Al Capone and the transformation of the IRS

10:18Joe Thorndike:He got a job as a stenographer at the post office in D.C. and worked his way up to becoming a postal inspector.

10:25Jason Scott Smith:Now, there's a big footnote here that you have to understand. The one beacon of light in the federal law enforcement back then was the U.S. postal inspectors. They could trace a fraud to a penny.

10:39Joe Thorndike:That's right. The most impressive crime-fighting cops worked for the post office. Because at this time, the early 20th century, more and more people were moving to cities. Industries were booming. Life was changing fast. And so if, say, you had a stock trade you wanted to make, it went through the mail. Needed to pay your rent or water bill? Mail. We're waiting on a big shipment of rugs. You get the idea.

11:06Jason Scott Smith:So it was important that the government made sure that that agency was free as much as possible of fraud, waste and abuse.

11:13Joe Thorndike:That's where Elmer cut his teeth.

11:16Jason Scott Smith:He was a humble guy, worked hard, and he became a very good investigator and well-respected.

11:24Joe Thorndike:And he might have spent his career in the Postal Service had things not taken an unexpected turn.

11:36Paul Camacho:World War I was brewing, and the U.S. had just ratified the 16th Amendment, which restored the income tax.

11:44Jason Scott Smith:It's viewed as a way to make the tax system more fair.

11:47Paul Camacho:The income tax had only been used a couple times before, mainly during the Civil War, to fund the Union's war effort. When that war ended, so did the income tax. But some Democratic and Republican congressmen had been pushing ever since to bring it back. They didn't think we should be relying so much on tariffs, which at the time were the main way the government got its money. They thought tariffs put too much of the burden on consumers and farmers, led to unstable trade relationships with other countries, and unfairly favored industrialists and the wealthy. And once the U.S. entered the war, the income tax proved vital.

12:34Jason Scott Smith:There's this tremendous need to fund the government, to fight World War I. The income tax gets much bigger very quickly. The top rate went from 6 % to like 77%. 77%. When I say top rates, that was for people who were making a lot of money. That's a huge portion.

12:54Paul Camacho:Some of the people being taxed the most were ironically making that money from the war itself. The media labeled them war profiteers.

13:03Jason Scott Smith:Businessmen that were providing the military equipment, the goods, everything needed for the war. And they became some of the most wealthy people in the country.

13:14Paul Camacho:People like Pierre S. Dupont, Charles M. Schwab, and J.P. Morgan Jr. And some of these so-called war profiteers?

13:23Jason Scott Smith:They had the temerity to bribe tax collectors and have them turn a blind eye and not pay taxes. And it became an embarrassment for Treasury.

13:39Joe Thorndike:After the war ended in 1918, the income tax rates were significantly reduced. But those wealthy tax evaders were getting all scot-free. So officials at the Treasury Department were trying to think of a way to improve the image of the IRS. How could it get the kind of reputation the Postal Service had? And the light bulb goes off.

14:02Jason Scott Smith:They went to the Postal Service and took one of their senior leaders by the name of Daniel Roper. And they bring him over and he becomes a commissioner of IRS.

14:11Joe Thorndike:Without consequences, what's a person's incentive to pay? So then Roper decides he needs to set up a special division to specifically investigate tax evasion and root out corruption in the department.

14:23Jason Scott Smith:And he asked one of his assistants, well, who do you recommend to run this division? They answered, well, how about this Elmer guy? He's well-respected. He's a rising star. And he seems to be a guy that everybody likes to work with. And so they offered him the job.

14:40Joe Thorndike:It's 1919. Elmer Irie recruits six of his old colleagues, other postal inspectors. And together, they begin building this new unit of the IRS, the Intelligence Unit.

14:55Jason Scott Smith:And then... This tremendous loop is thrown on Elmer and Daniel Roper. And that is, in 1920, the 18th Amendment. Prohibition. We sat face-to-face in Roper's office in the Treasury Department. I broke the glum silence with Mr. Roper. They can't do this to us. Roper nodded and answered, they certainly can't, but they have. And I'm afraid you're stuck. Yes, I guess we are stuck, Mr. Roper. No, Mr. Ivory, we're not stuck.

15:29Paul Camacho:You're stuck. Me? I'm resigning. Overnight, the production, transportation, and sale of alcohol was illegal everywhere. No beer, no wine, no whiskey, nothing. And people didn't like it. It led to a whole underground economy. Speakeasies, moonshiners, and of course, organized crime. The mob. Who were making a lot of money. None of which was being taxed. This was a huge problem, and none of the government agencies had wanted to be in charge of policing it. So when the Treasury Department was forced to oversee the new prohibition service, Daniel Roper left his post. But Elmer had a family to feed, so he stuck it out.

