Why is it so hard to tax billionaires? (Part 1)

24:48They hated paying anything. Yeah. And they hated being exposed.

24:55Jesse says the arguments wealthy people were making back then sounded a lot like the arguments you'd hear today. The government wasn't better at allocating capital than rich people were. Taxing the rich could discourage them from working more. Back then, the wealthy won these arguments. That federal income tax passed during the Civil War was rescinded a few years after the war ended, 1872, which began a 40-year fight to restore it. I'd been surprised to know that there was a long period of time when we didn't have an income tax, but I was even more surprised to learn that the modern income tax, it exists because of the political party most dedicated to loathing it, the Republicans.

25:37Republicans in America are responsible for our federal income tax, and the story of how that happened is really the story of one of history's funniest own goals.

25:49Chapter 4, An Extremely Expensive Mistake So, what happens is the country is being run in the aftermath of the Civil War by Republicans, you know, famously. This is like the Party of Lincoln Republicans. They're like, not really like today's Republicans. Well, they're the Party of Lincoln's Republicans, but they're morphing into the party of George H.W. Bush's Republicans. Okay. So over that course of the second half of the 19th century, it becomes a party dominated by Northeastern wealthy interests, wealthy Republicans. The whole country is being run by those interests. I mean, I will say as someone who's a radical physician that income taxes should exist, I can also imagine how hard it must have been when you grow up with the idea that you pay taxes, you pay taxes.

26:37But being like, hey, I've got a crazy idea. Next year, we're taking a percentage of your money away from you. It'd be a very easy political project to defeat. It's an incredible story. It's an incredible accomplishment. I think it's the single greatest victory of average Americans against the wealthy class in American history to get an income tax. And as I say, it's a complete accident. An accident that would occur amidst a heated political fight. There was an insurgency of populists, Bernie Sanders types who were devoted to working class, mostly rural Americans. One of those populist politicians actually does get an income tax bill passed in 1894, but just a year later, the Supreme Court rules that it's unconstitutional.

27:25These insane insurgents have overreached. Their plan stopped in its tracks. So what happens over the next decade after the Supreme Court has rejected the income tax is there are huge debates about how they could possibly bring this back and resuscitate it. And my hero of this story is this guy Cordell Hull, who's a young Tennessee congressman. And he's the kind of single-minded, obsessive about the income tax. He's a Democrat from the Hill Country in Tennessee. and he talks in his memoir about how members of the Democratic Party, his own colleagues, run away from him in Congress because they're so bored of him, like, cornering them and talking about the income tax all the time.

28:18And so this is his obsession. And it was the Gilded Age where we're seeing fortunes that only have been matched by today's figures. And he's constantly giving speeches on the floor about how the wealthy, you know, how the Rockefellers at the time don't pay their fair share and feel like they're exempt from taxes. I hadn't considered this. Our present moment where we have these ultra-wealthy people whose power occasionally seems to exceed the power of the nations where they live, our moment had felt to me like something new, something outside of history. But we were pretty much here before once.

29:03The Gilded Age. Back then, instead of people becoming unimaginably wealthy by building and owning the infrastructure of the internet, people would become unimaginably wealthy by building and owning the infrastructure of physical things. Railroads, steel, oil. The fact that we have an income tax at all is a reaction to the problems of this earlier era. Here's how it happened. The progressives and the populists who wanted an income tax had to face down a big opponent, a powerful Republican politician named Nelson Aldrich. Nelson Aldrich, very opposed to the idea of an income tax. He'd referred to the concept at one point as communistic, which maybe a little bit.

29:44But Aldrich could tell Americans were boiling mad about inequality, and he knew he had to give this unwashed, angry mob something, some thrown bone. And he thought he saw a way out, a compromise. because around the same time, there'd been a different proposal. Instead of taxing the incomes of individuals, how about we tax the incomes of companies? A corporate income tax. That measure, to Aldrich and his Republicans, seemed like a less radical solution. So they pass a corporate income tax for the first time. Okay. And there's essentially no debate about it. and they pass it to try to cut the knees off of the movement for the income tax.

30:29And so they - So it's like he has to do something, but he wants to do as little as possible. Exactly, and he's trying. So what he, they pass the corporate income tax, which is a huge victory for taxation in America. And then what happens is that doesn't succeed in cutting off the momentum for the income tax. So there's still some public appetite for an income tax. And the Republicans, led by Nelson Aldrich, actually put forward a constitutional amendment supporting one. Their thinking is, the amendment's going to lose, it's badly missed time, the states will vote it down, and this will just end the conversation about a federal income tax.

