are high is what you’re saying.
DAVID CAY JOHNSTON: Absolutely. This is not the $2 table at Binion’s in Vegas. This is the $5,000 or $50,000 private room at Wynn.
HARRY SHEARER: Yeah, this is the baccarat table upstairs at Wynn.
DAVID CAY JOHNSTON: Yes.
HARRY SHEARER: So do companies get any other benefits from this offshore apparatus that extends around the world, other than tax benefits? Is it just basically done for tax dodging?
DAVID CAY JOHNSTON: It is basically a tax benefit. And the real problem these companies face, Harry, is this: They can’t use that money to buy back their stock. And that’s what they want to do.
One of the big stories in America that’s very important to understand about why your investments are what they are and what’s happening to wealth and income is that many, many companies are using most of their profits to buy back their stock, and then they issue to executives an amount of stock equal to what they bought back, and it’s a way to pump up executive pay, and it damages all the rest of the investors over a long period of time.
In the case of Pfizer, where they spent their tax savings and their repatriated money almost exclusively to buy back their stock, it didn’t work. The price of Pfizer has continued to fall, and I think now it’s about half what it was when that Jobs Creation Act, that I call the Jobs Destruction Act, was passed seven years ago.
HARRY SHEARER: You’re saying Pfizer needs Viagra for its stock price?
DAVID CAY JOHNSTON: It’s exactly – ! That’s very good, I wish I’d thought of that, Harry. That’s why you’re a comedian and I’m an investigative reporter. They need Viagra for their stock.
HARRY SHEARER: But do they get any kind of regulatory benefit from offshoring?
DAVID CAY JOHNSTON: Not really. I mean, one of the challenges I think we face is that corporations in the modern world have become so incredibly complex. What you see as the New York Times or CBS or General Motors – a company with that brand name – in fact internally is hundreds and in some cases thousands of separate little companies. Every corporate jet is its own corporation.
HARRY SHEARER: (laughs) With its own board of directors?
DAVID CAY JOHNSTON: That’s – (laughs) well, technically yes.
HARRY SHEARER: Yeah.
DAVID CAY JOHNSTON: That they’re internal executives, and…
So these structures, which are all designed to limit liability and limit taxes and are a full employment program for corporate lawyers – regulators really, I believe, you can’t expect government-grade regulators to truly understand these things. And the IRS actually admitted, I don’t know, in response to some story I wrote when I was at the New York Times, that Enron was so complicated, just that company, Enron, that they really didn’t understand what was going on inside Enron.
HARRY SHEARER: Well that’s the same thing we heard during the financial crisis, that regulators just couldn’t keep up with the complexity of derivatives and of CDOs and CDSs and the pyramid of debt that was being built. Isn’t that sort of – ?
DAVID CAY JOHNSTON: Exactly. And the few people who did get it, like Brooksley Born, of course, were immediately slapped down by politicians and told, you know, “Stay out of this, this isn’t your business.” When in fact that’s exactly the point of regulation.
HARRY SHEARER: Yeah. So it is a jobs creation act for corporate lawyers?
DAVID CAY JOHNSTON: Oh, yes. In fact, all of the tax law changes we’re making, for the last 30 years we’ve had this incredible growing remake of the tax code. Every year you may only hear about a few stories in the news – there are thousands of changes being made in the tax law, often to benefit one individual or handful or a small industry or to gain an advantage for one industry against another, and many of them, they don’t have a label on them. If you read the thing you would never know what it means unless somebody tips somebody like me off to what it is and shows you how to walk through it. And so that’s why we have this just terrible, indefensible mess of a tax code.
HARRY SHEARER: And whom did you anger when you were in school that you inherited the job of reading all this stuff and trying to figure it out?
DAVID CAY JOHNSTON: (laughs) I actually asked for this, Harry. I was, you know, 30 years ago I was the guy at the LA Times who remade the reputation of the LAPD and revealed the worldwide spying they were doing and the brutality and the failure to solve a lot of crimes, but I started to become interested in wealthy people and taxes because of two scandals in California.
One of them was the Hiltons. Conrad Hilton left his fortune to the starving children of the earth, and I exposed how his son Barron arranged to divert the money to himself, and he ultimately got about 2/3 of it.
And then the Keck brothers, as in the Keck telescope, made this deal with then candidate for governor Deukmejian, who was attorney general and who was supposed to be the guardian of charitable trusts, to get a million dollars a year in what I called anti-pauper insurance, anti-poverty insurance, from their father’s charitable fund.
And that’s when my eyes sort of opened up to, you know, there’s more to this tax system than what I’ve been hearing.
HARRY SHEARER: Than – more to taxes than form 1040.
DAVID CAY JOHNSTON: And, and – yeah. And what comes out of your paycheck. And I began to realize that, you know, there are people who are getting rich off this, and what is it? It’s taken me 20 years, and I assure you there’s no small number of detractors out there who will tell you I have no idea what I’m doing.
HARRY SHEARER: But you do have a Pulitzer Prize to show for it, right?
DAVID CAY JOHNSTON: I do, and I also have an unusual distinction. I am not a lawyer. In fact, I’m not a college graduate, though I have a college education including graduate school, but I am a professor of law and a professor of graduate accounting at Syracuse University.
HARRY SHEARER: Wow. Without ever having graduated from college.
DAVID CAY JOHNSTON: Yeah. I have a college education –
HARRY SHEARER: Yeah, I understand.
DAVID CAY JOHNSTON: – I went to the University of Chicago graduate school but never got a diploma because I never stayed in one college long enough.
HARRY SHEARER: You and Sarah Palin!
DAVID CAY JOHNSTON: Yep. Not somebody I particularly identify with, I’m sorry.
HARRY SHEARER: You’re not usually lumped in with her, but there you go.
David, anything more we need to know about this, this offshoring, that I haven’t been smart enough to ask you about, in terms of how it works or whom it benefits and whom it hurts?
DAVID CAY JOHNSTON: Well, here’s the other thing I think people should think about, about offshoring. The techniques that are used by wealthy Americans and large corporations offshore are the very same techniques that not nice people who want to blow people up and kill people and undertake revolutions, and people who are in the drug business, as with the incredible explosion, epidemic of murder and violence we’re seeing right across the border in Mexico – they use the same techniques.
So we should be thinking about international flows of money in terms not just of tax and tax avoidance and tax evasion, but in terms of stability, in terms of avoiding war and death and conflict, and having a regulatory regime that serves the interests of stability, democracy, and the liberties of the people.
HARRY SHEARER: Thank you so much. I’ve read you for years and you’ve done the impossible, which is make me understand this stuff, and I wanted to share that gift with the audience today and it’s really a treat to talk to you.
DAVID CAY JOHNSTON: Well, thank you, Harry, very much for having me on.
HARRY SHEARER: Appreciate it.