Booknotes

Ms. AMITY SHLAES, AUTHOR, "THE GREEDY HAND": Well, I'm a journalist, but I thought I would try and experience taxes the way the average American does, so I signed up at H&R Block Tax School, the school where they train their tax preparers, and I went in the fall and I did the homework. And I must say it's an excellent course, excellent because you see how very complex the code is and how it frustrates even their preparers. That was the first step to writing this book.

Ms. SHLAES: I live in Brooklyn, so I went deeper into Brooklyn on Flatbush Avenue, and I went into a little room with a class full of people and we studied twice a week. We had enormous amounts of homework. We had to prepare returns. It was like going to law school. I thought it was--I thought it was a big challenge. And fortunately, I passed and I got a certificate, and they offered me a job, which is one of the things I'm most proud of, preparing tax returns for an immigrant community called Greenpoint in Brooklyn, $6 an hour.

Ms. SHLAES: I told them that I was a writer writing a book, because I wasn't always working full time, and that I was writing a book about taxes and I told H&R Block, `Yes.' Eventually when the job was offered to me, I felt that it would be inappropriate for me to take the job and be a mole inside H&R Block without talking to the corporation. I--I'm not an investigating journalist any longer. So I asked them at their headquarters, `Can I take this job?' And they said, `No,' they were rather uncomfortable with having a Wall Street Journal editorial board member working inside their company. So I didn't take the job.

Ms. SHLAES: There's Schedule D, Schedule C, let's see, Schedule A--many, many schedules. And the problem, though, is not the number of the schedules but the complexity itself. Filling out Schedule D has become an art, particularly since the 1997 Taxpayer Relief Act, so-called, where there are many, many different capital gains rates and people are very confused, ended up turning to tax preparers regarding their capital gains more than before because of Schedule D.

Ms. SHLAES: Well, this is Brooklyn, which is a very modest area where a lot of the people who go in to have their tax returns filled out are modest people, so it might be between $50 and $100. I think the average return, if y--if you have a more complicated situation, will be higher, something very interesting about H&R Block in Brooklyn and tells you a lot about politics and the way America works.

We have a thing at the bottom under the income scale called the earned income credit, which is a form of negative income tax. What it does is it gives people cash back for working. They don't only pay zero tax, they get money back. Very unusual thing, a refundable credit. And that has a good social purpose. It's to keep people in the work force, keep them off welfare. It's relatively better than welfare, giving people money back. But for the Blocks of the world, this has developed into a major business, because very low earners, say someone who earns $10,000, knows that he can get $1,000 back if he files. And he--that's a big amount of money when you earn $10,000, $15,000, $20,000. So they will race into Block, and Block will offer them a r--money back fast. Block will lend them their refate--their refund, their rebate in advance. There's an interest rate charged for that. It's a real loan, just like at a bank. And that's become a lot of what a Block or any tax preparer will do in the inner city across the country, get people back this rebate fast. So it's--it's a part of our tax culture.

Ms. SHLAES: Well, you--you can file for it all by yourself, but you...

Ms. SHLAES: Oh, oh, oh.

Ms. SHLAES: How does it work? Well, I think it's a perverse thing, 'cause it sounds great. Rebate, money to people to keep them in the work force, negative income tax, encourage them. But guess what? Of course, like all tax advantages, credits that we've structured, it phases out. And you cease to get it when, say, you earn about $30,000. And that means your effective marginal tax rate, the actual tax you pay on the last dollar you earned, is a lot higher than what is published in the book 'cause you're losing extra money 'cause you're losing this benefit. And that's a disincentive, very important, Brian, for the so-called marriage penalty. Sounds technical, but here's a classic example.

If Brian and Amity have four kids between them, but we're not married and we each earned $10,000, when we get married--do the right thing, be the parent of our kids, have joint income of $20,000--we lose a lot of earned income credit because we're getting rich. If we're--we no longer deserve the credit in the eyes of the social engineers. We lose more than $3,000 in tax advantage. So if we had each claimed alone as head of household with these kids, we would have got lots back and we lose a lot of that as it phases out. So it's an example of how a well-intentioned thing ends up perverse, ends up punishing people.

Ms. SHLAES: Well, how does that work? We all think about politics and that's what we have in common, but my mother and my sister--my mother's a--formerly a professional Democrat, what in Illinois is known as an independent Democrat, which is a non-machine Democrat, a non--not--not the sort who was allied with the old mayor, Richard Daley. And my sister is generally, I think, more Democratically inclined, and my dad and my brother are much closer to the free-market end of things. So you have a little tension on that, and I think that's creative, and all these people supported me in their ways on the project.

Ms. SHLAES: Where do they all live? They live in Chicago. And one reason I'm a free-marketeer and "The Greedy Hand" is sort of a free-market book is I was around the University of Chicago. And the University of Chicago gave us a lot of the free-market thought that's so important to us through Milton Friedman, Garry Becker, other Nobel Prize-winning economists, who've taught us the importance of markets in our lives. And as a child, I was around that, even though I wasn't naturally attending the University of Chicago, but I picked some of that up and that spirit excited me. My--it excites my dad, too.