16:14Jason Scott Smith:All of a sudden, the responsibility for policing corrupt prohibition agents was now under Elmer Ivey.

16:25Paul Camacho:Prohibition agents were supposed to be reining in this massive black market. But because demand was so high, a lot of them had been hired with no qualifications. And corruption was rampant.

16:37Jason Scott Smith:Prohibition agents showing up to their jobs, wearing diamond rings, fur coats, being chauffeured to their jobs. I think a clue as to just how complicated this job became can be found in the following dreary statistic. From 1920 to 1928, we fired 706 prohibition agents for larceny and prosecuted 257 for saying. Elmer led this sweep of government corruption. He's starting to get attention. People are like looking at him like, whoa, who is this guy?

17:15Joe Thorndike:By the mid-1920s, some lawyers and government officials began pushing for criminals to be subject to tax evasion charges too. Because so much money was being funneled through their criminal enterprises during Prohibition. So in 1927, a case went before the Supreme Court. And in the decision, which Justice Oliver Wendell Holmes wrote, the court ruled that individuals must report and pay taxes on illegal income. After that decision, Elmer was basically told,

17:49Jason Scott Smith:Hey, the Supreme Court has now determined that illegal income is taxable. It's legal. Knock yourself out. Go after these kingpins. Use the tax law.

18:01Joe Thorndike:Now, Elmer had to face down the criminal underworld.

18:12Jason Scott Smith:The leader in the Chicago St. Valentine's Day massacre turned by police to be the most dangerous man alive. So when they started the investigation on Capone, what they were trying to show is, well, how much money did he have that he didn't report? So they followed the paper trails

18:30Paul Camacho:and then started interviewing people.

18:32Jason Scott Smith:You would have to go to the bank and that might lead to somebody at the home account. You had to go interview that person.

18:38Paul Camacho:Pretty quickly, Capone caught on that Elmer and his men were coming around asking questions.

18:43Jason Scott Smith:Witnesses were ending up dead.

18:46Paul Camacho:And then Elmer sent his best agent undercover.

18:50Jason Scott Smith:Then they were able to infiltrate the Capone organization. It was a dangerous situation for everyone. And at one point, Capone puts a hit out on a few people because of the investigation.

19:03Paul Camacho:But Elmer remained steadfast. He was like, we're going to do this investigation right.

19:10Jason Scott Smith:We've got to follow this to the letter of the law.

19:13Paul Camacho:And just as Elmer's crew was closing in on Capone,

19:17Jason Scott Smith:Wall Street was easy street for everybody.

19:20Paul Camacho:the stock market crashes. Panic gave way to despair.

19:25Jason Scott Smith:Overnight, the richest country in the world had spawned bread lines.

19:28Paul Camacho:The entire nation is sent into a tailspin.

19:33Jason Scott Smith:It sort of signals the beginning of the Great Depression.

19:39Joe Thorndike:By the time Capone went to trial two years later in 1931, the country had sunk deep into the Great Depression. Still, as the trial unfolded, all eyes were on Capone, the man everyone thought was untouchable. Day after day, rows of photographers swarmed him outside the courthouse. Eager readers followed along as witnesses took the stand. And through the papers, Capone made his case to the public, at one point saying, I've been made an issue and I'm not complaining. But why don't they go after all those bankers who took the savings of thousands of poor people and lost them in bank failures? Capone gets convicted of tax evasion.

20:25Joe Thorndike:Elmer's there as the judge reads the sentence.

20:28Jason Scott Smith:Right after, soon after, there are lines of mobsters at IRS buildings.

20:33Joe Thorndike:Collections from unpaid taxes spiked.

20:36Jason Scott Smith:And Herbert Hoover is so thrilled.

20:39Joe Thorndike:He's giddy. In a sea of losses amid the Great Depression, this was one bright spot for him and the country.

20:50Jason Scott Smith:And it makes people feel good about the tax system, too. He's like, yeah, at least they're paying their taxes.

20:55Paul Camacho:Hoover was hungry for more. He instructs Elmer and his team to go on a massive crime sweep across the country.

21:04Jason Scott Smith:This small band of elite financial investigators just took down one kingpin after another. And they got so good at it that the media called them the giant killers.

21:17Paul Camacho:In between chasing down kingpins, Elmer and his men also managed to help the famous pilot, Charles Lindbergh, solved the kidnapping and killing of his one-year-old son by tracing the ransom money. Everyone in America had been following the kidnapping. And now, a lot more people knew Elmer Irie, and they loved him.

21:39Jason Scott Smith:The public viewed Elmer as Uncle Elmer. He's this unassuming, church-going, all-American family man that had this immense courage and competence to take down these organized crime figures. And he did it in such a fair way, you know, he became the brand.

