Heather Cox Richardson:

From CAFE and the Vox Media Podcast Network, this is Now & Then. I’m Heather Cox Richardson.

Joanne Freeman:

And I’m Joanne Freeman. Today’s topic is taxes, except we’re not going to be talking about them as things you pay and what they pay for. We’re actually interested in things beyond policy and economics. We want to talk about more broadly what taxes say culturally about what Americans think about themselves, their place in society, their link with the country and how fair a place their country is.

So we’re going to be plunging into the meaning of taxes and some responses to taxes to get a sense of what this issue as it unfolded in the past can tell us about the current climate today because we are certainly at a moment when taxes are in the news.

Heather Cox Richardson:

Well, Joanne, as you know, nothing makes me happier than talking about taxes.

Joanne Freeman:

I do know this.

Heather Cox Richardson:

Which is not only a reference to the fact, I’m an incredible nerd, but also because taxes are really a question of what society should look like and who we think should pay for that. And this is absolutely on the table right now because of the Inflation Reduction Act of 2022, which is not only a major new investment in energy and climate change, about $369 billion to invest over the next 10 years to eliminate about 40% of carbon emissions. And it’s not only about extending the Affordable Care Act enhanced subsidies for about $64 billion.

It’s also about shifting the weight of our tax burden from where it sits now on to large American companies who will have to pay 15% minimum tax, raising about $313 billion. It’s attempt to close loopholes and especially to strengthen the enforcement of the internal revenue service in collecting taxes and what that is. For all the fact, they’re big numbers and it sounds fairly confusing.

What that is, is a reworking of the way the society has been set up to work since 1981 with the first major Reagan tax cut saying, “Wait a minute, that whole idea of trickle down didn’t work terribly well. Why don’t we see if we can share the burden of maintaining the society more widely than we have in the last 40 years.”

You hear Inflation Reduction Act because of course this bill will reduce inflation as well. And you probably think, “Oh, it’s a lot of words and it’s just more numbers.” But what’s really cool to me about it is that it’s a sea change in the way we think about society, what the government should do and crucially who should pay for that. And you can see how upset establishment Republicans have been about this bill. Mitch McConnell, for example, tried to argue that this would pile on giant tax hikes that will hammer workers and kill many thousands of American jobs.

Well, what he’s trying to say there is that by actually asking corporations to pay some taxes, they won’t produce as many jobs as they have in the past. And that’s an ideological stand more than it’s a realistic stand because of course we know that’s not the way things have worked out.

Joanne Freeman:

Well, and that’s the problem with taxes or one of them, among the many. One of them is just that is that intersection of taxes between realities, hard realities and ideology. And that those things-

Heather Cox Richardson:

And language.

Joanne Freeman:

And language.

Heather Cox Richardson:

When people talk about it.

Joanne Freeman:

Precisely, precisely. Those things do not all necessarily line up or perhaps thought of in an alternate fashion, they can be made to line up in all kinds of interesting ways.

Heather Cox Richardson:

Again, and Kevin McCarthy keeps talking about the Socialist Democratic Party. And as we’ll get into today, the concept of taxation, especially income taxation originally came from the Republican Party during the Civil War, which is the first time in America that taxes ever mattered. So why don’t we skip right to that?

Joanne Freeman:

As I said, laughing here thinking, “No, wait, wait.”

Heather Cox Richardson:

I know. You’re nodding and I’m thinking, “Really? There was something that happened early on. What was it?”

Joanne Freeman:

There was something we were going to talk about a little earlier like the Stamp Act. It is not an income tax, but it’s an interesting and significant moment as far as taxation is concerned because it gets American colonists to start to think about what these taxes mean, whether or not they should be paying them, what taxes are appropriate or not. And in essence, to think about their place in the British empire, how they should be paying regarding that place in the empire. And what different kinds of taxes mean.

So it comes down to, I don’t want to say equality, maybe British subjecthood, their place in the empire and in some way or another fairness, what seems fair.

Heather Cox Richardson:

And I would love to hear you talk more about this because I was really shocked recently when I was reading up on the Stamp Act to see how much of it was couched as the right of, at the time, British citizens to consent to their government. Because when I went through graduate school and probably undergrad, I think the idea was sort of like, “Oh, she didn’t want to pay money.”

Joanne Freeman:

Yes.

