TERRY GROSS, HOST:
This is FRESH AIR. I'm Terry Gross. The Internet was invented in the U.S., but we've fallen behind other countries in terms of access and speed. Our service is more expensive than in any of those countries. Why? That's one of the questions my guest, David Cay Johnston, tries to answer in his new book, "The Fine Print."
It's about how many corporations have worked the regulatory system to their advantage and how that affects things ranging from the service you receive to the state of our infrastructure. He also examines the fees that banks and phone companies have added over the years that have made your bills incrementally larger but have added up to big money for corporations.
Johnston was a reporter for the New York Times for 13 years, where he covered the tax system. In 2001, he won a Pulitzer Prize for his coverage of tax an equities and loopholes. He's now the board president of Investigative Reporters and Editors Incorporated and teaches at Syracuse University College of Law.
David Cay Johnston, welcome back to FRESH AIR.
DAVID CAY JOHNSTON: Well, thank you for having me, Terry.
GROSS: One of the things I've learned from the column that you used to write in Reuters and from your new book "The Fine Print" is that although until recently everybody had the right to a land phone line, and the phone company was required to provide land lines for everybody, that appears to be ending. That obligation appears to be ending. What is that obligation, and why is it ending?
JOHNSTON: Well, Terry, in 1913, the Justice Department wanted to break up the AT&T monopoly. And Thomas Vale(ph), the head of the company, in return for keeping that monopoly, promised universal public service: If you had an address, you would be entitled to a land line telephone.
Now, we're moving into a new world where we have cell phones and telephones over the Internet, and the telephone companies want out of this obligation of universal service. That's understandable. We don't want to have a society where every automobile must come with a buggy whip, right.
On the other hand, the laws they are getting written and passed entirely tilt the table in favor of the phone companies and the cable companies. Now, you could literally live on a street that has cable running down it and be told we're not going to serve you because you would no longer have any rights to be served.
GROSS: So for the phone companies, is it a question largely of where are the most profitable centers to wire, and is it going to be profitable to wire places with lower populations?
JOHNSTON: That's exactly what's happening. When you don't have a universal service obligation, then what the companies want to do is only serve those customers who will provide them with a high profit margin. So you could live in an urban setting in an apartment building that maybe has 200 or 300 apartments in it, but if only a minority of people want that service, the company can say we're not going to wire your building, and you're not going to get it.
And the problem with this is it cuts deeply into the interconnectedness of our society, and by doing that, I believe it retards our economic growth. It holds back our growth. If we had the kind of super-high-speed Internet that the Japanese have, the South Koreans have, the very inexpensive and much faster Internet the French have, I believe you would see businesses and business ideas develop that nobody would try right now, because our Internet is not up to the task.
GROSS: So I'm a little confused. What's at stake here for consumers? It is access to land lines or to Internet access or both?
JOHNSTON: Oh, it's both. You can end up in a situation where the only service you will have is a cell telephone: You won't be able to get cable; you won't be able to get a telephone; you won't be able to get Internet; and you will only have a cell phone, and, you know, a lot of buildings, cell phones don't work very well because of where the cell phone towers are located.
I'm not suggesting that we want to necessarily retain, with new technologies, the old rules, but we need to have some balance in these rules.
GROSS: So you write about how through various fees in our phone bills, we've actually been paying, over the years, to create the cable network that provides Internet access and cable TV.
JOHNSTON: Well, back in 1992, Al Gore began pushing for this idea of the information superhighway, a phrase the phone companies tell me don't use that, it's an old phrase, nobody uses it anymore. And the reason is they didn't really build it. We've paid, between cable company rate increases and telephone company rate increases, over a half-trillion dollars to get the Internet.
But what quietly happened without much attention is that the Internet, the standard that these companies had to meet, was a very low standard, far below the quality of the Internet that people have in other modern countries. America invented the Internet, so by the fact is it started out as number one. We now rank 29th in the speed of our Internet, according to Pando Networks.
