00:00 PJ Vogt Welcome to Search Engine, I'm PJ Vogt. 00:02 Each week on the show, we answer a question we have about the world, no question too big, no question too small. 00:07 Our question this week, why is it so hard to tax billionaires? 00:11 The answer may lie in a USB key leaked by a rogue IRS worker to a journalist. 00:17 A USB key containing private tax returns for the very wealthiest people in America. 00:23 Elon Musk, Taylor Swift, Jeff Bezos. 00:27 The story of that leak and the question it answered after these ads. 00:34 You know that moment when you're tracking down a lead and something just doesn't feel right? 00:38 Maybe it's a source that doesn't seem accurate, or a technical explanation that sounds impressive but falls apart under scrutiny. 00:44 That's when you need Claude. 00:46 Not to give you easy answers, but to help you think through what's actually happening. 00:50 Let's say you're trying to understand how a particular technology works. 00:54 Upload the technical papers, ask Claude to break down the methodology. 00:57 It doesn't just translate jargon, it helps you spot where the logic might be shaky. 01:02 Or maybe you're researching a company's claims about their breakthrough innovation. 01:06 Claude can search current sources, cross-reference information, and help you see patterns that might not be obvious at first glance. 01:12 It's built for those who don't stop at something being just good enough. 01:16 Whether you're investigating emerging tech, following complex business stories, or just someone who finds themselves going down research rabbit holes, Claude matches that energy of wanting to really dig deep into the why. 01:27 See why the world's best problem solvers choose Claude as their thinking partner. 01:31 Try Claude for free at claude.ai. 01:39 This episode is brought to you in part by Viore. 01:42 A new perspective on performance apparel, perfect if you're sick and tired of traditional old workout gear. 01:48 Viori clothes are incredibly versatile and comfortable, perfect for whatever your day brings. 01:53 They're designed to look great beyond the gym, whether you're running errands, heading to the office, or meeting up with your friends. 02:00 One specific Viori item I would recommend is the core short. 02:04 This is the short that started it all for Viori. 02:07 It is one short for every sport, you need for whatever sports you play. 02:12 It's ideal for fitness, running, and training, but also genuinely stylish and comfortable enough to just wear all day. 02:18 Viore is an investment in your happiness. 02:21 For Search Engine listeners, they're offering 20% off your first purchase. 02:25 Get yourself some of the most comfortable and versatile clothing on the planet at viore.com slash pjsearch. 02:32 That's V-U-O-R-I dot com slash pjsearch. 02:37 Exclusions apply. 02:38 Visit the website for full terms and conditions. 02:40 Not only will you receive 20% off your first purchase, but enjoy free shipping on any U.S. orders over 75 bucks and free returns. 02:48 Go to viore.com slash pjsearch and discover the versatility of Viore clothing. 02:53 Exclusions apply. 02:53 Visit the website for full terms and conditions. 03:25 Jesse Isinger Am I supposed to put these on or do I not? 03:28 PJ Vogt It's totally up to you. 03:29 If you feel more or less comfortable in either direction. 03:31 Sort of ensconces me in like podcast. 03:35 I was in the studio recently with a reporter who I know. 03:38 I've had the pleasure of knowing a lot of grumpy idealists, but few as grumpily idealistic as him. 03:44 Jesse Isinger Can you say your name and what you do? 03:47 Sure. 03:47 Jesse Isinger, and I'm a senior editor and reporter at ProPublica. 03:51 PJ Vogt And you, as part of your job, spend, I mean, other people spend more time thinking about the taxes rich people pay and don't pay, but those people tend to be rich people and the people they hire. 04:02 You're, like, in third place, I think. 04:04 Jesse Isinger Yeah, I'm in like the 99.5 percentile of people who think about rich people in taxes. 04:11 Yes. 04:11 Yeah. 04:11 How did that happen to you? 04:13 You know, just growing up angry. 04:16 I wake up angry in the morning every day. 04:19 I've always gravitated. 04:21 It was all... 04:22 It was a complete accident that I got into both journalism and then especially business and financial journalism. 04:29 And then by happenstance, I gravitated to... 04:34 con men and liars and charlatans. 04:38 I went from, you know, incredibly complicated stuff like accounting fraud and day sales outstanding and accounts receivable to structured finance and collateralized debt obligations and all that stuff. 04:52 But I was always very daunted about taxes because I thought that was actually the really complicated stuff that I could never understand. 04:59 And? 05:00 And then it fell into my lap through serendipity. 05:08 PJ Vogt It fell into Jesse's lab because of a stranger who would find him on the internet. 05:13 A stranger, presumably, who was inspired to reach out to him because of this series Jesse and his colleague at ProPublica, Paul Keel, had reported back in 2018. 05:22 It was called Gutting the IRS. 05:25 Who wins when a crucial agency is defunded? 05:28 Jesse Isinger I consider it the most boring investigative series ever written. 05:32 And what made it so boring? 05:35 It's about a bureaucracy that's not doing anything. 05:38 And it's about the tax bureaucracy that's not doing anything. 05:42 So you're layering taxes on nothing. 05:44 PJ Vogt Right. 05:45 It's like bureaucracy, which is already very sexy. 05:48 Nothing happening, which gets people to the movie theater. 05:50 And then nothing happening is about taxes. 