Heather Cox Richardson:

But they’re really not talking about it as, “Oh, we don’t want to pay money.” They’re talking about taxation as a fundamental part of what it means to participate in a society that has a government.” I think that’s fascinating and something I feel like we have not, at least, in my experience emphasized a lot over the past, year and a half since I was in graduate school.

Joanne Freeman:

When I teach the American revolution, I have to push really hard against the assumption that many of my students make, that all of the angst leading up to the revolution is because people don’t like to pay taxes. “No taxation without representation.” And they focus on the taxation half of that, right? People don’t like taxes. And so we had a revolution which is really not the case.

It’s what the taxes meant more than anything that got the colonists stirred up. There’s a handy-dandy sentence that’s written in a statement of grievances in the middle of the Stamp Act controversy that expresses why these colonists were really upset at the passage of this tax. His majesty’s liege subjects in these colonies are entitled to all the inherent rights and privileges of his natural born subjects within the kingdom of Great Britain.

So in other words, in Great Britain, people are represented in parliament and they have certain rights that are being respected whereas we’re just having things imposed on us in a way that feels as though we’re being treated as you can’t say citizens really, second class subjects.

Now, let’s look for a moment at the Stamp Act to see what all of the fuss is about. It passed in 1765 and it’s passed in part as the British empire’s trying to reorganize its finances in part because of the expense of the French and Indian war or the Seven Years War. And they’re trying to deal with what it might cost to keep an army in the colonies as a security measure of one kind or another. The difference with the Stamp Act, and what had existed before is that typically Great Britain taxed imported goods on imports and exports, not on things within the colonies themselves. This was a different kind of a tax. So it was in essence, an internal tax, not a shipping related tax.

And that felt different. As someone at a Boston town meeting put it, what heightens our apprehensions is that those unexpected proceedings, the Stamp Act and before, the Sugar Act may be preparatory to new taxations upon us. This, we apprehend annihilates our charter right to govern and tax ourselves. It strikes at our British privileges, which as we have never forfeited them, we hold in common with our fellow subjects who are natives of Britain.

Again, a really handy summing up. So this feels unfair and the way that it worked, it was taxing something within the colonies, not shipping related is that essentially you needed to have a particular kind of stamped paper for any number of papered goods. So legal documents, probate records, playing cards, newspapers, college diplomas, all of these forms of paper now needed to have special stamped paper which meant that essentially they were being taxed. The Stamp Act placed a text on a lot of items that people in one way or another were using in their everyday lives. So it felt immediate to people.

Heather Cox Richardson:

It seems to me, from what you’re saying that what the colonists are upset about is the idea of the government imposing on their lives without their consent. And they’re turning to taxation to complain about it, but are they turning to taxation because that’s basically all the government does in that period? Is there something else that they could have jumped on?

Joanne Freeman:

Well, part of the no taxation without representation formula was specific to it. And that had to do with property rights and property. The way that they would’ve interpreted rights and privileges to use their language is that a free person, free subject has the right, control of their own property. A slave is a person who has no control over his or her property.

Heather Cox Richardson:

So let me ask it a different way then. If it’s about property, if the British government had come in and said, “Okay, none of you, people are allowed to have portraits on your walls or none of you, people are allowed to have China on your table,” would we have had no portraits without representation?

Joanne Freeman:

Well, part of the answer to this, you can even see in England itself, right? There’s a window tax. How many windows you have in your house and your tax per window. Any of you out there who have been to England and have seen old buildings with the windows bricked up. Many times, those windows were bricked up so that they wouldn’t be taxed. They were no longer windows. So what I’m partly saying is there’s accommodation involved too.

The Stamp Tax involved a new practice, which was taxing internal things within the colonies. It involved the colonists saw as their own right to control their own property. It made them feel as though they were not of an equal class to other British subjects within the empire. It made them feel that they had no way to really protest this because they were not represented in parliament. So it raised all kinds of questions about the kind of empire that they were within and their place within it, and it felt to them inherently unfair.

Heather Cox Richardson:

Is there some level that if you pay a tax to your government, you are thereby participatory in your government, that is by excluding enslaved people and most women and indigenous Americans. Was that sort of a way to reinforce the boundary between you’re part of us and you’re not? Or was that just incidental?

Joanne Freeman:

No, I think there was some sense in a general kind of a way.

Heather Cox Richardson:

I’m sorry. I love taxes.

Joanne Freeman:

I can tell.