We're way behind countries like Lithuania, Ukraine and Moldavia in the speed of our Internet. Per bit of information moved, we pay 38 times what the Japanese pay. If you buy one of these triple-play packages that are heavily advertised, where you get Internet, telephone and cable TV together, typically you'll pay what I pay, about $160 a month, including fees.
Well, the same service in France is $38 a month, that is 25 cents on the dollars. And instead of two-country calling, you get worldwide calling to 70 countries. You get an Internet that is 10 times faster uploading - downloading and 20 times faster uploading. And you get much broader international television stations than you get here in America.
We are paying super-high prices for low speeds and poor quality, and a number of cities that did not have quality high-speed Internet have built municipal systems. And a good example I tell in the book is about Lafayette, Louisiana. The town fathers there were not going to get electricity over 100 years ago, so they created a municipal electric system.
Well, they also built a municipal Internet, and it is so high-powered and so fast that a lot of the work done for the Pixar animated movies is done, not in Hollywood, but in Lafayette, Louisiana. [POST-BROADCAST CORRECTION: Pixar does not have production facilities in Lafayette and has not outsourced work to any companies in Lafayette.]
Well, the response from AT&T, Verizon, Cox, Time Warner and the other cable and telephone companies has been to go to the legislatures and say we want a law passed that either blocks or makes virtually impossible to build municipal systems. That's competing with our business interests. And that's part of the whole strategy they have: We want to be monopolies without competition; we want to run the system in our interest to maximize our profits, with no regard for the overall economy of the United States.
GROSS: So when you say we already paid for the Internet system, what do you mean by that?
JOHNSTON: Over the last 20 years, we've paid at least $360 billion in higher rates to the traditional telephone companies and well north of $100 billion more to the cable companies, who all testified before Congress, made filings with regulatory agencies, bought ads on television that told us we were going to have this information superhighway, and it was going to be everywhere. Even at fleabag motels in the middle of the Mojave Desert, you'd be able to get every movie ever made in every language in your hotel room.
Instead, what they built was a system in very limited locations. Verizon, for example, is only going to provide fiber-optic service to 16 million Americans, and then they've said they're not going to build anymore. Whole, huge parts of the country, all of northwestern and central New York, everything away from metropolitan New York, is not scheduled to get the high-speed Internet that we paid for and we were promised.
And how did that happen? The telephone and cable companies worked the regulatory process and the legislatures and Congress to get the rules written for their benefit. We used to argue that telephone and electricity were natural monopolies because you don't want 12 sets of power lines and 12 sets of telephone lines running down the street. Imagine how ugly that would be if strung from poles.
That's how we got the system of regulation to both protect the investors and protect the customers and make sure that prices and profits were just and reasonable. The phone companies and the cable companies now argue that well, we live in this new world in which we have cell phones as an option.
Well, a cell phone is a perfectly good option in many cases for telephone calls, but it's not an option for - generally for Internet access or watching television, and wireless services aren't as effective everywhere. Everybody has had the experience of dead zones and drop zones and overloaded zones.
So what I'm arguing in the book is we need to have a balanced policy. We need to have a policy not just written by and for telephone and cable companies but written to promote the entire economy. If we wired our whole country with a super-fast Internet that can handle all telecommunications services, and we charged appropriately so that the companies earn a respectable profit for it, and the customers pay a reasonable price, I think you would see industries, that no one can imagine today, arise.
GROSS: So you write in the book about how, you know, in spite of the fact that our Internet is somewhat inferior to those of many other countries, our phone bills in many ways are more expensive than they used to be, and I'm not sure if you're just - I mean, I think you're referring to landline phone bills, since cell phone bills are relatively new, we don't have that much to compare it with.
Speaking for myself, I think my phone bill's actually more expensive than it used to be, you know, before cell phones and before the Internet. Why are so many people's phone bills higher now than they were, say, 20 years ago?