Ms. SHLAES: That happened in Communist East Europe.

Ms. SHLAES: Because after I finished college, I went overseas to Germany and I landed in Berlin and I spent a lot of time in East Berlin, and I ended up spending--particularly after that year in East Berlin, and I ended up working for The Wall Street Journal overseas, going into Hungary, Poland, before the change, before 1989, and I saw what an economy that doesn't work looks like. I saw what happens when a currency is broken, and when you see a country where the money is funny money, it's not real money, and where markets are so disrupted that people are entirely frustrated, you begin to appreciate what we have at home. And it tends to drive people towards the free-market end of things when they see all these broken economies. And they--then they have less patience for the principles preached by, say, our social democratic end here in America or by people who talk about the third way, 'cause in the Communist countries, they talk quite a lot about the third way. I remember when I was younger Yugoslavia was the big third-way country and we talked about how productive the worker teams were there during the Cold War. And we see now that the Yugoslavian economy was not so much more productive than the rest of the Communist economies and they were all junk.

Ms. SHLAES: Oh, they've been on a mixed adventure. They've been on a mixed adventure. You see a lot of--what you see is who these countries really were. Czechoslovakia really was a capitalist place. It had a strong worker base, very skilled workers, a lot of machine tool experts, tradesmen. A lot of them actually came over to America and live in areas around Ohio, Michigan, and practice the same trades here. Anyway, they reverted to what they were before communism largely. Czech Republic, Yu--Slovak, capitalist place, trade oriented. Country with an older, longer history of communism like the Soviet Union, which dates back much closer to the beginning of the century, has a much harder time finding its way to capitalism. East Germany has some problems, but those problems, I think, are--some of them about the bad social policies from West Germany are not about capitalism per se. East Germany is relatively OK because it's closer to the West than it has been, even while it was Communist.

Ms. SHLAES: Well, it's a good thing we don't have a VAT tax. A value-added tax is collected at different stages of production, but the way it feels is like an invisible sales tax. You go to the store and it says toothbrush, $1, and you learn later that 20 percent of that was this tax and the various stages of it. And it makes busin--business the handmaiden of government, 'cause business has to collect the tax. And it's hidden. And in "The Greedy Hand," I talk a lot--"The Greedy Hand" could be called "The Hidden Hand," about how it's a very bad thing when taxation is hidden. So that's one of the things I don't like about the VAT, because I believe it makes people frustrated and it drives them to illegal behavior. Particularly in Europe, people will shop for cars black market because they don't want to pay the 20 percent VAT tax. It's racked the political culture to some degree, these high VAT taxes. And, of course, they have them, in addition to owners' Social Security taxes that are higher than ours and high income taxes. So I don't think a VAT is a good cultural sign for an economy.

Ms. SHLAES: Well, generally--and I looked at this closely regarding schools, I think local taxes are good. Why is that? Local tax is close to a fee-for-service arrangement. You have some control of what you get for what you pay. For example, you own a home in a suburb and you pay a high property tax. You hate that. It makes you annoyed, but you can go to the PTA and sign up with a group who wants a new first grade teacher, as many of us might want. And you may even have a reasonable chance of actually getting that thing that you've decided you require for your child. So a good tax is a tax that's close to a fee-for-service arrangement, like this property tax can be.

A bad tax is an anonymous tax. You send the money to Washington, they send back what they think you need; or you send the money to the state capital, they send back what they think you need. So you need a first grade special teacher, they send back bilingual ed, whatever is a product of their culture and what they think you need, and often, it's a terrible fit. Big governments far away are very--have--are very primitive about figuring out what localities need. So I've--I've come to the conclusion that local is good and we've underrated that aspect of our lives.

Ms. SHLAES: We pay property tax.

Ms. SHLAES: I--in Brooklyn, yes.

Ms. SHLAES: We have three kids.

Ms. SHLAES: One, five and seven.

Ms. SHLAES: Flora, Theodore and Eli.

Ms. SHLAES: That's a very hard question. I think if the economy is gonna grow enough so that they can have great, prosperous lives, or kids like them can, then the tax structure is gonna have to be simpler, clearer and the rates are gonna have to be lower. Payroll tax, Social Security, very important problem. Payroll tax would have to go up to 20 percent. Now it's 15 percent or even--it's 15 percent now when you include your side and the employer's side. It would have to go up to 20 percent or higher. If you look at all the charts, where it's going, I don't want my children to have to carry that kind of burden, particularly for something that has negative returns compared to--has zero returns or close--just not very good returns compared to the private sector. I want my kids to have more control of their pensions, very important, individual accounts. That's why these proposals coming out now about individual accounts for investment are very important to all families, not just our family.

Ms. SHLAES: My husband is the editor of a small Jewish newspaper, the Jewish Forward. It's a national paper.

Ms. SHLAES: My husband's newspaper is a laborite paper. It comes from the Social Democratic tradition. And he is less excited about taxes than I am.

Ms. SHLAES: About changing. He thinks it's bad and he--you know, they are more inclined to look at taxation--they believe in taxation for the social good. So they think it actually works to some degree more than I would, coming, as I do, from The Wall Street Journal.