21:58Paul Camacho:The brand of the IRS.

22:04Joe Thorndike:And with life getting harder every day, the public was starting to wonder if maybe Capone had been right about something. Why don't they go after all those bankers?

22:15Paul Camacho:Weren't they just gangsters by a different, supposedly more legit name? Some papers even started calling them banksters.

22:25Jason Scott Smith:And so in the early 1930s, a lot of politicians are looking hard at that to try to figure out what role did finance and did the Wall Street bankers play in causing this depression.

22:39Joe Thorndike:Coming up, the banksters are put in a hot seat.

22:51Jason Scott Smith:Hi, this is Linda Turner from Huntington, West Virginia, and you're listening to Thrilline on NPR. This message comes from LinkedIn, who knows an empty seat can cost small businesses more than just space. That's why LinkedIn Hiring Pro makes it easy to fill that seat with the right candidate, streamlining everything from posting jobs to shortlisting talent. Nearly 60 % of businesses find someone to interview in the first week. Hire right the first time. Get started by posting your job for free at linkedin.com slash NPR. Terms and conditions apply. This message comes from Mint Mobile. If you're tired of spending hundreds on big wireless bills, bogus fees, and free perks, Mint Mobile is for you.

23:39Jason Scott Smith:Shop plans at mintmobile.com slash switch. Taxes and fees extra. See Mint Mobile for details. This message comes from Angie. If you're tackling a home project, check out Angie.com. From roofing to remodels and everything in between, Angie connects you with skilled pros who do such a good job, you might trust them to do other things, like pull out your tooth or be your kid's godfather. Don't actually ask them to do those things. Just let them get the job done well. Angie, the one you trust to find the ones you trust. Find a pro for your projects at Angie.com. That's A-N-G-I dot com.

24:19Joe Thorndike:Part 2. 99 and two-thirds.

24:24Jason Scott Smith:Who was your first witness? Mr. J.P. Morgan. Mr. Morgan, will you be sworn? Certainly. Hold up your right hand.

24:35Paul Camacho:You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, so help you God.

24:42Jason Scott Smith:I do.

24:46Paul Camacho:It's Tuesday, May 23rd, 1933, about four years after the stock market crash. Unemployment is at 25 percent. Red lines stretch around city blocks. And J.P. Morgan Jr. appears before a Senate banking committee who has called this hearing to investigate.

25:06Jason Scott Smith:What did Wall Street do and how bad was it? You know, can we blame them for this depression?

25:13Paul Camacho:And J.P. Morgan Jr.

25:14Jason Scott Smith:He is the archetypal Wall Street banker.

25:18Paul Camacho:Not only had he dominated Wall Street for decades by that point.

25:22Jason Scott Smith:He played a pivotal role in international finance through this whole period and was accused by many of being a war profiteer in World War I. He made an enormous amount of money doing that. You could just as easily make the case that he, you know, saved the allies from defeat.

25:39Joe Thorndike:Do you know what the aggregate amount was of those deposit accounts at the end of the last fiscal year?

25:46Jason Scott Smith:$340 million.

25:48Paul Camacho:This investigation was picking up steam as a new president entered the White House, the man who had beat out Herbert Hoover in the 1932 election, Franklin Delano Roosevelt. But his earlier career and his earlier life, you might not necessarily have predicted that this would happen.

26:09Joe Thorndike:FDR had grown up not all that differently from J.P. Morgan Jr. With a lot of money, rubbing shoulders with the elite. They even went to Harvard around the same time. And after college, J.P. Morgan Jr. goes into finance like his dad. And Franklin Roosevelt...

26:26Jason Scott Smith:Goes into politics thinking this is the family business. My cousin, Teddy Roosevelt, he was a Republican. I'll distinguish myself by being a Democrat.

26:35Joe Thorndike:He becomes assistant secretary of the Navy for a little while. and then tries to run for vice president in 1920, loses. And within a year...

26:44Jason Scott Smith:He tragically is struck with polio and is no longer able to walk.

26:49Joe Thorndike:By the way, this is Jason Scott Smith. He's a historian at the University of New Mexico, who's written two books about FDR and the New Deal.

26:57Jason Scott Smith:This kind of illness striking someone who was so wealthy and seemingly led such a charmed life must have humanized him to many Americans.

27:07Joe Thorndike:Roosevelt became governor of New York in 1929, just before the stock market crash.

27:13Paul Camacho:And during the first few years of the Great Depression, he watched as the Republican administration of President Hoover made a bad situation worse.

27:22Joe Thorndike:Raising taxes on businesses, which meant they had less money to invest.

27:26Paul Camacho:And individuals, which led to more unemployment and fewer customers at stores.