JOHNSTON: Well, there are several factors at work in this. I tell about a woman who lived in Brooklyn whose phone bill went up I think it's 2.8 times the rate of inflation over 20 years. And the phone companies, first of all, have begun adding all these additional fees. If you got a single bill, and they raised the price, you'll tend to notice. But if there are lots of little fees built into the bill, and they raise this one this month and another one two months from now, and then they raise another one two months after that, you tend not to notice this.
One of the items on the phone bill, one that's more than doubled in real terms in price, is often referred to as FCC line charge. Now that sounds like the Federal Communications Commission is imposing a fee on you, presumably to finance the FCC. In fact, that is the charge paid to connect to the long-distance system. It goes entirely to the phone companies. It doesn't go to the government.
And the FCC has something called a requirement for plain English language so people can understand their phone bills. And here is a perfect example of the misuse of language to confuse people and not have them understand what they're really paying for.
So there are lots of these bills. My electric company, for example, charges me a penny a month just to prepare my bill.
GROSS: So what is the FCC subscriber line charge or FCC charge for network access?
JOHNSTON: It is simply the amount of money that you are charged so that your telephone, which is in the local network, can connect to long distance. And that fee is set by the FCC, but it's been allowing it to go up and up and up and up at a tremendous rate over time.
GROSS: So you're saying it's set by the FCC, it just doesn't go to the FCC.
JOHNSTON: It is set by the FCC, but I think it's entirely misleading to call it that. It should be called long-distance connection charge.
GROSS: If you're just joining us, my guest is David Cay Johnston. He's an investigative reporter who worked for the New York Times for 13 years, won a Pulitzer Prize there. He's written extensively about taxes. His new book is called "The Fine Print: How Big Companies Use Plain English to Rob You Blind." Let's take a short break here, and then we'll talk some more. This is FRESH AIR.
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GROSS: If you're just joining us, my guest is investigative reporter David Cay Johnston. His new book is called "The Fine Print: How Big Companies Use Plain English to Rob You Blind." He was a reporter for the New York Times for 13 years, won a Pulitzer Prize and has written extensively about taxes.
Let's talk taxes a little bit, and this is something I want you to explain. You write than in 19 states, there are laws that let companies pocket state income taxes that are withheld from their workers' paychecks for up to 25 years. Would you explain what you mean by that?
JOHNSTON: Well, in 19 states, the legislature has passed a law that if a company says we'll leave if you don't let us do this, or in some cases if we move here, we'll let you do this, the workers have their state income taxes withheld from their paycheck. So as far as they know, they've paid their taxes. The government treats them as having paid their taxes.
The company then gets a tax credit equal to the taxes owed by its employees. Now imagine that you under-withheld, so at the end of the year you realize oh, I've got to pay the state government $500 more. You write a check to the state government for $500. That money doesn't go to pay for schoolteachers and judges and parks and roads, and all the other things that state government provides.
It'll go to the company you're working for. Every big, brand-name company you have heard of in America has one of these deals. Rupert Murdoch's Dow Jones, General Electric, Procter & Gamble, all the automobile companies, a lot of foreign banks and manufacturers, Electrolux, the Swedish appliance maker. They all have these deals. They cover hundreds of thousands of workers.
And why would the legislature let these companies do this? Well, quietly, laws have been passed that allow these companies to not pay state income taxes in most cases. Most state corporate income taxes now don't come from the big national or multinational companies, they come from locally owned businesses.
GROSS: So they're saying to state governments: Unless you give us this tax break, we're going to leave; or if you give us this tax break, we're going to move to your state.
JOHNSTON: That's right, and it's better than a tax break. They're actually letting them pocket the tax dollars.
GROSS: Now explain that to me a little bit more. Like, I mean, I work for a nonprofit public broadcasting company. Say I work for one of the corporations that you're writing about here. I'm paying my federal, state and city income tax. What happens to my state income tax if the company has this credit?