Ms. SHLAES: Seth Lipsky.

Ms. SHLAES: That's a Russian name. It's Shlaes. It's a very difficult name. People have a lot of trouble with it. Some of the reviews of this book, while glowing, have misspelt it. It--interestingly, my brother, Noah, researched the genealogy and he found that that's not our family name. We took that name because the czar used to make Jews all go in the military for years and years and years. And you could get an exemption if you already had a number of sons who had served. So my family took this other family's name because that family had had sufficient sons served to get out of military service.

Ms. SHLAES: Well, I think my grandmother--her name is Ruth Reese--very exciting example. She's received Social Security since the '60s and she's had a pretty good deal because she was married to a successful gentleman. And she is very concerned, as many seniors are, about keeping benefits. And I think that's an important concern and we should always stress that all these plans to reform Social Security, even the most wacky right-wing ones, would protect people who are currently seniors and ensure that they get exactly the same benefits that they get now.

Ms. SHLAES: Pretty close. Pretty close. I--I wouldn't work there if I didn't believe what we say about economics. And a lot--I--I thought--after the campaign of 1996, I--which I covered for The Wall Street Journal as an editorialist, I followed Dick Armey, House majority leader, to New Hampshire to watch him campaign for the flat tax. And I watched candidate Dole, Mr. Kemp, big tax fighter, fight on taxes. And I said, `Oh, my gosh. Something's not right here. People are angry about taxes, and the lawmakers are trying, the candidates are trying to fight for taxes for them, but something's not connecting.' And I discovered--and that's why I wrote "The Greedy Hand." I said, `I'm gonna go back and look at the problem.' This is 1999 we're in now, or 19--we're not in a presidential campaign year yet. So let me explain the problem. Next year, we can talk about competing solutions and horse races and who is the best exponent of the flat tax or whatever. This year, let's look at the American experience, and that's what "The Greedy Hand" is about.

So more fully than I ever could in editorials in The Wall Street Journal, I went from the first pay stub right through to the estate tax and looked at what this tax structure does. And what I discovered was while we have essentially a different tax problem from the one we had in the '70s, when the last tax revolt came, Brian, the last tax revolt was triggered in part by inflation. The wind of inflation blew people into higher brackets than they had ever imagined being in and that was a bitter shock, happened all at once. Within a short period of time, suddenly you were in a high bracket. And guess what? Your money wasn't even worth that much because of inflation, so you were angry. We have commensurate tax frustration now, but the problem is not acute, one big pain; it's chronic. And that's what I look at, all the aspects of our tas--tax dissatisfaction from the beginning to the end. It's a dull, generalized pain.

Ms. SHLAES: People get a description of something that they know. I think everyone wants to know the causes of things, why they're angry about taxes. For example, IRS rage. What's that about? People were so angry about the IRS that Congress felt compelled to pass a law last year about it. The IRS is a terrible bureaucracy. It's overly intrusive. It has too many powers. But it is a bureaucracy. I said know the demon behind the demon. The demon behind the IRS, which is a demon, is the bigger demon of the code and complexity itself. A lot of the stuff those IRS bureaucrats do, lawmakers cause by writing contradictory things, like the earned income credit that I just described, for perverse things.

Big subject in the book is the alternative minimum tax. Right now, it hits under then--it's--it's a penalty box you fall into if--if the law says you took "too many" tax deductions. Even if all those deductions were absolutely legal under the code, they put you in this penalty box to punish you 'cause they don't want you to get away with too much as a rich guy. That was the original intention of this alternative minimum tax, which was passed in the late '60s. Nowadays, under a million people pay this penalty box--tax, which is a very unhappy experience. You can't take deduc--deductions you counted on. It's frightening. Often, you get audited about it. Close to 10 million are set to pay it in coming years a--as more and more people fall into the trap. Lawmakers never intended this. It's an example of the law perverting its own goals. It's an example of how social engineering doesn't work. Think a theme in "The Greedy Hand" throughout is that social engineering doesn't work. Th--we have certain noble goals. We want to fix people's lives through the tax code. It almost always ends up hurting them instead. It's not a good thing to try to change our society through the tax code.

Ms. SHLAES: I've been in the offices, yes. Have you ever been in the offices? You go--I re--I--I had a very interesting experience to--this tells you a little bit about bureaucracy. I had an appointment to see the ombudsman there, Mr. Monks, and I wanted to be on time. But when I got there, they had a long queue, like at the airport, a long line, and they said--the woman come out, `Nobody goes in,' like a socialist country, `Nobody goes in. Everybody waits.' So we all waited 20 minutes. I was not allowed to call Mr. Monks, so I was late for the appointment. He was miffed. That's just an example of the way bureaucracy works. And the IRS is a--as I say, a big bureaucracy a--that reminds me a little bit of the Third World or of socialist countries where--this "Alice in Wonderland" situation where you do your best to do the right thing and still you're confounded, lost, confused.

Ms. SHLAES: Well, the--the tax c--the first time we had the income tax was 1913 a...