05:53 Exactly. 05:55 Jesse Isinger Exactly. 05:57 But I was very proud of it. 05:58 We really got into the IRS, and it was very important. 06:01 We penetrated a wealthy person's tax audit to explain why it was so difficult to audit the wealthy. 06:10 We wrote about, in the end, pretty outrageous things, like Paul figured out that you were more likely to be audited if you were a member of the working poor, if you were making $20,000 or $30,000 a year than if you were making $500,000 a year. 06:26 And why was that the case? 06:28 The shorthand way to think about it is that over a decade, Republicans, mainly, with the kind of passive acceptance of Democrats, gutted the IRS to the point where the tax collection system of the United States was horrible. 06:49 almost completely incapacitated. 06:52 So we had no ability to either oversee or audit or police the wealthy and corporations when they were trying to avoid or evade taxes. 07:04 And we wrote that series of stories. 07:06 It was read by a few important people in Washington and then one person 07:12 person who was really stirred to act, and they gave us all the taxes of the wealthy. 07:25 PJ Vogt Chapter One, The Mysterious Whistleblower. 07:28 In the fall of 2020, nearly two years after that IRS series was published, the rogue leaker makes contact. 07:37 Jesse Isinger a signal message pops up and asks if this is Jesse Eisinger from ProPublica, and the person says that they want to give me something. 07:47 And, you know, I always answer those things. 07:49 PJ Vogt How often do you get that? 07:51 I'll just tell you, as, like, a podcaster who tries to figure out, like, why monkeys at the zoo are sad, I don't get a lot of, like... 07:56 People aren't like, I got something to give you very often. 07:58 Do you get that a lot? 07:59 Jesse Isinger I get it a lot. 08:01 And 90% of it is that when I walk down the street, I'm being monitored by the FBI. 08:09 Oh, people who are just like not well. 08:11 Yeah. 08:12 Yeah. 08:13 So most people are unwell. 08:16 And then... 08:17 Nine out of 10 who are not unwell have something that is of some importance in a local or, you know, modest setting, but doesn't rise to the level of a ProPublica project or, you know, of national importance. 08:32 But, you know, I'll get two, three tips like that a week. 08:35 And so why did, what was the first sign with this message that this was actually substantial? 08:39 It took a while. 08:40 So the person said that they wanted to send me something. 08:44 And I said, sure, hoping it wasn't going to be 08:47 Anthrax, you know? 08:48 And then an envelope arrived, which is always kind of exciting. 08:53 That doesn't happen very frequently. 08:54 Again, it's never happened to me. 08:56 I feel jealous. 08:56 And I put the envelope aside and forgot about it. 09:01 And then a couple of months later, a few months later, the signal message pops up again. 09:05 And there's a lot of cloak and dagger stuff about how the plan is going to be activated now. 09:11 PJ Vogt And the person says— Like, this person's using this language, like, the plan is going to be accurate. 09:15 Jesse Isinger Yeah, like, I'm going forward. 09:16 I've decided to go forward. 09:18 I'm now ready to move to phase two or something, you know, something like that. 09:23 And are you kind of thinking, like— Oh, I'm thinking cranked. 09:26 PJ Vogt Yes. 09:26 Okay. 09:27 Jesse Isinger Yeah, yeah, yeah. 09:28 But, you know, I— 09:29 In addition to being angry, I'm sort of hopelessly optimistic. 09:34 And so I'll always think, like, there's a possibility. 09:39 But the first problem was that I had no idea where the goddamn envelope was. 09:44 So I spent hours and hours going through it. 09:49 You know, I don't know if you've never been to my apartment, but that's not an enjoyable thing to try to sift through the mountains of paper desperately looking for this thing. 09:59 I did find it, you know, deep within the bowels of our filing system, quote-unquote, and then got the password to this encrypted thumb drive, and I was looking at... 10:12 Clearly something that smelled like something that'd come from the IRS. 10:19 And what made it that way? 10:20 Like, what did it... You know, it had jargon. 10:23 It had fields and fields of numbers out to the single digits. 10:29 Things that wouldn't be... You always think... 10:32 The great fear is something that's fraudulent, that you're going to be tricked into. 10:37 PJ Vogt Someone's going to say like, hey, here's Donald Trump's tax returns, and it's just something they've cooked up on Photoshop. 10:42 Jesse Isinger Yeah, you know, James O'Keefe is trying to trick you into publishing something that would be catastrophically embarrassing. 10:50 Yeah. 10:50 But this just had verisimilitude to it. 10:54 PJ Vogt The whistleblower had gone back over 15 years, grabbing the tax returns for thousands of the wealthiest Americans and dumped them into this file. 11:03 Forbes every year publishes their Forbes 400 list, guessing at the richest Americans and their net worth. 11:10 But this was the real thing, government certified. 11:13 In practice, what this looked like was fields and fields of data, spreadsheets on spreadsheets. 11:19 And so how do you begin to understand what you've been given? 11:21 Jesse Isinger Well, that took months and months and months. 11:24 But at that point, I sort of, I called up Paul and I said, this is either the biggest hoax of your career or the best day of your career. 11:34 PJ Vogt It wasn't a hoax. 11:36 And for Jesse to say this was the best day of his career means something. 11:40 He's been an investigative reporter for decades. 11:42 He's won a Pulitzer. 