31:07The Republicans are feeling pretty good about this Putney-Swope maneuver. And so they embrace it as a legislative gambit. And Hull, who has been the great champion of the income tax, is against it because he knows that it's going to be the death knell for the income tax and his dream and his obsession. They pass the income tax amendment and they pass the tariff bill. And then the Republicans have wildly miscalculated. And it goes through the states and passes. And then we get the 16th Amendment. The passage of the 16th Amendment, the moment where we Americans made the federal income tax constitutional.

31:46The amendment reads, quote, Congress shall have the power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration. Jesse Eisinger is the only person I've ever met who finds this amendment exciting. The way you talk about the passing of the 16th Amendment, it's like a movie you just walked out of? Like, why is this so—like, listening to you, I feel like I'm listening to the Death Star explode. But it's like tax reform a long time ago. No, I'm just like, what is this—how come this is—what about this moment speaks to you so deeply?

32:27Because we are in a moment where our politics are totally calcified, where we have horrific wealth inequality, where our democracy is fragile, where people feel like they have no voice or ability to change anything. And so I have been obsessed with this period of time that looks very similar to our current period, but was a time of extraordinary reform. and I'm trying to understand why they were able to change things, and we can't. I thought we were telling a story about taxes, and we still are. But at the heart of this, for Jesse, is one of the most vexing, important questions about American life right now.

33:19Why does it feel like nothing can change? And what would it take to break that feeling? After a short break, yes, there is a thicket of intractable problems in America right now, but we'll continue to tell you the story of this particular one. How things got so stuck. How they might get unstuck. Let's after these ads.

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36:37Welcome back to the show. Reporter Jesse Eisinger just told us the story of the invention of the federal income tax. And that story ended on a feeling that I think most people don't actually have, although hopefully you were too swept up in the magic of storytelling to notice. We were celebrating the federal income tax as a kind of miracle. A miracle. Can we acknowledge most people do not feel that way? Our hatred of our tax code is one of the few things most Americans actually agree on. We like taxes like we like getting a paper cut on a sunburned, stubbed toe. But the income tax, back when I was first born, was a very different animal.

37:18In the beginning, it was relatively simple. And it described a very modest tax on income applied only to the wealthiest Americans. Even for them, tax rates between 1 % and 7%. But then, 1917, we enter World War I, the government needs a lot more money, and so those rates are immediately jacked on the ultra-wealthy. Way, way up. As high as 77%. Which brings us to Chapter 5. Chapter 5. The rich try to get their money back.

37:52So, I guess the thing I'm trying to understand, like, Why does the tax code be getting more complicated? Like in my head, in 1913, the tax code is like a couple pieces of paper in a folder. And then at some point, it is a phone book. And I'm trying to watch it get thicker, I guess. Yeah. So it's pretty simple initially. And as those tax rates go up, the incentive to make it more complicated also goes up. And that begins happening in the 1920s. Molly Mitchell Moore. She's a professor of history at Washington and Lee University. She is the person you go to if you want to talk, for some reason, about the history of the income tax.

38:29She told me the story of how the rich began to fight back. We see a sort of conservative move in the 1920s. Three Republicans in a row, three different Republicans in a row, are elected in 1920, 1924, and then in 1928. They all have the same Treasury Secretary, Andrew Mellon. Andrew Mellon, Pittsburgh banker with eyebrows as glorious as his mustache. His fortune rumored at over half a billion dollars, considered quite a bit of money in those days. This half-billionaire was given the job of treasury secretary, a wealthy person in charge of deciding how much he and his wealthy friends should pay the federal government.

39:09Just as a reminder, in the last chapter we learned about this, but basically there's two types of tax systems. Regressive, where everyone pays the same dollar amount, rich or poor. The sales tax on a bottle of whiskey, progressive. And then there's progressive, where people pay a percentage based on their wealth. In those systems, rich people pay more. Our new income tax was progressive. The person in charge of it, Andrew Mellon, did not like that. Andrew Mellon is pretty interested in reducing the progressivity of the tax code. but he understood that like taxing the rich has always been popular, right?