Ms. SHLAES: Interestingly, Republicans ha--played a big role and I think they should be blamed a lot for that. The--the--they were perhaps fighting worse things. They d--th--or they said, `Let's do our income tax so we won't have an even higher income tax put through by Democrats.' But a very important Democrat, Borque Cochran, a leader of the time, very articulate man, said that he didn't want too much progressivity. He opposed progressivity because he said one of the big engines for social order in America is the hope of success. And the important thing to know about that tax code--the top rate was 7 percent. And there was suggestion at the time, as I describe in "The Greedy Hand," that there should be some kind of law saying don't let the tax rate go above 10 percent. And they didn't even pass that legislation 'cause they thought it was too ridiculous, 'cause taxes would never go above 10 percent. What a silly idea, and an un--unnecessary bit of legislation. Yet very soon, once government had this tool, of course, taxes went up extremely high. They've been up as high as 90 percent.

And in "The Greedy Hand," I--I--I looked for a philosopher to explain tax theory, an economic philosopher, where does this all come from? And I love Milton Friedman. He's one of my great heroes. But he is not the political economist who is the hero of this book, who explains why government has this greedy hand and grabs so much from our pockets. That philosopher is James Buchanan, a Nobel Prize winner, school of thought called Public Choice Theory. It sounds very abstract, Public Choice Theory. But what it says is government's always gonna grow. And when you give it a tool like withholding, that we have where every week, your employer collects the money automatically from your pay stub, or some other tool like the income tax, it will, wow, use that tool to grow very fast indeed, not much you can do to stop it and it's kind of an illogical growth.

Ms. SHLAES: Yes, sir.

Ms. SHLAES: Wonderful story. I--I think the way you think about what's happened to you with taxes is you tell yourself stories and you say, `How did we get here with withholding? What's this about? Why is my son, who's starting a job, having this grand sticker shock where he thought he was gonna get the take-home and he--gonna get the gross and he's just getting the take-home and that huge payroll tax on his side alone, 7.65 percent? Where does it come from?' So the first sentence of the book is, `The father of the modern American state was a pipe-puffing executive from Macy's department store named Beardsley Ruml.' Ruml was the architect in World War II of the modern withholding arrangement.

Ms. SHLAES: But withholding only started in 1943.

Ms. SHLAES: Well, the income tax, while it existed and while there were very high rates, indeed, for many years, was not what they say, a mass tax. It was a class tax. Relatively few Americans paid it. But then along came the war. We had this World War II. We had this national moment where we wanted to pull together and we had to win, had to beat back the Japanese, had to beat Hitler. So a broad-based income tax was passed for the first time. Roosevelt led it. Congress agreed. They say the class tax became a mass tax. That's the phrase that we use.

But question was: Could people pay it once a year, come up with the money? What if they didn't have the money? And this was particularly acute because a lot of people were going into military service at that time, so they might be earning less in the military than they had been in the year previous, and yet, they owed a tax bill for the earnings on the year previous. And that--interestingly, Treasury Secretary Morgenthau panicked about this. A wonderful writer, Carolyn Jones, has written about it, too. And he said, `What am I gonna do? Am I gonna have to go out and arrest five million people if they don't pay their tax bill?' So they s--there was a panic and they said, `OK, let's switch to withholding, where we start to collect automatically. Let employers be the handmaiden of government. They'll collect it.' And that was the plan.

But w--i--Ruml was a marketer. He was also on the board of directors of the New York Fed, a Macy's executive, kind of a thinking--a think-tank sort of guy. And he said, `Let's not call it withholding or a collection at source, or the technical names we have for this kind of tax collection. Let's call it pay as you go.' Sounds nice. Perhaps inspired by his experience in retail, too. He figured out people didn't mind paying little by little what they might object to paying all at once. And there was a very interesting political event, which is they didn't just pass a law saying withholding. They also gave voters a sweetener. They said, `We're gonna grant a general tax amnesty for the year prior to 75 percent of what you owed for the year before. You can forget about paying that while we put in this withholding.' So it's not as if there wasn't political resistance to withholding. But it came attached to this--with this big sweetener. And as I say, it was during the war when everyone wanted to go along with the effort.

Interestingly, I think a lot of people thought it would end with the war. When--when the war was over, there would be no more high taxes and heavy withholding, but, of course, they stayed. And I describe the few lonely tax protesters in "The Greedy Hand" who--who tried to fight after World War II ended to lower taxes or to get rid of withholding.

Ms. SHLAES: I--I d--I had one economics class at Yale. That's it. A--th--and--and I wish I had done more.

Ms. SHLAES: Y--I did not find Yale an overwhelmingly free-market place, and fortunately, although I do have many free-market friends who came from Yale with me, what Yale had and probably still does have is a very high level of discussion and excitement. So that if you have an idea, you can find someone interesting to talk to about it. And that's a precious gift in the university, regardless of its politics, and they had an open spirit about that, even if the general political direction might have been a l--a little bit more to--to the left of where I am now. Wonderful tax scholar now at Yale, wrote a great textbook, Michael Graetz. You know, there are isolated heroes at Yale even today on this issue.