11:44 He is someone who has dedicated his life to understanding how the wealthy and powerful shape our society. 11:49 But he'd never seen wealth this unmasked. 11:54 Chapter two, The Secret Files. 11:57 Jesse Isinger We were looking at something that no one had ever seen before. 12:02 Something that had been one of the most guarded secrets in all of the federal government. 12:09 And we were privy to this extraordinary secret. 12:14 And when you say that this is one of the most guarded secrets, like, how guarded was it? 12:17 Well, you can go to prison for leaking any amount of private tax information. 12:24 So it was clearly a violation of the law just to leak one person's tax information. 12:30 This was thousands of people. 12:33 So you were like seeing how much they make in a given year. 12:37 You're seeing what kind of deductions they had. 12:39 You could see their gambling winnings. 12:41 You could see their stock sales. 12:43 I mean, it was an entree into a completely different world. 12:51 PJ Vogt And so as you're decoding the information you have, is it the billionaires that I've heard of? 12:57 Is it like Jeff Bezos, Warren Buffett? 13:00 Like, are you just looking at their tax information? 13:02 Jesse Isinger Yeah, yeah. 13:03 Every person you can think of, the Waltons, was like, oh yeah, there are a lot of Waltons here. 13:09 All the top hedge fund managers that you could think of, George Soros was in there. 13:14 And you would be hard-pressed to name a billionaire who we don't have. 13:21 PJ Vogt It's an extraordinary amount of private information for anyone to possess. 13:25 Jesse says the team at ProPublica had to think carefully about how to proceed. 13:29 There were ethical questions to consider, like which parts of this data dump were actually newsworthy. 13:35 But the story told by the tax returns was a story of a lot of behavior that seemed pretty astonishing. 13:42 Everyone's had the experience where a wealthy person explains to you how actually they're not really that wealthy. 13:48 But seeing these documents, it was like watching the wealthiest people in America do that to the U.S. government's tax collectors. 13:56 For example, Jeff Bezos, in a year where his net worth was $18 billion, was paying so little in federal taxes that he looked, to the IRS's eyes, like a poor person. 14:08 Somehow he both qualified for and took advantage of a government tax credit for childcare that's actually designed to lower child poverty in this country. 14:19 Our government sent Jeff Bezos a check for $4,000 to take care of his kids. 14:28 ProPublica reached out to Bezos' representatives, who declined to receive detailed questions about the reporting. 14:35 Another example, Warren Buffett. 14:37 In the data, they could see that one year, Buffett's wealth had grown by over $24 billion, and that he'd paid about $23 million in taxes. 14:45 That works out to one-tenth of 1%, the equivalent of a person whose net worth increases by $100,000 in a year, paying $100 in taxes. 14:55 Buffett, to his credit, one of the few billionaires who responded to ProPublica, in an extended letter, he pointed out that his tax returns have long been available publicly and said that he believes his money is more useful if it goes to charity rather than, quote, to slightly reduce an ever-increasing U.S. debt. 15:14 which honestly is probably the way a lot of people feel, not just billionaires. 15:19 Being a billionaire, I imagine, has its upsides, but it has its downsides too. 15:25 One is that when you say it has downsides, everybody starts laughing at you. 15:29 The other is that many people do not like you and do not think you should exist. 15:33 Only 15% of Americans polled by Pew said it was a good thing for the country that some people have more than a billion dollars. 15:42 I am perverse and tend to feel a little bit of curiosity for anyone everyone kind of hates, and I wanted to ask Jesse about this decision he'd made to pretty severely violate the privacy of the ultra-wealthy, even if it may have been for the greater good. 15:56 I also... 15:57 To play billionaire's advocate. 16:00 I understand why... 16:01 They need all the help they can get. 16:02 Obviously, and particularly for me. 16:04 I understand the idea that in a world where there isn't full transparency, no one wants to, like, go first. 16:11 Like, I understand the feeling of, like... 16:13 let's all be naked or let's nobody be naked, but I don't want to be one of the only naked people. 16:17 I get, in that way, I will defend the billionaires. 16:20 Jesse Isinger Yeah. 16:21 Well, good. 16:24 I was worried for a moment that we were going to be too hard on them. 16:27 I just don't want to get all those emails from Jeff Bezos. 16:30 Yeah. 16:32 I... 16:33 Well, first of all, I have been one of the people who's been naked at ProPublica because I've been lucky enough, fortunate enough to be in the 990 where they disclose some of the top salaried people. 16:46 And I'm sure that in my unproductive years, many people at ProPublica have felt... 16:52 resentful toward me. 16:53 Maybe they feel resentful toward me in any year. 16:56 But, you know, in fact, I go on. 16:58 I'm able to work hard and work with colleagues, so you get over it and people aren't very conscious of it. 17:04 Anyway, I think billionaires are special, or let's say the ultra-wealthy are special because they are 17:11 are often quasi-public figures. 17:15 I think it essentially makes you a public figure once you reach a certain threshold of wealth, especially because of the power and influence that the wealth accords you. 17:25 They donate to major institutions and fund political campaigns. 17:32 And I think, in turn, they should sacrifice a little bit of their privacy. 