Heather Cox Richardson:

I love the concept of taxes because it’s like, they’re everything. It’s the relationship between your government and your livelihood.

Joanne Freeman:

I mean, the British prize themselves, “We have the most liberties. We are the freest nation on the face of the earth, blah, blah, blah.” If that’s your culture, and then there’s this tax passed and suddenly you’re like, “Wait, wait, wait a minute. This is new. We had never had this before. We also had no say over it. We also don’t really know how we can object to it. And this would suggest they can do this again with other things.” Right? You can see why Americans, colonists had a sense of their place in the empire that partly was grounded on the fact that they were equal subjects within the empire to other British subjects.

That was their sense of where they belonged. And they felt as though the Stamp Tax was proving that wrong. So they were, essentially, feeling for the first time that they weren’t equal under the British empire in the way that they had felt they were before.

Heather Cox Richardson:

So it’s really about the government. When I learned this stuff, it was all about we’re cheap, we don’t want to hand over our money. But they’re really using that as a wedge to talk about what governance should look like.

Joanne Freeman:

What governance should look like, what liberty under the law should look like, what the privileges of being a British colonist should look like. And all of those things are bound up with governance. They don’t know what to do to oppose it.

Heather Cox Richardson:

So this is all fine and good. But if I’m a doc worker in Portsmouth, New Hampshire, I don’t care what John Hancock thinks about taxes. How do they get people behind the idea that this really, really matters?

Joanne Freeman:

Because I think in part it has to do with broader ideas about rights. So here’s an example of how people got riled up. Apparently in Boston on August 25th, 1765, and you’ll see why the date is important in a moment, there was a sermon preached in Boston. And in the sermon, the person doing the preaching said, “These people, these people who are imposing these unfair stamp taxes on you, they need to be just cut off. It’s not fair. It’s not right. Your rights are being violated.” So that’s August 25th.

The next day, people who heard that sermon go to attack Lieutenant Governor, Thomas Hutchinson’s house. The next day, they attack it, they break the windows. They actually tear the whole house down. And when one of the people involved in that is arrested, he says, “Well, I was told to do that.” Before we started this episode, I said to Heather, “I found a story yesterday that really was striking to me. This person essentially says he was inspired to act as he did because he heard it in the sermon.” And that roused them up. And also, there were others being roused up, in some cases by people deliberately doing the rousing.

This is an example of how people get riled up and eager to act. Because if we’re talking about rights, if you’re talking about liberty, if you’re talking about a sense of equality, all of those things are emotional issues, and in that sense, personal issues, even though you would say, “Oh, big deal. Diplomas now have a tax on them.”

The idea behind it is what’s riling people up. And in the case of Boston, driving mobs to attack stamp collectors and people who appear to be in favor of the act. I should mention that we talked about that raid on Thomas Hutchinson’s house in our May episode called free speech. What is cancel culture? Because he was really canceled.

I can’t resist adding this one stupid thing in because it amused me and I thus offer it in that spirit to you. So as I was casting that yesterday, I did discover one of the things I love about studying the 18th century is the weird over the top, overly earnest, yet sort of rye and humorous forms of culture, cartoons, and poems and things that they would write. And there’s one that I found yesterday called a poetical dream concerning stamped papers that was published in 1765. And I just have to read you-

Heather Cox Richardson:

A poetical dream. Don’t we all dream in poetry?

Joanne Freeman:

I know. And the whole thing is that, someone falls asleep and he begins dreaming about stamped papers. And in his dream-

Heather Cox Richardson:

As one does.

Joanne Freeman:

Exactly. In his dream, diplomas and newspapers, and almanacs, and probate papers are speaking about how upset they are about the stamp tax. And so just three lines. Probate papers, this is what they say in the poem, “The probate papers next with many a sigh, ‘Must we be stamped?’ with tender accent to cry. We who our life and breath so freely spend, the fatherless and widow to defend.” The weirdness and the humor put the earnestness of this poem. I love this stuff. I love this stuff. But what it does give you a sense of is I think something we’re going to keep coming back to, which is the deeper meaning of taxes and what they suggest about people’s sense about their society, their country, and where they fit within it.

Heather Cox Richardson:

I mean, again, poking fun, yes, but he was defending widows and orphans.

Joanne Freeman:

Yeah.

Heather Cox Richardson:

And they’re the ones who are going to have to pay the tax. Right?

Joanne Freeman:

Right.

