History of Income Tax in the United States

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DARRIN T. MISH:  Good morning and welcome to the IRS Solution Attorney show. I am THE IRS Solution Attorney Darrin T. Mish.

KATRINA MADEWELL:  And I’m your co-host, Katrina Madewell. Thank you for joining us here for the IRS Solution Attorney show.

DARRIN T. MISH:  How are you doing Katrina?

KATRINA MADEWELL:  Doing great. Still have that raspy cough voice a little bit?
DARRIN T. MISH:  Yeah, I think the common cold is terrible. I saw a funny joke recently.

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KATRINA MADEWELL:  It makes your voice sound a little bit better, it’s not so bad for you.

DARRIN T. MISH:  It said that it’s a well-known fact that a man suffering from a common cold goes through more pain then a woman in labor.

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KATRINA MADEWELL:  Oh, please, where is Heather when I need her?

DARRIN T. MISH:  Oh boy am I in trouble.

KATRINA MADEWELL:  I have had three.

DARRIN T. MISH:  Alright, if you want to call in and give us some hate it’s 888-404-1010. That’s 888-404-1010. I am the IRS Solution Attorney Darrin T. Mish so you know where to point it.

KATRINA MADEWELL:  That’s right, and you can get him off air if you have a tax problem he’s at 888-get-mish.

DARRIN T. MISH:  Or getirshelp.com.

KATRINA MADEWELL:  Last week we were talking about this stat, Darrin, that you said you saw or you found somewhere. It was a pre-tax stat, remember you were talking about that?

DARRIN T. MISH:  Yeah, today we are going to talk about the history of the income tax in the United States. Which sounds kind of boring, but I promise to try to make it interesting. I think it’s fascinating because we have a tendency to think, as taxpayers, after we grow up and we start figuring out who this FICA guy is and why they are taking so much of our paycheck. We have this tendency…

KATRINA MADEWELL:  You remember when you were a teenager and you looked at your paycheck and you go wait a minute where did this money go?

DARRIN T. MISH:  This is how old I am. I was doing the math. I was making $3.35 an hour. I knew how much money I was supposed to get and then you get your check and there is this big bite taken out of it and you wonder, what’s up with that.

KATRINA MADEWELL:  What happened?

DARRIN T. MISH:  W have a tendency to think that the income tax has been with us forever. So we think that is how it is and that’s how it’s always been and that’s how it’s always going to be. There was a period of time in U.S. History when there was no income tax. It was from right after the Civil War in about 1869 till about 1913. That was called the Golden Age or the Golden Era. During that time, there was no income tax in the United States because there had temporarily been an income tax pass to wage the Civil War in the Union. That golden age had the highest rate of sustained growth in U.S. History.

DARRIN T. MISH:  There was over 6% growth annually  in GEP in Income per Capita during that period. I would attribute a lot of that to the fact that we had no income tax overhead. The Federal government was small and it wasn’t burning through our cash like it does now.

That’s one of the reasons we don’t have more job growth and we don’t have more economy growth. Because we have this government overhead. Our national debt is so high and our debt service is so high there is waste there too. I know this is kind of controversial, but you know what? The government doesn’t and cannot create jobs. It really can’t. Not by spending money anyway. The government can create jobs by reducing regulation, reducing bureaucracy and getting the heck out of the way. But the government cannot take a hundred grand from me and create a hundred thousand dollar job for someone else because there is the governmental overhead.

KATRINA MADEWELL:  Or multiple jobs.

DARRIN T. MISH:  Yeah, they can’t do that, there’s overhead.

KATRINA MADEWELL:  I listen to you talk about the golden era and it makes me think and wonder if the government were to temporarily suspend taxes – we are not going to take any taxes out of your check for this whole next year – how would it change the economy?

DARRIN T. MISH:  It would be absolutely amazing. Now, there would be a lot of people hurt from the stand point of the Federal Government does provide a lot of essential services and remember this was terrible in 2013 we had that about 6 weeks where the government shut down.

KATRINA MADEWELL:  We remember because, in my world, that also meant that no money was passing through the Federal Reserve. Which meant that no money could be wired which meant that no closing’s happened during that time.

DARRIN T. MISH:  Well, listen to how bad it was for me, it was terrible. I about went bankrupt and in 2013 was the worst single year I’ve had in business. I have been in business over 20 years. Here’s what happened to me; I had the tax resolution firm, I had a bankruptcy firm, what happens when the Federal Government shuts down well the court shut down?

KATRINA MADEWELL:  Everything shuts down.