27:31Joe Thorndike:Raising tariffs to protect American jobs, which backfired and triggered a global trade war.

27:37Paul Camacho:and refusing to give direct aid to people, leading to a crisis of hunger and homelessness.

27:43Jason Scott Smith:Good evening, my fellow Americans and friends of the radio audience. I hope during this campaign to use the radio frequently.

27:51Joe Thorndike:So Roosevelt decided to throw his hat into the ring for the presidency. In this time of unprecedented economic and social distress,

28:00Jason Scott Smith:the Democratic Party declares its conviction that the chief causes of this condition... Roosevelt said the problem was too much government, and he was going to cut it back. First, an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than 25%. And his running mate accused Hoover

28:28Joe Thorndike:of leading the country down the path to socialism. This is Lawrence Reed, President Emeritus of the Foundation for Economic Education.

28:36Jason Scott Smith:But once he took office, the kinds of advisors he listened to were the ones telling him that, no, we've got to go whole hog for as much government spending and relief programs as we can. That's the only way to get out of the Depression. So that's the way he went. In the working out of a great national program that seeks the primary good of the greater number, It is true that the toes of some people are being stepped on and are going to be stepped on.

29:09Paul Camacho:This new deal would offer direct relief to the poor, infrastructure programs to put people back to work, and a whole new way of doing business where the government, not the private sector, would lead the way.

29:22Jason Scott Smith:The inefficiency was the point. He wanted to provide jobs. He wanted to provide government paychecks to prevent, you know, an uprising. It's a way of using the power of the state to support the private economy in a more effective and regulated fashion. In a sense, I would say the New Deal is trying to save capitalism from the capitalists and for the capitalists.

29:49Paul Camacho:Who represents the capitalists?

29:52Jason Scott Smith:J.P. Morgan Jr., we can see him as a kind of symbol of this older money opposition to Franklin Roosevelt, the Democratic Party, the New Deal, and the kind of tension that reflected the broader class divides that existed during the Great Depression.

30:09Paul Camacho:Which brings us back to J.P. Morgan Jr. sitting in the Senate Banking Committee hearing.

30:15Jason Scott Smith:In that bookkeeping process, do you count deposits as liabilities? Do I?

30:21Joe Thorndike:I do not think that question is very necessary, Senator.

30:25Jason Scott Smith:The critics of this are saying, you know, this is just blatant politics. You're just searching for scapegoats. And then it was discovered in the hearing... J.P. Morgan and his partners hadn't paid any taxes for a couple of years in the early 1930s. People were outraged. They were like, oh my goodness, I cannot believe that one of these richest people in America is not paying any taxes. And J.P. Morgan says, hey, no one regrets that more than I do. I wasn't paying taxes because I was losing money. How could I pay taxes on money I wasn't making?

30:58Paul Camacho:In other words, because he hadn't made a profit those years after the stock market crash, technically he didn't have any taxable income and hadn't evaded taxes.

31:09Jason Scott Smith:Who do you blame in that moment? Do you blame the taxpayer, J.P. Morgan, who's taking advantage of the law as best he can to minimize his taxes? Or do you blame the law and say, hey, Congress shouldn't have written the law like this in the first place? You know, you can go either way on that.

31:23Joe Thorndike:The committee interviewed a series of other bankers. And by the end, it was clear.

31:29Jason Scott Smith:Unchecked stock market speculation was one of the factors that had sent the economy and the American banking system into collapse.

31:38Joe Thorndike:So Congress quickly moved to pass a series of laws to regulate the stock market and put more checks in place on bankers to prevent them from gambling with people's money.

31:48Paul Camacho:But the tax question remained.

31:51Jason Scott Smith:What is the moral status of tax avoidance? It may be legal, but is it moral?

31:58Paul Camacho:FDR took this up as his personal fight.

32:01Jason Scott Smith:To him, the aggressive tax avoidance, even when legal, is just as worthy of scorn and political attack. Because you think about it, that's the New Deal. The government is relying on the tax system.

32:14Joe Thorndike:Thing is, most of the government's revenue to fund New Deal projects, like new schools, new sewers, new sidewalks, new airports, new courthouses, came from deficit spending and from excise taxes. Taxes on goods like tobacco, cars, radios, and alcohol, as Prohibition ended in 1933. Not the income tax, which only about 5 % of the population at this point, the wealthiest of the wealthy, were paying.

32:43Paul Camacho:But for Roosevelt, the income tax was symbolic. A way to rebuild trust with the public and restore that feeling people had when Elmer Irie took down Capone. that everyone was expected to pay their fair share. And he wants to name names. One of the names Roosevelt tells the IRS to investigate is Elmer Irie's former boss, Andrew Mellon.