17:37 PJ Vogt In Finland, Norway, and Sweden, citizens' tax returns are made public. 17:42 In America, Wisconsinites can actually file public records requests and learn the state tax bill of any other citizen. 17:49 Jesse's interest in this is not strictly about humiliating the ultra-rich. 17:53 It's more this. 17:55 Jesse's suspicion is that if billionaires' taxes were transparent, we'd discover that a lot of their tax strategies that may be legal still don't pass the ethical smell test. 18:05 And if we saw the loopholes they were using, we might be motivated to close those loopholes. 18:11 Of course, if it seems hard to imagine any of this actually happening, Jesse will tell you that as an enthusiastic student of the American tax code, the story of how we got this code, it's really the story of history and accident. 18:24 It has changed a lot. 18:26 It could change again. 18:27 Jesse Isinger This is not written in the Hammurabi Code. 18:31 You know, this was not handed down on Mount Sinai. 18:35 These are just policy decisions that generations relatively recently made with some expertise and other blind spots. 18:45 One of the struggles was to understand how income tax got to be the way it is in this country. 18:50 And it's still a process. 18:51 We're still learning about it. 18:52 I'm like, you know, among the seven people in the world that find it fascinating. 18:56 And then tried to figure out, why is this private? 19:00 You know, why is it a secret? 19:02 And it turns out that's a policy decision. 19:04 And that originally in the Civil War, it wasn't secret. 19:06 It was public. 19:07 In the 1920s, it was public. 19:08 So at each step of the way, we were realizing, oh, there are all these decisions. 19:14 It's all contingent. 19:15 There's a lot of accidents. 19:17 And we got to a system that actually is totally wrong for the current economy. 19:28 PJ Vogt After the break, we will make you the eighth person in the world to find income taxes fascinating. 19:34 The most spellbinding story you never knew you wanted to hear, I swear to God. 19:39 How America even decided to have an income tax 20:10 This episode is brought to you in part by Vanguard. 20:13 To all the financial advisors listening, let's talk bonds for a minute. 20:17 Capturing value in fixed income is not easy. 20:19 Bond markets are massive, murky, and let's be real, lots of firms throw a couple of flashy funds your way and call it a day, but not Vanguard. 20:27 Vanguard bonds are institutional quality, and that's not a marketing phrase, it's a promise. 20:32 It means your clients get access to products built with the same care and rigor that institutions demand. 20:37 Their lineup is huge, over 80 bond funds, managed by a 200-person global team of analysts, traders, and sector specialists. 20:44 Some firms love 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now, to mark the 35th anniversary of Twin Peaks, you can stream the complete original series from 1990 and 1991, created by Mark Frost and David Lynch. 21:49 Plus, Twin Peaks, a limited event series from 2017, available for the first time on MUBI. 21:56 It is so good, and it is so scary. 21:59 Who killed Laura Palmer? 22:00 That question shook television history. 22:02 Twin Peaks rewrote the rules of TV. 22:05 Twin Peaks remains both wonderful and strange 35 years later. 22:09 From the visionary minds of Mark Frost and David Lynch, this is a chance to revisit, or discover, the show that influenced everything from true detective to severance. 22:18 To stream the best of cinema, you can try MUBI free for 30 days at MUBI.com slash search engine. 22:24 That's MUBI.com slash search engine for a whole month of great cinema free. 22:44 Chapter 3, Class War. 22:50 Every country needs to raise money from its citizens somehow, but there's a lot of ways that this could happen. 22:55 You could have a sales tax. 22:56 You could tax land with a property tax. 22:59 In ancient Egypt, the pharaoh taxed the citizens wheat harvests. 23:04 These days, the tax we usually talk about is the income tax. 23:07 But if your country has an income tax, you have to decide. 23:10 Do you tax people? 23:12 Do you tax companies? 23:13 Do you tax both? 23:15 America, in the beginning, chose to not tax the income of either people or companies. 23:20 When we first started experimenting with the radical left-wing idea of income taxes, Jesse says it was just a temporary reaction to an ongoing national crisis. 23:30 Jesse Isinger So the first income tax was passed in the Civil War. 23:34 And the way the government had raised money before that and then after that for a long time was through tariffs and levies, you know, fees on tobacco and alcohol largely. 23:47 And that was a regressive system. 23:51 PJ Vogt So it— That means that basically, like, because everyone pays the same amount for a bottle of whiskey, whether you're wealthy or poor— 23:57 If the government raises all of its money through a whiskey tax, everyone is paying the same amount of taxes no matter how much money they have. 24:03 Jesse Isinger Right, right. 24:04 So it's a higher percentage of your overall income or wealth if you're a working person than if you're really wealthy. 24:10 PJ Vogt And did that, I mean, when people were making an argument against that, was that why they decided to shift it? 24:15 Jesse Isinger Did they have those kinds of considerations? 24:16 Soundbite That's the central argument. 24:17 Jesse Isinger Okay. 24:17 That is at the heart of it, that the wealthy are not paying their fair share, that they think they're exempt from taxes. 24:25 PJ Vogt These arguments came to a head in the Civil War because the government badly needed money. 