39:47If you look through American history, the sort of cry of taxing the rich is always one of the popular things. And so Mellon knows that he can't get rid of the progressive tax code, but what he can do is make it less progressive sort of sneakily, right? By introducing all of these kind of write-offs, what we might think of as tax shelters, and allow people with that kind of income, income from investments, income from businesses, to shield some of that income from the tax code. So just to make sure I understand, Andrew Mellon was working for the government. And one way you could understand what he was doing was intentionally making the tax code more complicated as a way of giving the wealthy people who presumably he knew and had dinner parties with and was in fact one of them some outs.

40:34Like it's like, you don't like school, here's a big stack of excuses. Yeah, right. So you preserve the appearance of a progressive tax code, but you're actually making it less progressive by giving people a lot of ways to hide some of their income. All of these shenanigans were happening behind closed doors. And the average American would not have been thinking about any of this. Because remember, for the normal, non-railroad-owning American, there was no income tax. But all of this was about to change. Well, your profits are going to be cut down to a reasonably low level by taxation. Your income will be subject to higher taxes.

41:15Franklin Delano Roosevelt takes power. Very much the opposite of Andrew Mellon. No mustache. Normal-sized eyebrows. In FDR's cabinet, Cordell Hall, the original hero of the income tax. FDR wanted to heavily tax the rich, but also tax everybody else. Indeed, in these days, when every available dollar should go to the war effort, I do not think that any American citizen should have a net income in excess of$25 ,000 per year after payment of taxes.

41:54Chapter six. Everyone has to pay taxes now. The Revenue Act of 1942 makes U.S. income tax into a mass tax rather than a class tax by lowering the threshold at which income first starts to be taxed. So the number of taxpayers, right, income taxpayers, goes from about, I want to say, 3.5 million Americans in 1939 to about 42 million Americans in 1945. five. And how do people feel about that at the time? Because there are the Nazis are there. Yeah, right. So they feel pretty good, which is the sort of extraordinary part. And one of the things that's really sort of fascinating is to look at, well, I mean, how do you sell this income tax that, you know, people don't like paying taxes necessarily, right?

42:43No. But our tax system still relies on volunteerism. You know, maybe you'll get audited, Maybe the IRS will cut after you, but you're basically sort of paying your taxes more or less voluntarily. And that was kind of extraordinary. It's like the first time that most Americans are sitting down and writing a huge check to the government. Yeah, right. And it wouldn't have been necessarily a huge check, but it would have been the first time that they did it. So they had to be taught to do it. And one of the things the Treasury Department then does is it works with, I mean, influencers is the wrong word to use for the 1940s.

43:15But it's basically that they work with pop cultural figures. They commission a song called I Paid My Income Tax Today. I said to my Uncle Sam, old man taxes, here I am. And he was glad to see me. Which was then distributed to, you know, almost a thousand radio stations across the country. It was recorded by Gene Autry. But it is, right, the lyrics are something like, I paid my income tax today. I'm squared up with the USA. You see those bombers in the sky. Rockefeller helped to build them, so did I. I paid my income tax today. We paid our income. And it's very much sort of geared towards what the song calls Mr.

44:10Small Fry. This idea that everybody has an obligation to pay their taxes. The slogan that the Treasury Department decided to use to sell the income tax was taxes to beat the Axis. So it's very much linked to this effort to win the war. They even go so far as to commission two films from Walt Disney starring Donald Duck. Are you a patriotic American? Yes, sir. Eager to do your part? Yes, sir. Then there's something important you can do. And so again, right, there are these two problems that the government feels like it has to solve. One, people don't know how to pay their taxes. And two, you've got to convince them that they should pay their taxes because it is sort of part of being an American citizen.

44:58It's part of being a good American citizen. You won't get a medal for doing it. Oh, that's all right. It may mean a sacrifice on your part. I'll do it anyway. But it will be a vital help to your country in this hour of need. Your country needs taxes for guns. I'd wondered about this when I was talking to Jesse. Like, I'd wanted to know how the U.S. government had convinced Americans to get on board with this idea that we'd all send in a check every year. And hearing how it actually worked only made it seem crazier. During my grandfather's lifetime, Americans were instructed, partly via our pop culture, that we'd be doing something new now.

45:36We'd all now contribute to the federal government's GoFundMe. Donald Duck said we have to in order to stop the Nazis, and we're going to do it. Not just this year, but forever. That we agreed to this really is a civic miracle. Shall I tell you what it is? Yes, what is it? Tell me! Shall I? Tell me what it is! Your income tax. Income tax? Yes, your income tax. And so in that moment, people are happy to do it because there's this existential threat, because some of people's anger and anxiety about elites in this country has temporarily been becalmed by just historical events. After the war, what happens after the war?