Heather Cox Richardson:

The question of who should pay and what society looks like, it’s always so on the table when you do taxation. I remember working on my dissertation, which has a whole chapter on taxes and reading an extreme… I mean, it’s this incredible amount on whether they should tax sugar at 2 cents and a quarter a barrel or 2 cents and a half a barrel. And it was quite a long discussion. I remember sitting in the basement library reading it and thinking, “Am I wasting my life?” And then being like, “No, this is really-“

That’s right, exactly. This is really about to what degree should the cost of the Civil War be assumed by the people who started it. I got to the point where I was skimming a little bit about the various arguments, but that question, anyway, comes very much to the fore, again, during the Civil War. So when the Civil War breaks out, the United States has a real problem because the majority of its money has come in through the Southern ports through tariffs, and those are the busiest ports in the country. So they think they’re going to be in real trouble really quickly. And then of course, with the firing on Fort Sumter in April of 1861, Lincoln has to call for volunteers, a lot of volunteers and somebody’s got to pay for the volunteers and pay for outfitting them. And all of a sudden this United States government, which really hasn’t had much need for a lot of money before that period and who has been able to rely on tariffs primarily and on western land sales has to raise a lot of money really quickly.

And it’s a really interesting moment because going into the war, the people who support the United States don’t expect it to survive because the government has not previously had a system of taxation that has worked terribly well and they know they need a new one. And at the end of the day, they’re going to be more successful than the Confederacy by far, but they’re going to be so successful in their tax policy that they end up essentially creating a new nation.

And the way they do that, I just find fascinating because what they do is instead of saying, “Oh, we need this much money. And we got to do a little bit here and take a little bit from over here, and do this, and do that.” The way they actually start the process when they have no idea what they’re doing, by July of 1861 when Lincoln special session comes into Washington and starts to talk about taxation, they literally say, “Okay, we’re creating a new nation that is not going to rest on the idea that’s pushed forward by the enslavers that the government should react to just the very wealthy.”

We have said, “We’re going to create a nation that is based on the people.” What does that look like for taxation? And what they end up doing is they create a system of taxation that rests on the idea that ordinary Americans not only should, but also want to support their government. And one of the ways they do that is beginning in 1861, and then really taking off in 1862 and 1864.

The Republicans invented the income tax and they invented the federal system for collecting that income tax. And that was extraordinarily deliberate. At one point, the states actually want to collect the income tax themselves and they discuss it in Congress. And the Republicans say, “First of all, that’s going to be really expensive. And second of all, we really like the idea that people are paying their money into a central pot that is going to bring them the benefits of a government of the people, by the people, and for the people.”

So beginning in 1861, they begin to tax income for the first time in American history. They taxed it at 3% for everybody who’s making more than $800 a year. And this is a really interesting moment because… And you will appreciate this, Joanne, because how do you know how much you make in a year? They don’t. They don’t. They’re literally sitting in Congress going, “I don’t know how much I make.” And isn’t this a big thing in the colonial era too? You have all these guys who owe you and you owe all these other guys. And sometimes you switch the notes of who owes what.

Joanne Freeman:

Well, and there’s routinely IOUs and everything else. So I mean, a member of Congress would’ve known what their salary was as a member of Congress, but that doesn’t mean that’s all that they make in a year.

Heather Cox Richardson:

But they’re not thinking about annual income, which is such a gut thing for us today, your annual income. And they’re literally standing up in Congress and saying, “I don’t know how much I make in a year.” How are we ever going to make this work? And that’s when they start to talk about going ahead and having a bureau that takes care of this. But then something interesting happens in 1862 because the war is not over and the expenses continue to go up. Eventually this war is going to cost more than a million dollars a day, which is like unthinkable in this era for how much money this is going to be.

So they recognize that the methods that they have in place for taxation, and it’s not only an income tax, they also have what’s called a manufacturing tax, which is essentially a sales tax. And they have heightened tariffs. But the reason I’m focusing on the income tax is because they recognize that they can’t put a tax as high as they need on everybody because it’s going to completely hamstring the people at the bottom. They’re not going to be able to afford it.

So in 1862, they start a progressive income tax in which they develop categories, tiers if you will, for how much money you’re going to pay. So they tax people at 3% for anybody making between $610,000 a year, which is a very good living. And they tax at 5% anybody making above 10,000 a year. And that doesn’t mean you pay 5% on the whole 10,000. People often make that mistake. It means that any amount above that pays at a higher rate. And in 1862, they create a commissioner of internal revenue, which is eventually going to become the IRS. And then in 1864, they increase that progressive income tax even more.