24:30 And tariff revenue, money from taxes on alcohol and tobacco, had dried up in wartime. 24:36 Jesse Isinger There are blockades, and trade is really curtailed. 24:40 The economy slows down, so everything kind of comes to a halt, and we need to fund it somehow. 24:45 So we passed this income tax, and the express purpose of it was so that the wealthy were going to contribute to the war effort. 24:55 because this was a class war and you could buy your way out of your position in the army. 25:03 You could buy your way out of the draft. 25:05 And so there were accusations that only working men were dying. 25:11 And so Lincoln said, we're going to have the wealthy contribute to this and it's going to be public so that people can see how much they're contributing to the effort. 25:21 And, of course, they hated it. 25:23 They hated it then. 25:24 They hated it for the same reasons. 25:26 I think they hated it for, yeah, very similar reasons. 25:29 They hated paying anything. 25:30 Yeah. 25:31 And they hated being exposed. 25:37 PJ Vogt Jesse says the arguments wealthy people were making back then sounded a lot like the arguments you'd hear today. 25:42 The government wasn't better at allocating capital than rich people were. 25:46 Taxing the rich could discourage them from working more. 25:49 Back then, the wealthy won these arguments. 25:52 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. 26:03 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. 26:18 Republicans 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. 26:30 Chapter four, an extremely expensive mistake. 26:35 Jesse Isinger So what happens is the country is being run in the aftermath of the Civil War by Republicans, you know, famously. 26:43 This is like the party of Lincoln Republicans. 26:44 PJ Vogt They're like not really like today's Republicans. 26:46 Jesse Isinger Well, they're the party of Lincoln's Republicans, but they're morphing into the party of George H.W. 26:52 Bush's Republicans. 26:54 So over that course of the second half of the 19th century, it becomes a party dominated by Northeastern wealthy interests, wealthy Republicans. 27:04 The whole country is being run by those interests. 27:08 PJ Vogt I mean, I will say, as someone whose radical position that income taxes should exist, I can also imagine how hard it must have been 27:15 When you grow up with the idea that you pay taxes, you pay taxes, but being like, hey, I've got a crazy idea. 27:21 Next year, we're taking a percentage of your money away from you. 27:25 It'd be a very easy political project to defeat. 27:28 Jesse Isinger It's an incredible story. 27:30 It's an incredible accomplishment. 27:33 I think it's the single greatest victory of average Americans against the wealthy class in American history to get an income tax. 27:42 And as I say, it's a complete accident. 27:47 PJ Vogt An accident that would occur amidst a heated political fight. 27:50 There was an insurgency of populists, Bernie Sanders types who were devoted to working class, mostly rural Americans. 27:57 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. 28:06 These insane insurgents have overreached. 28:09 Their plan stopped in its tracks. 28:12 Jesse Isinger 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. 28:25 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, 28:36 obsessive about the income tax. 28:39 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 and 28:55 of him, like, cornering them and talking about the income tax all the time. 28:59 And so this is his obsession. 29:03 And it was the Gilded Age where we're seeing fortunes that only have been matched by today's figures. 29:11 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. 29:27 PJ Vogt I hadn't considered this. 29:28 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. 29:41 But we were pretty much here before once. 29:44 The Gilded Age. 29:45 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. 29:57 Railroads, steel, oil. 29:59 The fact that we have an income tax at all is a reaction to the problems of this earlier era. 30:05 Here's how it happened. 30:07 The progressives and the populists who wanted an income tax had to face down a big opponent, a powerful Republican politician named Nelson Aldrich. 30:16 Nelson Aldrich, very opposed to the idea of an income tax. 30:20 He'd referred to the concept at one point as communistic, which maybe a little bit. 30:25 But Aldrich could tell Americans were boiling mad about inequality, and he knew he had to give this unwashed angry mob something, some thrown bone. 30:36 And he thought he saw a way out, a compromise. 30:39 Because around the same time, there'd been a different proposal. 30:42 Instead of taxing the incomes of individuals, how about we tax the incomes of companies? 30:47 A corporate income tax. 30:49 That measure, to Aldrich and his Republicans, seemed like a less radical solution. 30:57 Jesse Isinger So they pass a corporate income tax for the first time. 31:00 And there's essentially no debate about it. 31:04 And they pass it to try to cut the knees off of the movement for the income tax. 31:11 And so they— So it's like, he has to do something, but he wants to do as little as possible. 31:14 Exactly. 31:15 And he's trying. 31:15 So they pass the corporate income tax, which is a huge victory for taxation in America. 31:22 And then what happens is that doesn't succeed in cutting off the momentum for the income tax. 31:29 PJ Vogt So there's still some public appetite for an income tax. 31:33 And the Republicans, led by Nelson Aldrich, actually put forward a constitutional amendment supporting one. 31:39 Their thinking is, the amendment's going to lose. 31:41 It's badly mistimed. 