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Beyond The Panama Papers: How Else Do Wealthy People Avoid Paying Taxes?

ARI SHAPIRO, HOST:

While millions of people are working on their taxes this week, we are also seeing headlines from the Panama Papers leak about shell corporations that rich people use to avoid paying taxes. So we wondered what other tricks rich people can use to dodge taxes. David Cay Johnston won a Pulitzer Prize for his coverage of tax issues. Welcome to the show.

DAVID CAY JOHNSTON: Thank you.

SHAPIRO: So the Panama Papers leak goes into great detail about these shell companies, tax havens, how to move around money so that the feds can't find it. What other tricks do rich people use to avoid paying taxes?

JOHNSTON: Oh (laughter) the reason our tax code is almost 6,500 pages long is, first of all, there are all sorts of legal devices. There are special rules for real estate professionals, private equity and hedge fund managers that allow them to live tax-free if they choose to. There are all sorts of deferral situations where instead of paying your taxes you get to delay paying your taxes. And when that happens, the government has effectively loaned you that money at zero interest.

And if you could hold on for just 30 years, invest the money and netting 4 percent a year, after the 30 years for every dollar you didn't pay in taxes you'd have more than $3. So you could pay the $1 of tax. It's not adjusted for inflation. And you'd pocket more than $2 and you'd be richer. And, by the way, if you bought treasury notes, it would mean that all the rest of us would be taxed to pay the interest that made you rich off the taxes you didn't pay on time.

SHAPIRO: You say real estate can help people avoid paying taxes. How does that work?

JOHNSTON: Well, if you work 15 hours a week in real estate, Congress has special rule. You can take unlimited deductions for the depreciation of your buildings to offset your other income from a salary or, say, a television show.

SHAPIRO: Is that true even if the cost of real estate is increasing?

JOHNSTON: Oh, yes. This is not about real economics. This is about tax and accounting rules.

SHAPIRO: Do you feel like this is likely to change anytime soon? Is there much pressure to change it?

JOHNSTON: It will change when the American public gets fed up enough and says we need to have real reform but not until then. The reality is that there are legions of lobbyists who go to Congress and say, you know, the world would be fair if we could just get this one little rule here. And one little rule at a time we have built an absolutely indefensible monster that's damaging our economy. It is holding back progress, and we need to replace it with a 21st-century tax system.

SHAPIRO: You know, with all of these legal loopholes, it's hard to see why rich people would ever need to cheat on their taxes.

JOHNSTON: Well, some rich people get a great deal; others do not. It depends on your situation. That's one of the big problems with our tax code. Instead of treating everybody equally, we have special rules for certain enterprises - real estate, hedge funds, utilities, private equity - and other rules for everybody else. So it really is a matter of Congress not leveling the playing field and being rewarded with donations and jobs when you leave office and other things for making an unlevel playing field.

SHAPIRO: That's David Cay Johnston, a columnist at The Daily Beast and USA Today. Thanks so much for joining us.

JOHNSTON: Thank you, Ari. Transcript provided by NPR, Copyright NPR.