Ms. SHLAES: Title. The title "The Greedy Hand" l--I wanted, and the publisher, Random House, wanted a title that reflected people's frustration and rage. But I didn't want one that didn't come from history. I wanted it to be from our own experience. "The Greedy Hand" comes from Thomas Payne, one of the publicists who wrote at the beginning of our country's founding. He wrote of, `The greedy hand of government making our prosperity its prey--"In the Rights of Man" he wrote this. `The greedy hand of government, making our prosperity its prey.' And I thought that was particularly apt for now because we are quite prosperous as a people and government is taking a greater share of our money than it ever has before. Federal government takes over 20 percent of gross domestic product of the economy in taxes, which is the highest rate since Beardsley Ruml. I had a nice talk with Eric Foner, the editor of Thomas Payne's--Thomas Payne's writings, and we talked about, how did Tom Payne know about taxes? And it turned out--it's right in the back of the book--that he was an excise man. He was a professional tax collector. So, of course, he knew about the greedy hand. He had been the greedy hand, measuring beer casks to collect excise taxes on alcohol.

Ms. SHLAES: People know that they're frustrated and you have to start to talk to them about their frustration. We get a lot of marriage penalty calls. Th--and marriage penalty is a wicked thing at the bottom end, as I describe, but also at the top end. When you get married, you pay more taxes for no reason at all except for that the code is trying to pursue too many social goals and they all conflict.

Ms. SHLAES: Wonderful study by June O'Neill when she was at the CBO--that's what that's from--yes, but as many people get a marriage bonus. So the point is not to focus on this marriage penalty thing the way the Republicans do in a narrow sense with a microscope. The point is it's not the job of the tax code to decide whether it's better if you're married or single. It should be neutral across the board, and the best way to get rid of the marriage penalty is to lower rates all around. It's not to zap the marriage pen--penalty like some pimple. It's not going to work. In fact, you can't do it, as I show in the marriage penalty chapter. You have to lower rates all around. We should all have low rates.

Ms. SHLAES: Sure.

Ms. SHLAES: It's about shopping. I think tax shopping, which is what people do when they travel to a venue or order from the direct mail--L.L. Bean or on the Internet--in order to avoid sales tax or higher sales tax--I say, they're telling government something, and I talk about the Mall of America, which is an important tax draw because it has no sales tax on clothing in Minnesota, and the Minnesota Department of Revenue actually acknowledges that. What is that--what are we telling government when we try to save by avoiding taxes? We're not being bad, we're telling them something. Sometimes governments respond.

Ms. SHLAES: Yes. Forty-two--well, what--many, many visitors, and indeed taxes are a factor. I'm not the one who made that up. I was told that by people there, and that tells you something about what people are willing to pay and not willing to pay.

Ms. SHLAES: Your Work--it's about Social Security. For seven out of 10 working households, Social Security is the biggest tax. It's not a good deal. I write a lot about the cul--the political culture inside the Social Security Administration, when I took my son and went there.

Ms. SHLAES: Eli. Eli. And we had a very satisfying time, but this is a bureaucracy devoted to a myth that FDR built up, and the myth is not appropriate to this era, because the system cannot deliver. As we know, it'll run out in 2030 or 2031 or whatever, and we need to shift, culturally, to find another way to assure our retirement. And now that we do believe more in the private sector--I write about that and I write about--also about the way the Social Security Administration Web site looks and what cultural--what's the culture of Social Security?

Ms. SHLAES: Well, yes. Eli--Eli had an error in his Social Security card. His name--his name was written wrong, and he got to change it, so we got to touch the beating heart of bureaucracy and communicate with bureaucracy, and Eli's name was fixed, and that was a very satisfying thing, but unfortunately, most of us don't always get to communicate with bureaucracies in such a nice and satisfying way.

Ms. SHLAES: Outside Baltimore in a--in a big no-name sort of structure, big, big building, full of people who--who govern--civil servants who believe they're doing a good thing, and they are. Because they're giving out money. But the question is, is this the culture that's the right culture for the future of the country?

Ms. SHLAES: Just that I wrote specifically about a congressman, Dave McIntosh, whom I admire very much, and his own spiritual battle ab--and political battle of fighting the marriage penalty, and realizing that the real problem is the code itself. You can't just knock off the marriage penalty. You need to lower rates all around.

Ms. SHLAES: Very important political chapter--we had two candidates for attorney general who didn't make it, women, because of nanny tax irregularities. The--the--the net is, when you have a business at home, and you need a baby sitter, you get no help from the tax code on that baby--or little help from the tax code on that baby sitter situation, compared with when you're in an office and you go out to lunch and you have a secretary--all these things have more favorable tax treatment, and I say in the book that also--oh, baby sitter taxes, the taxes that we have to pay to the federal government because we have a household employee, so-called Schedule H--I note that it's driven many, many families, the huge majority of families who do have employees, off the books, and that's a bad thing for the culture of the home. These nanny taxes are way too complicated. The real--you know, it--it--it's a crazy system. I write about how the au pair is a tax loophole, because technically, an au pair, when you get one from Europe, under US law is a cultural exchange...