31:43 The states will vote it down. 31:44 And this will just end the conversation about a federal income tax. 31:48 The Republicans are feeling pretty good about this Putney-Swap maneuver. 31:52 Jesse Isinger And so they embrace it as a legislative gambit. 31:55 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. 32:06 They pass the income tax amendment and they pass the tariff bill. 32:11 And then the Republicans have wildly miscalculated it. 32:15 and it goes through the states and passes, and then we get the 16th Amendment. 32:21 PJ Vogt The passage of the 16th Amendment, the moment where we Americans made the federal income tax constitutional. 32:28 The 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. 32:42 Jesse Isinger is the only person I've ever met who finds this amendment exciting. 32:49 The way you talk about the passing of the 16th Amendment, it's like a movie you just walked out of. 32:54 Like, why is this so... Like, listening to you, I feel like I'm listening to the Death Star explode. 33:00 But it's like tax reform a long time ago. 33:02 No, I'm just like, what is this? 33:04 How come this is... What about this moment speaks to you so deeply? 33:08 Jesse Isinger Because 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. 33:29 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. 33:41 And I'm trying to understand why they were able to change things, and we can't. 33:49 PJ Vogt I thought we were telling a story about taxes, and we still are. 33:53 But at the heart of this, for Jesse, is one of the most vexing, important questions about American life right now. 34:00 Why does it feel like nothing can change? 34:02 And what would it take to break that feeling? 34:05 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. 34:18 Let's after these ads. 34:31 This episode of Search Engine is brought to you in part by Framer. 34:35 Most design tools are gated behind a paywall, not Framer. 34:38 With design pages, you get a full-featured professional design experience, including vector workflows, 3D transforms, image exporting, and more, completely free. 34:47 Framer already built the fastest way to publish beautiful production-ready websites, and is now redefining how we design for the web. 34:54 With the recent launch of Design Pages, a free canvas-based design tool, Framer is more than a site builder. 35:00 It's a true all-in-one design platform. 35:03 From social assets, to campaign visuals, to vectors and icons, all the way to a live site, Framer is where ideas go live, start to finish. 35:11 Framer lets you create social assets, campaign visuals, icons, even site resources, all inside the tool. 35:16 No switching back and forth. 35:18 This episode of Search Engine is brought to you in part by Built. 35:45 Nobody wants to pay rent. 35:47 But if you have to, Built makes it worth it. 35:49 Built is revolutionizing how millions think about paying rent by rewarding their members with points and exclusive benefits around their neighborhoods every single month. 35:57 By paying rent through Built, you earn flexible points that can be redeemed through hundreds of hotels and airlines, a future rent payment, your next Lyft ride, and more. 36:05 But it doesn't stop there. 36:07 Built's about making your entire neighborhood more rewarding. 36:10 You can dine out at your favorite local restaurants and earn additional points, get VIP treatment at certain fitness studios, and enjoy exclusive experiences just for Built members every month. 36:20 Built is turning a monthly expense into an opportunity to earn rewards and discover the best that your neighborhood has to offer. 36:26 Your rent is finally working for you. 36:29 Earn points on rent and around your neighborhood, wherever you call home, by going to joinbuilt.com slash search. 36:34 That's J-O-I-N-B-I-L-T dot com slash search. 36:38 Make sure to use our URL so that they know we sent you. 37:25 Welcome back to the show. 37:27 Reporter Jesse Isinger just told us the story of the invention of the federal income tax. 37:32 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. 37:41 We were celebrating the federal income tax as a kind of miracle. 37:45 A miracle. 37:46 Can we acknowledge most people do not feel that way? 37:49 Our hatred of our tax code is one of the few things most Americans actually agree on. 37:55 We like taxes like we like getting a paper cut on a sunburned, stubbed toe. 38:01 But the income tax, back when I was first born, was a very different animal. 38:06 In the beginning, it was relatively simple. 38:08 And it described a very modest tax on income applied only to the wealthiest Americans. 38:13 Even for them, tax rates between 1% and 7%. 38:17 But then, 1917, we enter World War I. 38:21 The government needs a lot more money. 38:22 And so those rates are immediately jacked on the ultra-wealthy. 38:25 Way, way up. 38:26 As high as 77%. 38:29 Which brings us to Chapter 5. 38:32 Chapter five, the rich try to get their money back. 38:39 So I guess the thing I'm trying to understand, like, why does the tax code be getting more complicated? 38:44 Like, in my head, in 1913, the tax code is like a couple pieces of paper in a folder. 38:49 And then at some point, it is a phone book. 38:51 And I'm trying to watch it get thicker, I guess. 38:54 Molly Mitchell Moore Yeah. 38:55 So it's pretty simple initially. 38:57 And as those tax rates go up, the incentive to make it more complicated also goes up. 39:04 And that begins happening in the 1920s. 39:06 PJ Vogt Molly Mitchell Moore. 39:08 She's a professor of history at Washington and Lee University. 