So your tax at 5% when you make between 605,000 a year, 7.5% between 5,000 and $10,000 a year and 10% for anybody making over 10,000 a year. And what’s interesting about that is that in ’64, a lot of people, especially Democrats at the time are furious at the very wealthy who are making bank on the war. And there’s a long cultural history behind that. And they try and put on a really high, upper tier income tax to really hit just a handful of people.

And the Republicans who are the ones who came up with the idea of graduating the income tax in the first place say, “No, you really can’t do that because that singles out special people for punishment by the government, and that’s not okay. We can lower that upper tier, so that includes more people and then it’ll be fine, but you can’t pass a punitive tax on the very wealthy, which I think is really interesting.”

Joanne Freeman:

Let me ask a question though. So you’re presenting this in a way as partly an ideological debate about who should or shouldn’t be paying taxes and what that represents about their place in society. And the idea being that Americans might be willing to do this, but this is only happening because of the emergency of the moment. So then my question is how much of this is sort of earnest, “Here we are”? And how much of it is, “Whoa, we better raise some money. How are we going to do this? Well, this seems kind of fair”?

Heather Cox Richardson:

So I would say it is, “Whoa, we got to raise some money.” But if we need to raise some money for something that we all agree is important, i.e, saving the United States, we have to make sure it’s done fairly and it’s done in such a way that people can afford it. So the other piece of this of course is going to be that the United States government is going to work to get people educations and to get them land and get them access to resources so they can in fact make money and go ahead and pay these taxes. And as they do that, Americans start to love the taxes. Love.

Joanne Freeman:

Now, what do you mean by that when you say Americans love the taxes?

Heather Cox Richardson:

States have a monopoly over bank notes. So you’re going to be using state bank notes and you’re going to focus on your state. And the federal government is full of those kind of people yelling at each other all the time. They’re in Washington. And you’re really focusing on your state. And then these enslavers say, “Well, we’re going to take the whole thing over.” And we’re basically going to destroy your opportunities to take care of your family going forward. And people come together and they’re like, “Wait a minute. That’s not the country we want.” And as Congress puts in place the measures that they do to create a national currency and to have nationally funded universities, for example, they start to think about the United States.

Heather Cox Richardson:

And then they recognize that in the past it’s been wealthy people who have supported the government by bank loans essentially. And they’re like, “No, no. The government should answer to us. We should literally own the government.”

Joanne Freeman:

That’s what I was about to ask you. In a sense, it’s not so much that Americans love taxes, but the taxes represent an investment in a government and a nation that they feel ownership in. And it sounds like what you’re saying is in paying those taxes that’s an assertion of a kind of nation that is precisely the opposite of what the Confederates are promoting.

Heather Cox Richardson:

That’s exactly right. So we get quotations like this from Justin Smith Morrill who was a representative from Vermont and was the chair of the house committee on ways and means argues that every American should be prepared to give up 99% of their property to serve the public good. He says, “The government of the United States, the most parental and benign of all earthly governments in an hour of need has the right to demand whatever may be the measure of its necessities to sustain the public credit that the government is the property of the people, is not more true than that the property of the people for public use belongs to the government.” If the power of taxation gives the right to take 3%, it gives the extent of 99%, just as much.

Joanne Freeman:

Which is what the colonists were protesting.

Heather Cox Richardson:

But he goes down to say, “It would be an abuse of power justifying a revolution if it exacted anything beyond its reasonable and urgent necessities.” But the Republican Party and its media organs, like the Chicago Tribune argue that paying an extraordinary price of what they call blood and treasure, so send your sons and husbands to the battlefield, but also put up your money would bring to American citizens, as a quote, a sense of personal responsibility in the safety and stability of the nation.

Joanne Freeman:

Would you say that it’s the emergency of the moment that’s allowing this to slide into a place where people are not only talking about it, but promoting it?

Heather Cox Richardson:

It’s a great question because I don’t think it’s just that. I think that once people see this new system and they recognize that in exchange for their tax dollars, they are not only getting a war to save the union. And remember that war didn’t go well for a very long time. They’re also getting a government that responds to their needs. If you’re living through that time, you’re seeing a government that isn’t jumping to bankers and to large enslavers, but that’s actually answering your needs. And the same thing with money.