33:09Jason Scott Smith:Andrew Mellon was a very prominent and very wealthy man. Everybody knew who he was. There is an old joke about Andrew Mellon that three presidents served under Andrew Mellon. He'd been Treasury Secretary for more than 11 years. basically from the time Prohibition began. And what did he believe in? He believed in cutting taxes, more than anything else.

33:28Paul Camacho:The Roosevelt administration made me go after Andy Mellon. I liked Mr. Mellon, and they knew it. Elmer initially objects to the investigation. He's like, there's nothing there. And then he gets a phone call from the new Treasury Secretary, Henry Morgenthau, a close friend of Roosevelt, who says, Irie, you can't be 99 and two-thirds percent on that job. Investigate Mellon. I order it.

33:57Jason Scott Smith:Everyone was convinced, I think, of Mellon's innocence, except perhaps for Franklin Roosevelt and Henry Morgenthau. It was politics driving this. Elmer showed him, okay, if you ask me to do this, I'll put my best agent on it, and eventually showed the judge that the guy was innocent beyond a reasonable doubt. If the case is not there, he's going to make it known that the case is not there.

34:17Paul Camacho:But it is telling that if he was a different person who got that request and understood the subtext, like, we don't like this guy, find something on him, you know, what havoc that could have wreaked on the government. Oh, yeah.

34:33Jason Scott Smith:I mean, look, he even talks about it, that an investigation could destroy a person. And he preached to agents follow strictly the rules of the Constitution and the laws that govern criminal investigations. That was what it meant to be a civil servant.

34:57Jason Scott Smith:in 1935 roosevelt starting to gear up for his first re-election campaign that year roosevelt

35:03Joe Thorndike:pushes through the social security act and the so-called wealth tax which raised the federal income tax on the highest income earners those in the very highest tax bracket had to pay 79 And there was no war to fund this time. Now, full disclosure, that 79 % only applied to one person. It was John D. Rockefeller Jr. Even J.P. Morgan Jr., who had a lot of money, didn't have that kind of money. So is that a meaningful tax?

35:35Jason Scott Smith:Well, it's not meaningful in the amount of revenue it's going to raise. But it might be meaningful in terms of the message that it sends. These kind of rhetorical attacks on the wealthy were terrific politics. He was, over time, seen by the wealthy as a kind of traitor to his class.

35:54Joe Thorndike:Even though this tax crusade against the wealthy was resonating with people, FDR was feeling uncertain about his re-election. And he began asking Elmer to investigate more and more people who could be fairly described as his political opponents. Among them were a Democratic senator from Louisiana named Huey Long, who was a threat to him in the primaries, a Republican congressman from Roosevelt's home district, Hamilton Fish, and Mo Annenberg, owner of a media company that was vocally critical of FDR and the New Deal.

36:28Paul Camacho:Paul Camacho says it's unclear how much these investigations were politically motivated, because some of them were suspected of actual criminal wrongdoing. But Lawrence Reed cites this as counter-evidence.

36:41Jason Scott Smith:Elliot Roosevelt, the son of the president, wrote a very revealing book about the family's years in the White House. And he points out in that book, quote, my father may have been the originator of the concept of employing the IRS as a weapon of political retribution.

37:03Jason Scott Smith:We know now that government by organized money is just as dangerous as government by organized mob.

37:16Paul Camacho:Roosevelt won re-election in 1936, and he would go on to win re-election an unprecedented two more times.

37:24Jason Scott Smith:They are unanimous in their hate for me, and I welcome their hatred.

37:42Joe Thorndike:Nowadays, we are assailed by a chorus of horrid threats. By the late 1930s, talk of war began to fill the airwaves, and fascism was taking hold of Europe. Some Americans, angry at Roosevelt, began to call him the New Deal dictator. He proposed a 99 % top income tax rate. That was extreme and didn't actually get approved by Congress. But for the business class, this tax crusade and the New Deal were a direct threat to their bottom line. And more than that, a threat to American innovation and entrepreneurship.

38:23Jason Scott Smith:They're saying we're not going to take all the risk and have almost all the reward taken by the government.

38:29Paul Camacho:And whether you saw it as a good or a bad thing. This is a radical transformation of the federal government. Exactly how much New Deal programs actually fix the economy is hard to measure. Unemployment rates were still high and businesses still struggling by the time World War II began. But it did restore hope among many people that they were not alone in the struggle, that the government was growing to meet their needs, that taxes were the engine for that growth, and that trusty Uncle Elmer was making sure everyone paid their fair share. gangsters, banksters, and politicians alike.

39:10Joe Thorndike:Coming up, that trust is put to the ultimate test.