39:11 She is the person you go to if you want to talk, for some reason, about the history of the income tax. 39:17 She told me the story of how the rich began to fight back. 39:21 Molly Mitchell Moore We see a sort of conservative move in the 1920s. 39:26 Three Republicans in a row, three different Republicans in a row, are elected in 1920, 1924, and then in 1928. 39:32 They all have the same Treasury Secretary, Andrew Mellon. 39:37 PJ Vogt 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. 39:47 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. 39:57 Just as a reminder, in the last chapter we learned about this, but basically there's two types of tax systems. 40:03 Regressive, where everyone pays the same dollar amount, rich or poor. 40:06 The sales tax on a bottle of whiskey, progressive. 40:09 And then there's progressive, where people pay a percentage based on their wealth. 40:14 In those systems, rich people pay more. 40:16 Our new income tax was progressive. 40:19 The person in charge of it, Andrew Mellon, did not like that. 40:23 Molly Mitchell Moore 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? 40:34 If you look through American history, the sort of cry of taxing the rich is always one of the popular things. 40:41 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. 40:49 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. 41:02 PJ Vogt So just to make sure I understand, 41:04 Andrew Mellon was working for the government. 41:07 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. 41:21 Like, it's like, you don't like school. 41:23 Here's a big stack of excuses. 41:25 Molly Mitchell Moore Yeah, right. 41:26 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. 41:36 PJ Vogt All of these shenanigans were happening behind closed doors. 41:40 And the average American would not have been thinking about any of this. 41:43 Because remember, for the normal, non-railroad-owning American, there was no income tax. 41:49 But all of this was about to change. 41:51 Franklin Delano Roosevelt Well, your profits are going to be cut down to a reasonably low level by taxation. 41:59 Your income will be subject to higher taxes. 42:03 PJ Vogt Franklin Delano Roosevelt takes power. 42:05 Very much the opposite of Andrew Mellon, no mustache, normal-sized eyebrows. 42:10 In FDR's cabinet, Cordell Hall, the original hero of the income tax. 42:15 FDR wanted to heavily tax the rich, but also tax everybody else. 42:20 Franklin Delano Roosevelt 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 42:31 in excess of $25,000 per year after payment of taxes. 42:41 PJ Vogt Chapter 6. 42:43 Everyone has to pay taxes now. 42:46 Molly Mitchell Moore 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. 42:59 So the number of taxpayers, income taxpayers, goes from about, I want to say, 3.5 million Americans in 1939 to about 42 million Americans in 1945. 43:12 PJ Vogt And how do people feel about that at the time? 43:14 Because there are, the Nazis are there. 43:16 Molly Mitchell Moore Yeah, right. 43:17 So they feel pretty good, which is the sort of extraordinary part. 43:20 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? 43:31 Crosstalk No. 43:31 Molly Mitchell Moore But our tax system still relies on volunteerism. 43:35 You know, maybe you'll get audited, maybe the IRS will cut after you, but you're basically sort of paying your taxes, right? 43:41 more or less voluntarily. 43:43 PJ Vogt So it's kind of extraordinary. 43:44 It's like the first time that most Americans are sitting down and writing a huge check to the government. 43:50 Molly Mitchell Moore Yeah, right. 43:51 And it wouldn't have been necessarily a huge check, but it would have been the first time that they did it. 43:54 So they had to be taught to do it. 43:56 And one of the things that the Treasury Department then does is it works with, I mean, influencers is the wrong word to use for the 1940s, but it's basically that they work with pop cultural figures. 44:09 They commission a song called I Paid My Income Tax Today. 44:13 Gene Autry I said to my Uncle Sam, old man taxes, here I am, and he... 44:20 Was glad to see me. 44:23 Molly Mitchell Moore Which was then distributed to, you know, almost a thousand radio stations across the country. 44:30 It was recorded by Gene Autry. 44:32 But it is, right, the lyrics are something like, I paid my income tax today. 44:37 Gene Autry I'm squared up with the USA. 44:41 You see those bombers in the sky Rockefeller helped to build them, so did I I paid my income tax today 44:52 Molly Mitchell Moore And it's very much sort of geared towards what the song calls Mr. Small Fry. 44:58 This idea that everybody has an obligation to pay their taxes. 45:03 The slogan that the Treasury Department decided to use to sell the income tax was taxes to beat the Axis, right? 45:10 So it's very much linked to this effort to win the war. 45:16 They even go so far as to commission two films from Walt Disney. 45:20 Wow. 45:20 Starring Donald Duck. 45:22 Soundbite Are you a patriotic American? 45:24 Yes, sir. 45:24 Eager to do your part? 45:26 Yes, sir. 45:27 Then there's something important you can do. 45:30 Oh boy, oh boy, oh boy, I'll do it. 45:32 Molly Mitchell Moore And so again, right, there are these two problems that the government feels like it has to solve. 45:37 One, people don't know how to pay their taxes. 45:39 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. 45:45 It's part of being a good American citizen. 45:47 Soundbite You won't get a medal for doing it. 45:49 It may mean a sacrifice on your part. 45:54 But it will be a vital help to your country in this hour of need. 46:00 Your country needs taxes for guns. 46:02 PJ Vogt I'd wondered about this when I was talking to Jesse. 