When you get a national money for the first time, it’s way easier to do business. That’s a piece of your government. The greenbacks are backed by the government’s promise to pay. They’re not backed by capital. That’s going to be the national bank notes later. Whereas state money had always been backed by rich guys, basically. So you always had some rich guy running everything.

Joanne Freeman:

So you’re empowering the non-rich folk by basically making the government theirs. And the act that confirms that is paying your tax.

Heather Cox Richardson:

There’s a wonderful quotation here from John P. Hale, who is a Senator from New Hampshire. The actual discussions of the taxes during the war are quite extensive. And they’re reported quite extensively in the newspapers. People are really interested in this and Hale, who is a Republican as well says correctly, by the way, I think, “The condition of this country is singular. I venture to say it is an anomaly and the history of the world. What do the people of the United States ask of this Congress? To take off taxes? No, sir. They ask you to put them on. The universal cry of this people is to be taxed.”

And it’s dead true because what they were concerned about was that the government would go under because it couldn’t afford to fund its debt. And by paying taxes, they were literally doing something for their government to keep their government afloat. And they liked those taxes.

Joanne Freeman:

But here’s a thing. That would not necessarily have been seen as permanent, right? So there’s the person who was made chair of the US Revenue Commission in 1865, talks about what he thinks is the ridiculously complicated system that’s being put into play of federal duties and stamp taxes and government fees, et cetera, et cetera. And he says that the tax structure in the United States is based on a principle, “Akin to that recommended to the traditionary Irishman on his visit to Donnybrook fair.” Whenever you see a head hit it, Congress was guided Wells wrote by a similar principle.

Whenever you find an article, a product, a trade, a profession, or a source of income, tax it. And he later goes on to say this is based on no past experience and there’s no way it’s going to apply in the future. And of course he’s wrong.

Heather Cox Richardson:

Which Wells? Is that Gideon Wells?

Joanne Freeman:

David A. Wells.

Heather Cox Richardson:

Oh, he’s an (censored).

Joanne Freeman:

Okay, wait. I love this moment. I love this moment. I quote David Wells saying something that actually is kind of irritating, I will admit. But when you ask which Wells and I tell you, “Well, that guy is (censored). That’s such a historian moment, Heather.

Heather Cox Richardson:

Well, he is in part reacting, not only to taxes, but to tariffs where people said that a lot during the war that anytime there was anything…

Joanne Freeman:

Still, the fact that you personally know David A. Wells.

Heather Cox Richardson:

Well, listen to you and your guy who broke his thermometer. They did expect that these would not survive much after the war period, that these would like many of the war measures not be necessary any longer. And there were many reasons actually that were interesting about why they thought once they had paid down the national debt, not gotten rid of it, but paid it down because there’s some guy in the colonial period who really likes a national debt. I forget what his name was.

I’m sorry. I’m teasing her. It’s Alexander Hamilton. They did want to keep some kind of a national debt, but they wanted to pay it down significantly. But one of the reasons that I loved that they wanted to get rid of the income tax after the war was that it became a sign that your business was doing well, if you were paying high income tax and there were all kinds of social reasons to suggest that you needed to pay a high income tax. And in those days, the numbers of how much you paid were put in the newspapers.

There was an argument in the newspapers and in Congress that they had to get rid of the income tax or at least publishing the numbers because young men who were starting out were trying to make their businesses look so productive that they were lying about how much money they made and they were so overpaying their income taxes that they were ruining their businesses. Now, I don’t suspect that’s actually true, maybe in some cases, but it was a big complaint, especially in New York that it was kind of a sign of status.

Joanne Freeman:

A moment ago, I mentioned David A. Wells who you corrected me was a jerk, but he represented one view and his view was, “Well, this is just temporary. Harumph, harumph, harumph. So then project ahead a little bit in time. And in what ways does this have a legacy? And in what ways does it not?

Heather Cox Richardson:

Okay, that’s a really good point because one of the reasons they expect that the taxation system that they invent during the war is going to be able to disappear is because they expect that after the war, the government is not going to have a lot of expenses. And the government does in fact slash the cost of the army, and it cuts back the Navy so much. It’s not going to be many years before Naval ship starts sinking. They don’t have an active government in many ways in that period.