39:18Paul Camacho:Hello, my name is Tamara.

39:20Jason Scott Smith:I'm in New Orleans, and you're listening to ThruLine on NPR. This message comes from LinkedIn, who knows an empty seat can cost small businesses more than just space. That's why LinkedIn Hiring Pro makes it easy to fill that seat with the right candidate, streamlining everything from posting jobs to shortlisting talent. Nearly 60 % of businesses find someone to interview in the first week. Hire right the first time. Get started by posting your job for free at linkedin.com slash NPR. Terms and conditions apply. This message comes from Mint Mobile. If you're tired of spending hundreds on big wireless bills, bogus fees, and free perks, Mint Mobile is for you.

40:03Jason Scott Smith:Shop plans at mintmobile.com slash switch. Taxes and fees extra. See Mint Mobile for details.

40:11Joe Thorndike:If you're like me, you probably have an email inbox that's full of receipts and ads and other things you're avoiding. But we've got something that you'll actually want to open. Subscribe to NPR's Books newsletter for book recommendations, reviews, author interviews, and more. Delivered straight to you. No paywalls, no digging around. Sign up at npr.org slash newsletters. Part 3.

40:41Jason Scott Smith:New Deal Dictator

40:47Joe Thorndike:Japan, like its infamous Axis partners, struck first and declared war afterwards.

40:53Jason Scott Smith:Costly to our Navy was the loss of war vessels, airplanes, and equipment, but more costly to Japan was the effectiveness of its foul attack in immediately unifying America in its determination to fight and win the war thrust upon it, and to win the peace that will follow.

41:16Joe Thorndike:On March 9th, 1942, just a few months after the U.S. entered World War II, Elmer Irie received a letter from Franklin Roosevelt himself.

41:27Jason Scott Smith:We were not really winning the war, and FDR was not just sending letters randomly out to people.

41:33Joe Thorndike:This is Paul Camacho. He's a retired special agent for the IRS Criminal Investigation Division.

41:40Jason Scott Smith:And so he's writing this letter. Dear Mr. Irie. And telling Elmer, you know, I'm looking back at your career when you first started.

41:49Joe Thorndike:I feel I should take a moment to tell you of my pride in the work of the intelligence unit. As the years have gone by, the intelligence unit has become a shining mark, not only of incorruptibility, but what is just as important, of A1 efficiency.

42:07Jason Scott Smith:And I just want to thank you, because going into this tax season...

42:13Joe Thorndike:On this coming March 15th, we will be unpopular with more millions of taxpayers than ever before.

42:19Jason Scott Smith:I mean, they're in a perfect position for an agency to hate.

42:23Paul Camacho:Back then, March 15th was tax day, and Roosevelt, needing money fast to fund World War II, had pushed through the Victory Tax of 1942, hoping the goodwill and trust Almer Irie had built up with the public would help this new tax land with them.

42:43Joe Thorndike:Victory Tax Plan adopted. All individuals earning more than$12 a week affected the Baltimore Sun.

42:53Jason Scott Smith:Suddenly, millions and millions of Americans who've never had to pay income taxes are suddenly paying them for the first time.

43:00Paul Camacho:This is Joe Thorndyke, historian for Tax Analysts, a nonprofit provider of tax information.

43:06Jason Scott Smith:And that's how the federal government manages to take what they call a class tax and turn it into a mass tax.

43:12Paul Camacho:A mass tax. Because now, it wasn't just the rich being taxed. It was also everyday middle-class Americans that had to contribute.

43:22Joe Thorndike:In 1939, only about 5 % of American workers were paying income tax. By the time victory tax came along, it had risen to 75 percent.

43:34Paul Camacho:Are Americans angry about this?

43:37Jason Scott Smith:You know, war has a way of holding that kind of taxpayer anger and abeyance for a while. Patriotism really matters. Like, hey, our boys are dying in the field, in the trenches, in Europe, in the Pacific. The least we can do is contribute our dollars to support them.

43:54Joe Thorndike:And the government builds a whole PR campaign around this new tax, partly to make sure people comply, and partly because people who had never done it, they didn't know how to do that.

44:06Jason Scott Smith:I paid my income tax today.

44:11Joe Thorndike:I'm only one of millions more whose income never was taxed before. A tax I'm very glad to pay.

44:19Jason Scott Smith:The federal government commissioned people like Irving Berlin to write songs.

44:24Joe Thorndike:This is Jason Scott Smith. He's a historian at the University of New Mexico who's written two books about FTR and the New Deal.