46:04 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. 46:11 And hearing how it actually worked only made it seem crazier. 46:16 During my grandfather's lifetime, Americans were instructed, partly via our pop culture, that we'd be doing something new now. 46:23 We'd all now contribute to the federal government's GoFundMe. 46:27 Donald Duck said we have to in order to stop the Nazis, and we're going to do it. 46:30 Not just this year, but forever. 46:33 That we agreed to this really is a civic miracle. 46:36 Soundbite Shall I tell you what it is? 46:38 Yes, what is it? 46:40 Tell me. 46:41 Shall I? 46:41 Tell me what it is. 46:44 Your income tax. 46:47 Income tax? 46:48 Yes, your income tax. 46:51 PJ Vogt 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. 47:06 After the war, what happens after the war? 47:09 Molly Mitchell Moore So after the war, the tax system itself more or less stays in place. 47:15 There are reductions in the rates right throughout, both at the top and at the bottom, but the basic shape remains the same. 47:22 It's then codified in 1954. 47:24 And that World War II tax system is basically the basis of the tax system that we're still using today. 47:33 PJ Vogt That tax system really fuels the modern federal government. 47:37 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. 47:45 That tax code also balloons and becomes, weirdly, a place where we have arguments without quite having arguments. 47:52 Rich people's arguments about holding onto their money get inscribed into bizarre little subsections. 47:58 But also, government subsidies, which might be too controversial as straight cash payments, get described instead in tax credits, mortgage interest credits, childcare credits. 48:10 It's like the tax code is this very hard to understand, intentionally boring codex in which we conduct some of our loudest disagreements. 48:18 But while we're having these disputes, something really fundamental is about to change, something most of us won't actually notice. 48:25 The billionaires are about to build themselves an escape pod. 48:32 Chapter seven, the rewiring of American capitalism. 48:36 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. 48:44 I asked Jesse Eisinger about this era. 48:46 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. 48:54 Like, what is tax day in the life of... 48:57 an American CEO of a successful company in the 1950s. 49:01 Jesse Isinger Right. 49:01 So what's happened is we've had the Great Depression. 49:04 We've had World War II. 49:05 Those were extraordinarily leveling events for the American economy. 49:11 And in the 50s and 60s, the way a CEO is paid... 49:15 And wealthy people, by and large, are paid. 49:18 They're paid salaries. 49:20 So the giant corporations of the time are companies like GM. 49:25 And executives aren't being paid. 49:27 In stock, they're being paid salaries, and those salaries are taxed. 49:30 PJ Vogt 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. 49:36 Jesse Isinger Exactly. 49:37 PJ Vogt And then the government, unlike today, like, the tax rates were much higher. 49:40 And so not all of my money, but... 49:42 the part of my income that was much higher than the workers' income would be taxed at a much higher rate. 49:48 Jesse Isinger Yeah, exactly. 49:49 But then there's a revolution that starts in the 70s that rewires American capitalism. 49:59 PJ Vogt In the 1970s, as search engine listeners and only search engine listeners know, 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. 50:13 That inflationary crisis ends in the 1980s with Ronald Reagan, who presides over a series of massive tax cuts in 81. 50:20 Molly Mitchell Moore And that is correlated with probably not the cause 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. 50:32 And a tax code that is designed to tax regular income is not as well equipped to tax these new forms of wealth. 50:41 PJ Vogt And when you say financialization, what do you mean? 50:43 Molly Mitchell Moore Basically, people are, and the wealthy are, making money not by making things, but by making sort of paper investments, right? 50:53 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. 51:09 PJ Vogt 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. 51:19 Normal salaries, like paychecks, we know are taxed as income. 51:23 But if you own a stock and it goes up in value, that is not taxed unless you sell it. 51:28 Jesse Isinger 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. 51:37 And then you get huge amounts. 51:39 So you have this giant upside for these stocks. 51:41 And we also have a technology revolution. 51:45 So people are founding companies in their proverbial garages, and they own big chunks of it. 51:53 And these are very profitable companies because they're doing things like software. 51:57 So you don't have to spend a lot of money to make the incremental floppy disk. 52:11 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. 52:29 PJ Vogt The 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. 52:44 These billionaires possess a kind of wealth our tax system often just doesn't know what to do with. 52:49 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. 53:01 Billionaires powerful enough to reshape society, but who, every April, magically resemble paupers in the eyes of our government. 53:09 In our next episode, we will tell you a pretty bulletproof method for legally hiding your money from the federal government. 53:16 If you're a billionaire, this next episode of Search Engine might help you finally afford a second vacation home for your personal trainer. 53:23 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. 53:31 That story is in our next episode, which is out right now.