Ms. SHLAES: ...a baby sitter you get from Europe through the United States Information Agency. Comes on a one-year visa. Now there are 13,000 of them, I believe, in the country. This--and it's viewed as a cultural exchange, but it's a way to get someone to baby-sit your child without making them your household employee, because an au pair is called a cultural exchange, not a worker.

Ms. SHLAES: And they get money from the--they get money from our families. You pay your au pair a $100 or $200 a week stipend. She lives in your home, and people like this, because they can't deal with the tax complexity and the immigration complexity of having a regular employee. It's not right that household employees should be so complicated for us, having them. I say everyone wants Mary Poppins, but the--and I show how the tax law prevents us from having Mary Poppins.

Ms. SHLAES: Oh, Your House--it's just the--the home mortgage deduction is something we value so very much. It has its own lobby--the Realtors--but I point out that we only value it because we have so many other high taxes that it's the oasis in the desert of the tax code, and actually at certain points in our history, including recently, there have been a lot of other investments that have had better returns than homes, and yet we--we're forced to invest in our homes because we need that tax advantage as a wonderful accountant, Tom Oxenschlager at Grant Thornton, who says `Your home mortgage is a municipal bond you can sleep in.'

Ms. SHLAES: The home mortgage deduction?

Ms. SHLAES: I think--I think--I--I wouldn't defend it like wild. The reason we have it is because the rest of the taxes are so high, but it does advantage a certain group: homeowners, and it forces us to do this, buy houses when we don't necessarily, in a rational system, want to do that.

Ms. SHLAES: Your School, very important.

Ms. SHLAES: I have two kids in school, and one of my sons goes to private school and one goes to public school, so I have a little experiment up and running currently. Your School is about this `local is good.' It's about the enormous--I tell the story of one woman, Mary Beres, wonderful woman in Vermont and her battles with her school system and how they're changing the school system in Vermont. This is an example of a court making tax law because the high court in Vermont decided to change the whole school tax structure, and the legislator--slature then passed a law off that. And they have a kind of Robin Hood system now where they take from the so-called `rich' towns and send to the poor, and it's--it's destroyed the local culture of schools, and I tell this story through Mary Beres.

Ms. SHLAES: As we speak, it's--both--we're not happy with either one.

Ms. SHLAES: The--the public school--we--Theodore has one of the best teachers we've ever had in the public school; my--so I--I'm very impressed with the teachers. I think one insight I've had to public school through having a child in public school is that while we may have some quarrel with the teachers or the system, the teachers are not the big problem. The big problem, unfortunately--and this is something government can do nothing about--is that the children come from more troubled backgrounds than they did formerly when you and I were growing up. So you'll have a lot of children who are really troubled, and that causes problems in the classroom, and that means you'll have seven disruptive kids instead of two disruptive kids.

Ms. SHLAES: That's not a tax story.

Ms. SHLAES: Oh, well, in the families, I think a very important problem, underreported, is this earned income credit problem. I'm not a huge social conservative, but I do point out in the book that this earned income credit situation discourages people from marrying, because they lose this $2,000 cash bonus when they get married, and I do believe that generally, having two parents is better for a child than having one. So, yes, very important.

Ms. SHLAES: Your Accountant: We have a--what is that about? What's a tax preparer about? Why do we need them? I think I write about H&R Block--this is a profile of H&R Block, wonderful company; they were very tolerant of my attentions--but really what it's about is, as Adam Smith said, `When the code is complex, when the laws are complex, we are all more or less in the hands of the tax gatherer.' Now the code is very complex, and we're very--and the rules are uncertain, too--we're in the hands of the tax gatherer. We're very vulnerable to the IRS. So we need these protectors, these accountants, but we feel ambivalent about them.

I tell a few accounting jokes. What's the difference between the short form and the long form? Short form you pay the money to the government, long form you pay the money to the accountant. An interestingly, some of my best fans of this book have been accountants who are themselves frustrated with the code, very frustrated.

Ms. SHLAES: I'm--I'm--no, yes--I admire them, because I saw how complex it was. And--but I also have questions. What about this? What about that? I'm astounded how--how limited all the breaks are and how they're tailored to different groups. Why should someone who's left-handed on Tuesday get one targeted tax break because the president or the Republicans want it. Someone who's right-handed on Wednesday not get that break?

Ms. SHLAES: It's about the core problem of the code--progressivity.

Ms. SHLAES: Well, progressivity--it's central to our lives. We don't all understand it. It says that as you earn more, your tax rate goes up. For the last dollar you earn, you pay the top rate. The more you earn, the worse you're punished, and interestingly, there's--this is the centerpiece of our tax law. Very few people dare question it--the flat tax questions it, because it goes to a flat rate structure, but generally in the political discussion right now, you don't have too much questioning of progressivity. And there's very little evidence, one, that people are for it.

Blueprint, a magazine that's produced by the New Democrats--not a--not a Republican magazine--did this wonderful study, and they found that fewer--only 15 percent of people believed that it was the job of government to redistribute wealth, which is what progressivity is about. It's get the rich, and yet you will have lawmakers go on television saying, `We need to get the rich. The rich me--need to pay more taxes.'