44:32Jason Scott Smith:They were all about how, hey, I've paid my income tax today. Isn't this great? See those bombers in the sky. Rockefeller helped to build them, so did I. I paid my income tax today. And there was this famous campaign that they rolled out using Donald Duck. Are you a patriotic American? Yes, sir. Eager to do your part? Yes, sir. Then there's something important you can do. Oh boy, oh boy, oh boy, I'll do it. Your income tax. Income tax? Yes, your income tax. No, no, no, income tax.

45:11Paul Camacho:Now, it's one thing to ask people to pay their taxes and have a cartoon explain how to file them, and a whole other thing to actually send your tax money to the government.

45:21Jason Scott Smith:There was a huge fear that these new taxpayers would, one, not realize that they were supposed to pay in the first place and just wouldn't file returns, or two, wouldn't have enough money saved to pay the taxes when the time came. There are many people in Washington who knew that it might become increasingly difficult to collect the money.

45:38Paul Camacho:The IRS wasn't staffed up enough to keep track of that many new taxpayers.

45:43Jason Scott Smith:And so policymakers recognized early on that they're going to have to find some better way for these people to pay. And so in 1943... They thought, hey, let's put withholding in place because then we'll get it before the taxpayer ever earns it.

45:57Paul Camacho:Tax withholding. You know what I'm talking about. That one line on your paycheck that says federal income tax and how much was automatically taken out of it.

46:07Jason Scott Smith:And the idea is that a little bit will be taken out of your paycheck every two weeks or every month or every week, whenever you get paid. And then that will effectively pay your tax bill in pieces over the course of the year. This is the way we pay our taxes now.

46:20Paul Camacho:This was a win-win for the federal government because it did two things. One, this simplified and streamlined tax payment system meant the government would actually get the money it needed. And two, the IRS didn't have to be the one collecting everyone's money. Instead, your boss was going to do it.

46:40Jason Scott Smith:The federal government's sort of deputizing employers and saying, you're going to be our tax collectors. So take that money out of the paycheck for your employee and then send it to us directly.

46:51Joe Thorndike:It was a drastic step in terms of government invasiveness.

46:56Jason Scott Smith:If there hadn't been a war on, I'm guessing you would have seen far more opposition to withholding. But the fact that there was, and everybody was pulling for victory, that made withholding much more palatable. And a lot of people thought it would only be temporary anyway, that it would go away after the war.

47:13Joe Thorndike:But there were some people who were speaking out against these new tax laws, even as the war raged on.

47:19Paul Camacho:People like Vivian Kellams.

47:23Jason Scott Smith:Vivian Kellams is one of my favorite people.

47:26Paul Camacho:In the late 1920s, Vivian and her brother started a company together based around an invention.

47:33Jason Scott Smith:Called a cable grip, which was used by bridge builders and ultimately even the military would use it to lift heavy artillery shells.

47:43Paul Camacho:And so she made a lot of money, money that was taxable.

47:47Jason Scott Smith:She was rebelling by the 1940s against the sky-high income tax rates. From her perspective, she thought, I haven't done anything wrong. I've added value to society. I haven't taken anything from anybody. I've employed people, good wages. And I helped the war effort by making these things that the Army needed for its artillery shells. She felt aggrieved and for good reason.

48:12Paul Camacho:Vivian's frustrations started coming out in newspaper articles. The Chicago Tribune reported on a speech she gave saying that withholding was, quote, a deliberate plan to keep the system of free enterprise from surviving after the war. This underground movement will not only control, but own all business. And she refused to be a part of that plan.

48:35Jason Scott Smith:I mean, this was quite remarkable for a woman to say, no, I'm not going to do it. And she told her employees, you're responsible for making your tax payments. and even though the government tells me I have to take it from you, I'm not going to do it.

48:48Paul Camacho:Vivian traveled around the country giving speeches.

48:51Jason Scott Smith:And often had sizable crowds in which she argued against compulsory withholding and against big government in general. There are plenty of Americans that are upset, as they were near the close of World War II, about federal controls on prices, about shortages of meat at the supermarket. You know, the Republicans' campaign in 1946, wouldn't you like to be able to go to the grocery store and buy something that you can afford?

49:22Jason Scott Smith:From this day, we move forward. We move toward a new era of security at home.

49:32Joe Thorndike:After the war ends, Elmer Irie retires from public service. Life magazine calls him one of the world's greatest detectives. And there was even a Hollywood movie called The T-Man, which stood for the Treasury Man, that was partly inspired by Elmer Eyrie and his Treasury agents.

49:50Paul Camacho:And this is where the story ends for Eyrie. Nearly three years after the war's end, he passes away. But what he left behind, this tax system that he helped enforce and grow, didn't go back to the way it was before the war. Instead, all that tax money got fed into something else.