46:21So after the war, the tax system itself more or less stays in place. There are reductions in the rates right throughout, both at the top and at the bottom, but the basic shape remains the same. It's then codified in 1954. And that World War II tax system is basically the basis of the tax system that we're still using today. That tax system really fuels the modern federal government. It's what pays for everything. Schools, roads, wars, astronauts. Everything the government does that you like. Everything the government does that you don't like. That tax code also balloons and becomes, weirdly, a place where we have arguments without quite having arguments.

47:05Rich people's arguments about holding on to their money get inscribed into bizarre little subsections. But also, government subsidies, which might be too controversial as straight cash payments, get described instead in tax credits, mortgage interest credits, child care credits. It's like the tax code is this very hard to understand, intentionally boring codex in which we conduct some of our loudest disagreements. But while we're having these disputes, something really fundamental is about to change, something most of us won't actually notice. The billionaires are about to build themselves an escape pod.

47:44Chapter 7. The rewiring of American capitalism. So, in the middle of the last century, in Mad Men times, I was surprised to learn that rich people once had enormous tax bills. I asked Jesse Eisinger about this era. So, 1950s, which is a moment where we still have an income tax that seems to function more the way you would think it's supposed to, Like, what is tax day in the life of an American CEO of a successful company in the 1950s? Right. So what's happened is we've had the Great Depression. We've had World War II. Those were extraordinarily leveling events for the American economy. And in the 50s and 60s, the way a CEO is paid, and wealthy people by and large are paid, they're paid salaries.

48:32So the giant corporations of the time are companies like GM. And executives aren't being paid. In stock, they're being paid salaries, and those salaries are taxed. But so they would have, like if I were the head of GM in the 1950s, I actually would have gotten an enormous paycheck every two weeks. And then the government, unlike today, like the tax rates were much higher. And so not all of my money, but the part of my income that was much higher than the workers' income would be taxed at a much higher rate. Yeah, exactly. But then there's a revolution that starts in the 70s that rewires American capitalism.

49:11In the 1970s, as search engine listeners and only search engine listeners now, there's a massive inflation crisis. That comes with both a recession and a real loss of trust by Americans in their government because of inflation, because of lots of other things. That inflationary crisis ends in the 1980s with Ronald Reagan, who presides over a series of massive tax cuts in 81. And that is correlated with, probably not because of, the kind of financialization of the U.S. economy that begins in the 1980s and then accelerates through the 90s and into the 21st century. And a tax code that is designed to tax regular income is not as well equipped to tax these new forms of wealth.

49:53And when you say financialization, what do you mean? Basically, people are, and the wealthy are, making money not by making things, but by making sort of paper investments, right? So most of the money, right, is not in building new factories, is not in coming up necessarily even with new technologies, but in the financial markets, in buying and selling bits and pieces of other companies. So in the 1980s, rich Americans are making more of their money, not through their salaries, but through stock options, which has a weird side effect on taxation. Normal salaries, like paychecks, we know are taxed as income.

50:35But if you own a stock and it goes up in value, that is not taxed unless you sell it. And so you have this kind of explosive ability to make money because a stock option is worth nothing unless the stock goes way up. And then you get huge amounts. So you have this giant upside for these CEOs. And we also have a technology revolution. And so people are founding companies in their proverbial garages and they own big chunks of it. And these are very profitable companies because they're doing things like software. so you don't have to spend a lot of money to make the incremental floppy disk. And so you see somebody like Larry Ellison at Oracle or Steve Ballmer and Bill Gates at Microsoft with concentrated ownership of companies that have huge margins and their stocks explode and we get a new kind of wealth that turns out largely to be untaxed.

51:41The feeling many of us have these days that inequality is high, that the wealthy have become unfathomably rich, it begins here. Our new gilded era, where once again we have barons who sometimes live beyond or above the state. These billionaires possess a kind of wealth our tax system often just doesn't know what to do with. Sometimes it's like their money is invisible to the IRS, not because a crime is being committed, but because by design or accident, their money is money the government really does not know how to see. Billionaires powerful enough to reshape society but who, every April, magically resemble paupers in the eyes of our government.

52:21In our next episode, we will tell you a pretty bulletproof method for legally hiding your money from the federal government. If you're a billionaire, this next episode of Search Engine might help you finally afford a second vacation home for your personal trainer. If you're not a billionaire, you can listen to the story of how they figured out an enormously profitable loophole and hear about what it would mean to close it. That story is in our next episode, which is out right now.