One, there's very little evidence people actually believe that. Two, the problem with progressivity, as with all other aspects of the code, is that it doesn't do what it's supposed to do. Progressivity's supposed to get the rich, but it doesn't get the rich. The rich are clever people. Eventually when you're very rich, you know that ordinary income in the progressive rate structure is taxed at over 40 percent, and you figure out ways to have income that is not ordinary income--to realize, for example, capital gains, which have a lower tax rate.

Who's stuck in the progressive rate structure? Who's punished the most by progressivity? Those who are becoming successful. Tho--and you have a system, therefore, that doesn't punish the successful, the Bill Gateses of the world, as much as it punishes those who are becoming successful--us wage slaves, people who are not clever enough to have enormous tax attorney plans to realize capital gains, to--to do extensive tax planning, to have income that is not ordinary income. We just earn money in our job, we're so busy in our job--that's what we have. We--and I think that's ex--completely at odds, I point out, with our culture, which is about becoming successful. Some of the most--this chapter is very important--and some of the most compelling readers I have, have been American immigrants who have made it in the country, say as dentists or doctors or attorneys or accountants, have come to me and say, `Here I am. I am important in my family, I have made it in America, and yet I pay these terrible penalties for my success, this high income tax rate, and I need to support the rest of my family and I can't do it, even though I'm the emblem of success in my family. What's it about? This is not what I expected from America.'

Ms. SHLAES: Very interesting, about the purgatory of retirement; being a fixed-income person is not always a great thing to be, because you're dependent on that fixed income, and our system forces us into a fixed income situation through Social Security, then they change the rules. For example, formerly Social Security benefits were not taxed over 50 percent. And now 85 percent of benefits are taxed. That was a change in the--I believe--in the '93 law. Or you have to impoverish yourself to get Medicaid. The--the--the world that our seniors live in is supposed to be a great world. They're the recipients of most of our benefits, a lot of our tax money, and yet it's not a free world or a happy world. They face a marriage penalty, too.

Ms. SHLAES: I think her friends think that she's very sophisticated. I don't know--she w--she--I think her friends think that when I have people call me on the radio, they say, `You want to privatize Social Security, you're going to take away my money.' First thing I think we should do if we want to change Social Security is pass a law that says, `Grandfathers are grandfathered. Everybody already in the system on the recipient end is going to get what they get now.'

Ms. SHLAES: No.

Ms. SHLAES: No. No, even the Medicare cuts, so-called, that were demagogued in various political fights that we've covered in the past few years weren't cuts. They were cuts in increases. They were cuts in the rate of increase. Nobody wants to take away benefits. It's just not on.

Ms. SHLAES: Well, this is a--a small tax in the picture of things. It's not a lot of revenue, but it's a very important tax to families. They hate it. I call it the death tax--it's the estate tax. It's supposed to be an ephemeral tax. It happens after you die, and effectively before the person gets the money, the hand of government reaches in and takes its share. But it's a painful tax, in reality. I tell the story of a family who lost their son on Pan Am Lockerbie flight, and were expecting money from the--from a compensation from the airline, insurance compensation, and even before they got the money, the IRS came in and dunned them for a huge bill of money they were expecting to receive for the loss of their son.

What the estate tax does that is particularly bitter is, it takes money at a time when you're vulnerable, a very weak time in your life. And as we point out in the chapter, it also hurts family business, because here's how it works: Say you don't have a lot of cash to spare. You work very, very hard, and you have two McDonald's. When you die, those McDonald's are worth over $1 million, so they're subject to the estate tax, but you don't have a lot of money to pay that estate tax rate, which can go up to over 50 percent. So you have to sell the thing you inherited that your family built for you to pay the tax on it. And that's a bitter thing, because you lose your parent and you lose what you built together with your parents.

Ms. SHLAES: Not right now. The--I--I say that very--the Republicans are supposed to be the tax-cutting party. I come from The Wall Street Journal, where we follow very closely and worked on the way the Republicans in their '80s historically cut taxes--Ronald Reagan's '86 tax cut--but as a party, the Republicans since then have betrayed their heritage. It's a bitter thing to say, but it's true--first through George Bush in reversing hi--the tax pledge, his `no new taxes' promise that he broke--and then I think in the '90s, by going along with what the Democrats wanted and by seeing salvation in tiny credits targeted to various focus groups. Oh, the child credit is the answer. Well, we're glad to get the child credit. It means a lot to us, but only because the rest of the system is so messed up and taxes are so high. Actually $500 a year doesn't mean a lot in the economic life of most families. It's less, as I say, than the earned income credit that we describe, and by focusing on this little thing instead of doing the big thing, the Republicans have gone down the wrong path.

Ms. SHLAES: The Heritage Foundation and the Bradley Fellowship were one project.

Ms. SHLAES: They paid me money--I had to stop working to write "The Greedy Hand," and that was the compensation for that. And that was a great thing, and I'm very grateful for it, particularly because not everyone at the Heritage Foundation agrees with my conclusions. I'm not so focused on the family as they are. The--I was studying taxes in New York, and the Manhattan Institute, which is a free market group in New York, gave me some money for that, and Hoover paid for me to go and talk to their wonderful economists, John Koge and Marty Anderson, Milton Friedman in California for--for a few weeks.