50:10Jason Scott Smith:We developed a national security state that was big and expensive and required a giant standing army and navy and air force. In addition, you know, this is the beginning of the atomic arms race and we're developing a huge atomic arsenal. All of that is expensive and they have to find some way to keep paying for that. So the government does not shrink. It's permanently expanded by World War II. You know, there's a before and after moment in American society, and this is one of them. Before the 1930s, Americans encountered the federal government at the post office. After World War II, Americans encountered the federal government in all aspects of their lives, from Social Security to federal highways.

50:54Paul Camacho:And the debates surrounding these new taxes and this new expanded role of the federal government got louder. People like Vivian Kellams made it their life's mission to fight back against the government that they thought had gotten way too big.

51:09Jason Scott Smith:I decided that we had to take some action. And what I did was a perfectly American thing. I broke the law to provide a test case.

51:18Paul Camacho:Vivian was invited onto talk shows. She was one of the first women interviewed on Meet the Press. And she even took the IRS to court.

51:27Jason Scott Smith:And I wrote to the secretary of the treasury and I told him that I had not sent any money and that I was not going to until he paid me what he owed me.

51:38Paul Camacho:And these voices coalesced into a new movement.

51:42Jason Scott Smith:The new right that we think about today in the 1980s and 1990s and beyond, that the origins of the new right really do lie in the 1930s and the kind of business reaction to the power of the New Deal, the remaking of labor relations and the growth of organized labor.

52:02Joe Thorndike:Jason Scott Smith says so much of how people think about the government, of the taxes they pay, and of their role in all of that, boils down to trust.

52:13Jason Scott Smith:To what extent do people trust the government to do the right thing with their tax money? To what extent do people feel like they are getting good value for their money?

52:23Joe Thorndike:And without an Elmer Eyrie in the picture, someone to be the trustworthy face of the government, building that goodwill has proven difficult for the agency entrusted with our taxes.

52:35Paul Camacho:In the century since, the IRS has been embroiled in scandals, political retribution, and not everyone is always paying their fair share. So it's not unreasonable to ask, What am I paying?

52:49Jason Scott Smith:Who's getting away with not paying? And in our present moment, we have a president who's proud of the fact that he's avoided taxes for many years, that he knows so much about the tax code that he can do that.

53:01Paul Camacho:But this imperfect system is what helps keep the lights on, the roads operating, the water running.

53:09Jason Scott Smith:Taxes are the price we pay for civilization. There's an element of truth to that. After all, taxes do pay for the core functions of a government. To provide protection at home, a court system, a national defense, and those kinds of things that keep order and allow for us in a free society to be prosperous. The problem has been throughout the ages that a government doesn't know when to quit. You give it an inch and it'll take a mile. and it often has done that over and over again.

54:03Paul Camacho:That's it for this week's show. I'm Randa Abdel-Fattah.

54:07Joe Thorndike:I'm Ramteen Arab-Louis and you've been listening to ThruLine from NPR.

54:11Paul Camacho:This episode was produced by me and me and Lawrence Wu, Julie Kaye, Anya Steinberg, Casey Miner, Christina Kim, Devin Kadiyama, Sarah Wyman, Irene Noguchi.

54:25Joe Thorndike:Voice over work in this episode was done by Jason Divina Gracia, Fulton Ho, Christian Benford, Shahir Khan and Ivan Wu.

54:34Paul Camacho:Thank you to Yohannes Durgi, Edith Chapin, Nadia Lancey and Colin Campbell.

54:40Joe Thorndike:Fact-checking for this episode was done by Kevin Vocal. The episode was mixed by Jimmy Keighley.

54:46Paul Camacho:Music for this episode was composed by Ramtin and his band, Drop Electric, which includes...

54:52Jason Scott Smith:Naveed Marvi. Sho Fujiwara.

54:55Paul Camacho:Anya Mizani.

54:56Joe Thorndike:And finally, if you have an idea or like something you heard on this show, please write us at throughline at npr.org. And make sure to follow us on Apple, Spotify, or the NPR app. That way, you'll never miss an episode. Thanks for listening.

55:17Paul Camacho:This message comes from Mint Mobile.

55:19Jason Scott Smith:If you're tired of spending hundreds on big wireless bills, bogus fees, and free perks, Mint Mobile is for you. Shop plans at mintmobile.com slash switch. Taxes and fees extra. See Mint Mobile for details.

55:34Paul Camacho:This message comes from Capella University. That spark you feel? That's your drive for more.

55:40Jason Scott Smith:Capella University's FlexPath Learning Format lets you earn your degree at your pace, without putting life on pause. Learn more at capella.edu. This message comes from Grainger. For the ones who get it done, Grainger offers the professional-grade products you need to get the job done. With fast delivery and access to technical product experts ready to help you meet any challenge. Call, click grainger.com, or just stop by.