JOHNSTON: Your state income taxes are kept by the company. The company doesn't tell you this. You don't know this. And the way the company does it is it files a form that gives it a tax credit equal to the state income taxes withheld from its workers' paychecks, or in some states, whatever the obligation is. So that if the workers were to say we're going to stop withholding state income taxes, the company could still get the money.
GROSS: So in other words my state taxes would be going to the company I work for, as opposed to going to the state government to provide infrastructure or whatever the state's going to do with it, but...
JOHNSTON: That's right, Terry. You would be being taxed by your employer. And that means everybody else in the state has to make up for those taxes if they're going to have schools to educate children, courts to adjudicate disputes and all the other services on which business depends.
GROSS: Now you're making that sound like a really horrible thing, but the argument on the other side is, in part, it means more jobs. This is a big company that you're talking about. It's employing me, hypothetically, in this little scenario that we just created. So I'm grateful to have the job. It's employing a lot of other people.
I mean, big businesses are good for states. That's why the states offer these tax credits in the first place.
JOHNSTON: Well, here's the question, Terry: Are we going to live in a market economy, where businesses operate by providing the services and products and earning profit, or are we going to live in an economy where we're taxed to subsidize these businesses? Because that's what this is. This is a subsidy with this business.
State legislatures have passed laws that effectively allow the big multinational companies to pay little or no state income tax. They take all their profits in states that don't tax those profits on the state level. Then in many cases they have given them property tax breaks for building a new factory or an office building.
In some cases, taxpayer dollars are directly used to build the factories and offices and even the shopping malls and individual stores. So when companies then go to the state governments and say, well, we're going to leave your state if you don't give us more, the politicians don't want to write a check, that would be pretty transparent.
So they say, well, tell you what, we'll do this deal where you withhold taxes from your workers' paychecks. Then you get a tax credit equal to that. So you can keep those taxes. The workers won't know, the public won't know about it, and you'll get all of this money.
That's not market economics. That's not capitalism. That's corporate socialism. That is taking from the many to benefit the few, and it's not free. The rest of us will have to pay higher taxes or take less in government services to benefit these companies.
And why should a handful of companies get these deals and not everybody? I mean, if we decided that businesses can't make a decent profit in America, maybe we need to rethink our entire model.
GROSS: So are you concerned that this gives big corporations the edge over small businesses that don't have the clout to say if you don't give us a tax break, we're going to move to another state?
JOHNSTON: That's exactly what I'm concerned about. And, in fact, what we're seeing is the homogenization of the American economy. Because of these stealth subsidies to big multinational companies, you're seeing more and chain operations. You are seeing all sorts of entrepreneurial family operations winding down and going out of business because they don't get these deals that the big multinationals get.
And without these subsidies, then I think we would have a much better market. You know, what do we want in market economics? We want the rigors of the market to get the most efficient companies to provide services. What we don't want to do is take companies and allow them to be inefficient, where they have an interest in providing not as good service because they don't face competition or to charge higher prices.
And to the extent that we take the state income taxes withheld from workers' paychecks and let companies keep that money, that we tax people to put up factories and office buildings and retail stores, that we grant tax exemptions to these big national companies, we are promoting inefficiency, and we are privatizing the profits and socializing the costs.
Let me give you a real good example of this. General Electric in Ohio is getting $115 million withheld from its workers' paychecks to modernize one of its factories in which it's spending $126 million. So 92 cents on the dollar of this investment is coming from the taxpayers.
Now GE, if it makes an eight percent profit on its investment, will make 100 percent annual profit on its investment in that factory, thanks to the taxpayers. Why should I be taxes, why should you or anybody listening to the show be taxes to give money to General Electric?
GROSS: Well, David Cay Johnston, thank you so much for talking with us.
JOHNSTON: Thank you, Terry.
GROSS: David Cay Johnston is the author of the new book "The Fine Print." You can read an excerpt on our website, freshair.npr.org. I'm Terry Gross, and this is FRESH AIR.
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