Ms. SHLAES: No. No, well I think that--that you know, you have to look at it and say, `They probably wouldn't have given me this grant had I not been a free marketeer.' But I am a free marketeer, and they're free marketeers. We might advocate wildly different solutions. For example, I'm for a flat tax--not all these groups are for a flat tax.

Ms. SHLAES: I'm talking here about the noble editor of The Wall Street Journal, Robert Bartley, who is a taciturn man, and he is not a take-you-out-to-lunch kind of boss, he doesn't communicate too much and, nonetheless, he is a great teacher, in this instance, a great tax teacher, because in his book, "The Seven Fat Years," he describes the importance of taxation in the prosperity of the 1980s. So I'm his student, and we--we all feel very devoted to him, and somehow, because he's quiet, we've even more devoted to him.

Ms. SHLAES: I try to figure out what the right thing to do is.

Ms. SHLAES: I don't know, about 10, is it?

Ms. SHLAES: Yes, but also, you know, you can disagree with him. I mean, there are certain issues I've disagreed with him on. For example, the euro, I've disagreed with him on, and he's a great person to disagree with, because he respects disagreement.

Ms. SHLAES: Yes, in fact at roasts, that's big--topic A. Paul Gigot, my colleague, gave wonderful remarks at a recent roast about Bartley's silences.

Ms. SHLAES: Well, right now I write fewer than normally, but in 1996, for example, I wrote between 60 and 70 that year, I believe. I don't have the numbers in front of me, so--there are 50 weeks in a year, it's--it's a little bit over one, sometimes two. I think we can do more. It's a wonderful place--there's not a lot of direction. Most of the ideas that I've come up with, I've come up with myself. We don't fight a lot. It's a very quiet place. My first job was at the New Republic, where people would talk--rat, rat, rat, rat, rat--in the meetings, lots of--this was like McLaughlin Group. The Journal is known for its silences at its board meetings. We don't yap around too much. Things seem to happen without discussion, and that's part of the magic of the place.

Ms. SHLAES: Who messes with it then--a wonderful editor named Daniel Henninger, who is the slot man--is the--the newspaper term for it--the point man, the chief editorial editor and chooser. He picks what he wants to run each day on a day-to-day basis, and he will mark it up in Word--in Microsoft Word and give it back to us, or just put it right through.

I had a wonderful experience with him about 10 years ago, where I went home, and I had sent him an editorial, and he hadn't responded, and I was feeling a little hurt, and the next morning, I woke up and it was in the paper, and he hadn't--that's more of his MO--he'll just--he's also a man of few words, and often he'll just put them right through. It's kind of frightening.

Ms. SHLAES: Because we're speaking with the voice of the paper. This is the voice of the paper. I'm not writing Amity's views, when I write these editorials. I'm writing our line. It's almost like the Supreme Court. It's a boat you don't turn too fast, either. It's a big, powerful boat, just like the Supreme Court, so you move it by degrees if you're going to move it at all, and when you move it, you have to have consensus on moving it.

For example, I have an editorial I'm working on now, on charter schools and vouchers, and we're less for charters and we're more for vouchers, and I had to think about what we'd said about charters and vouchers before. I--every editorial that I write, I try to be aware of every other editorial that we've written on this topic, back 10 years, but...

Ms. SHLAES: Oh, wonderful, wonderful, thank you.

Ms. SHLAES: Yes.

Ms. SHLAES: Well, with you I was very grateful, because this is one of our favorite shows, but every author is grateful for all publicity he gets. Sometimes you--you do sound like a broken record after a while, and the goal is to make it fresh again.

Ms. SHLAES: I said, `That's the course of life. I hope they do it again.'

Ms. SHLAES: I--no, it didn't make me mad.

Ms. SHLAES: It did make--in life, many inefficiencies happen. The--the number of errors that happen around a book is frightening. This was not a big inefficiency, a big--a big problem.

Ms. SHLAES: The--the--the--one--one sad thing that happened was The New York Times wrote a wonderful review of my book, and spelled my name wrong throughout. That was--that made me mad. But I was also really grateful that they wrote a wonderful review, and actually the editor of the paper sent me flowers to tell me he was sorry, and that made me feel better, too--Joe Lelyveld.

Ms. SHLAES: Uh-oh.

Ms. SHLAES: What else went wrong. At various points my name is always spelled wrong. Other columnists have spelled my name wrong. Shlaes is a difficult name, but it's my dad's name. I can't change it.

Ms. SHLAES: The best part is to get a call--the best review that I've gotten in terms of gratification came from Tax Notes, which is this relatively obscure, very important tax journal for tax lawyers, and they pay a lot of money, maybe over $500 a year--I don't know--to get this journal. And the book got a wonderful review in Tax Notes where the author, Luther Avery, whom I do not know, said, `I defy any tax person to find something he doesn't know in "The Greedy Hand," and I will refund the money to any tax person who buys this and who doesn't find something new,' and since I w--I was an outsider, an English major, a journalist entering the world of tax, to have this endorsement from the center of the--of the--from the tax scholars was most, most exciting to me.

Ms. SHLAES: Thank you.