So they expect those taxes and to some degree, the tariffs are going to be able to disappear. Now, after the war, the tariffs don’t disappear. They’re actually used to protect business. And we end up with a hugely embarrassing budget surplus in the 1880s. One of the reasons we have all those statues of the revolutionary war all over cities is because the congress was busily trying to spend its surplus in the 1880s.

Joanne Freeman:

Spend the money.

Heather Cox Richardson:

Spend as fast as you can. Let’s put up a statue here of yet another revolutionary war hero because we can all agree on that. The south is back in the Congress. But that’s going to change in 1893 when we have a major depression. And when that happens and when the government is in real need of money, because of the attempt of a democratic Congress at that point to lower tariffs, the democratic Congress passes a revenue bill that adds an income tax back into the American legal code.

And the Republicans then challenge it as being unconstitutional. And in fact, the Supreme Court decides in 1895 that the government has no power to levy federal taxation. Fascinating. And one of the reasons that we get from that, the constitutional amendment that says, “Yeah, actually the government does have the power to tax.”

Joanne Freeman:

As a matter of fact.

Heather Cox Richardson:

This is the progressive era and the idea that taxes are going to pay for things that people actually want, that are not war related is challenged. That is really a question. Can you do that? We decide that in fact the government can do that. And that throws us directly into World War I when taxes, once again go up astronomically.

So Woodrow Wilson during World War I with the Revenue Act of 1918, put the highest marginal income tax rate at 77%. It only covered about 5% of Americans, but US tax revenue increased from about 809 million in 1917 to 3.6 billion in 1980.

Joanne Freeman:

So that’s million to billion.

Heather Cox Richardson:

Yeah.

Joanne Freeman:

Wow.

Heather Cox Richardson:

So what this means then is when World War I is over, we get Warren G. Harding as president. And that to me is always a fascinating moment because Harding wins by a landslide in 1920. Takes office in 1921 and Harding is like… He’s a newspaper guy. He’s from Ohio. He’s handsome. Well, and Harding is not up for the task. And he knows he’s not up for the task. And what that means is that the Republican Party to which Harding belongs has been out of power for a long time because the Democrats have really run things under Woodrow Wilson.

And with the sort of vacuum in the White House power could have gone back to Congress, but Congress doesn’t really know what it’s doing. So the real power of the administration flows into the cabinet and the person to whom it flows most fully is Andrew Mellon who’s a treasury secretary. And also to some degree to Herbert Hoover who’s going to become president. He’s a commerce under Harding, but Mellon is an old school guy.

He is 645 when he takes office. I’m sorry. He was born in 1855. He was the son of a wealthy man. It’s a banking family and he ends up being a businessman himself. He eventually becomes associated with the Aluminum Company of America. That’s later going to become ALCOA and Gulf Oil. He is an extraordinarily wealthy man.

By the 1920s, he is the third highest income taxpayer in the nation. Second only to John de Rockefeller and Henry Ford. So the man has serious, serious cash and he has decided that he did it all on his own hard work. So for example, he insisted that when the stock market crashes and launches the depression in 1929, that the government shouldn’t do anything to fix that. Because if in fact people lost their jobs and got thrown out of their homes, and I don’t know, died of starvation, he said, “High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted and enterprising people will pick up the wrecks from less competent people.” And even Herbert Hoover at that point was like, “Dude, I can’t let the whole country starve.”

Joanne Freeman:

Things you can’t imagine. Herbert Hoover saying, “Dude.”

Heather Cox Richardson:

Well, he doesn’t actually say dude, but remember Herbert Hoover had fed a lot of Europe during World War I. And literally Mellon is saying to him, “Let them starve.” And Hoover is like, “I don’t think I can do that.” So Hoover to his credit kind of pushes back on that. So Mellon is at treasury and he wants to cut taxes across the board because he believes that the way society should run is you should make sure that the people at the very top have their capital to spend freely. Because if they have their capital to spend freely, they will use it to expand their businesses, which will hire more people and they will have more work.

Joanne Freeman:

Is this trickling?

Heather Cox Richardson:

Isn’t it astonishing? I actually don’t dislike Mellon and Hoover that much because they really believed that their system worked.

Joanne Freeman:

With the credit for being sincere.

Heather Cox Richardson:

Yes, they’re sincere. That’s the word. Because of course we discover in 1929 that this doesn’t work. And we’ll walk through what that looked like. But after 1929, I have no patience for anybody arguing that this works because we tried it and it was a complete freaking disaster.

Joanne Freeman:

Wait, you mean history can tell us something about what trickled down economics looks like? I am shocked. I’m shocked, Heather.

Heather Cox Richardson:

So my favorite story about Mellon is first of all, Americans actually like the progressive era and they actually don’t mind paying off the debt. So he has to go on this sort of advertising campaign to explain to everybody by why it’s a terrible idea for there to be actual taxation. So he writes this book in 1924 called taxation, the people’s business in which he argues that if you lower taxes that will actually increase tax revenue. But his argument is different than the Reagan Republicans who say that that’s because the wealthy will then invest more in the economy.

What Mellon says is that Americans would be more likely to pay their taxes rather than hiding it in income tax shelters, if taxes were lower. So literally, the man then goes privately to the head of what is in the IRS, asks him how one could avoid the income tax. And then he does that on his own taxes and then he goes into the public and he says to the American people that it’s clear that the wealthy will cheat if you give them the opportunity. So the only way to make sure they don’t cheat is to get rid of taxes all together because that will take away their incentive to cheat. I am totally not making that up.

Joanne Freeman:

Wow.

Heather Cox Richardson:

Congress gives him really carte blanche to do what he wants. So they pass revenue acts in 1921, 1924 and 1926. And under him by 1929, the top marginal income tax rate fell from 73% to 24%.

Joanne Freeman:

Woo.

Heather Cox Richardson:

In addition to that, he gave refunds to people. He gave credits. He gave tax abatements and he had quite a free hand to do this. So between 1921 and 1929, he returned $3.5 billion to wealthy people and he personally got a refund of $400,000.

Joanne Freeman:

Wow.

Heather Cox Richardson:

That’s the highest amount any individual got. His Gulf Oil company got a $3 million tax rebate and he, of course, gave all kinds of tax rebates to his friends and his people. Of course, this is all going to come to a crashing halt at the end of the 1920s when we get the great crash and when people recognize that this system of returning money quite freely to people in that upper bracket had not resulted in more jobs, had not resulted in the stable economy, but that in fact had done the opposite.

And the Democrats during the new deal begin to investigate Mellon and discover that in fact he had a number of conflicts of interest. He had used the government to support. And that actually was not contrary to his ideology. I don’t think the idea that the government should be protecting and helping big business was the mentality of the 1920s. But that’s sort of the whole point here. That idea in the 1920s was so different than that of the 1860s, that in fact taxation should be arranged in such a way that it concentrated wealth at the very top, which is exactly the opposite of what Lincoln and the Republicans had said 70 years earlier.

Joanne Freeman:

We are talking about an ongoing thread about how taxes and fundamentally, they are about how people connect with their government and what people think of their society. And that’s an ongoing thread that remains true to this day. But the other half of that is what kind of society at what moment are the taxes being either put in effect or taken away that in a sense, when you look at debates and arguments over taxation and what people at a given moment think is important, that tells you a lot about the values and the ranking of issues and the ways in which people are envisioning society and governance.

Obviously, I’m swinging us back around to the present because we’re at this moment where there’s extreme separation between the top and bottom of the economic spectrum in the United States. And here we are with all of these debates taking place about what happens with the people on the top. It’s only fair that they pay something. It’s only fair. Oh no, no, that’s not fair. It’s a similar argument to what happened before, but there are such extremes now that it feels as though it has potentially an even greater impact because of the greater disparity between rich and poor.

Heather Cox Richardson:

I actually think that you’ve put your finger on it exactly that there is this argument about should the government take care of people throughout our society, making sure that people at the bottom have an opportunity to have access to resources and can support the government and the government in turn will support them, the way that the Lincoln Republicans did or there’s that opposing ideology that what you really want to do is use the government to help the people at the very top because they’re job creators and that’ll help people at the bottom.

But I’m going to do something different for a change and throwing us to the present and instead, throw it back to you in that at the end of the day, this is all about what government is. What are the rights and privileges, and duties of people who live in a government? And what does that mean?

Joanne Freeman:

And if that is indeed the case, if all of this talk about taxation is really fundamentally about what government is, government is only what its people allow it to be, right? Any government, Democratic or otherwise it’s the citizens or subjects of that country that make up or affect or shape or put up with whatever that government is going to be. So what we’re talking about here is really debates about what at a given time American society is, what the link of Americans is or what they feel it should be to that government. What are the implications of that connection and how that can really make a big difference on society itself, and governance because governance, society, democracy, they’re all grounded on the people.