DARRIN T. MISH:  The IRS shut down. So, the way the clients ended up finding me is the IRS applies pressure to them by filing liens or having revenue officers or levies or wage garnishments or whatever. The Federal Government tends to push people in my door on the tax resolution side. At the time, when we had the bankruptcy filing or the bankruptcy firm you couldn’t file bankruptcy. So, there was no, basically I had all this staff,, all these people that needed to be paid.

KATRINA MADEWELL:  Doing nothing..

DARRIN T. MISH:  Who actually did get paid, but I had no revenue coming in and so, not to mention, the National parks you are talking about the Federal Reserve. It was all kinds of things.

KATRINA MADEWELL:  What happened? I forget what happened. Why did the government shut down? I remember when it happened, I just don’t remember why?

DARRIN T. MISH:  It was some dispute between the Republicans and Congress. Then Barak Obama and somebody said I dare you. And the other one said, I double dog dare you. Then they just shut the whole thing down for about 6 weeks and it was not good. That is not the way you should do things. It’s a cool fantasy that you have, if you shut the government down for a year. But, we would have to have essential services and then we have to have the discussion about what are essential services.

KATRINA MADEWELL:  It would just be interesting to see how things change like from an observation perspective. It would give us a whole lot to talk about for a year.

DARRIN T. MISH:  I think Donald Trump is going to really reduce, or at least he says he’s going to try to reduce, bureaucracy and ways, regulations and those types of things.

KATRINA MADEWELL:  I think that he will.

DARRIN T. MISH:  I think he is going to try, I don’t know if he will or not I don’t know if he’s got the chops. I think he is going to run into, he’s going to go to Washington, I don’t think he understands how dysfunctional that place is. I don’t think he understands how broken it is.

KATRINA MADEWELL:  He will when he gets there.

DARRIN T. MISH:  If he can chop through that and make stuff happen then he’s going to go down in history.

KATRINA MADEWELL:  No matter who you voted for. I think that is why a lot of people voted for him. Because he wasn’t scared to take on people like that and he said I’m going to make a stand. So, whether you like him or don’t like him, don’t like his hair whatever, that’s the whole point.

DARRIN T. MISH:  I actually don’t like his hair. I hate his hair.

KATRINA MADEWELL:  Nobody likes his hair.

DARRIN T. MISH:  But…

KATRINA MADEWELL:  He would probably look decent bald.

DARRIN T. MISH:  I like about 60% of what he says and about 40% of what he says makes my skin crawl.

KATRINA MADEWELL:  I think that’s the same for the general consensus.

DARRIN T. MISH:  Compare contrast about 98% what Hillary said made my skin crawl, so I guess I had to make that choice.

KATRINA MADEWELL:  Alright Darrin here we go no political talk lets move on.

DARRIN T. MISH:  So, anyway, going back to the history of the income tax in the United States. When the country was founded, this is an interesting historical fact that we always forget, that there was a country here or there was a system before the Constitution was passed. It was called the Articles of Confederation and it didn’t really work. That is why they ultimately passed the Constitution, they ratified the Constitution. Which I believe was in 1791. So, from like 1776 until about 1791 there was the Articles of Confederation. The way that the country was envisioned, was there would be 13 individual states that were loosely aligned. They were part of one country but each state… The reason they choose the term state because the word state before the United States was founded meant country.

DARRIN T. MISH: You had Sparta and Athens were city states. So state actually meant country. The whole idea was that each state would run much like it’s own country and if you didn’t like how your state was working you were free to move to another state. So the states were supposed to be experimental laboratories for Democracy and for Government and to see how things worked. Over the years what’s happened is we’ve abandoned the principles of Federalism. Federalism means that the Federal Government should be weak and the States should make most of the decisions. So Federalism has been abandoned and we’ve got a stronger and stronger and more sort of over reaching Federal Government.

KATRINA MADEWELL:  It’s a total opposite of the way that we live now. The states are definitely not stronger then the Federal Government.

DARRIN T. MISH:  But there is still our significant differences in the way that the states are Governed and I think that’s a good thing. I mean on one opposite end of the spectrum you have California. That’s just a nanny state that believes that everything should be regulated. We were out there a couple of weeks ago and literally you see this prop 65 sign everywhere that says this establishment contains some chemical that might cause cancer. Now the funny thing about that particular law is that you sees those signs everywhere and so what does that do?  It makes you ignore it. Now, if you are a tourist, I just laugh. I just think, look at this. This is idiotic that the owner of this establishment has to put this stupid sign up that nobody pays attention to because they are everywhere. They were at Disneyland. No kidding there is probably some stuff that might cause cancer because…

KATRINA MADEWELL:  That is not what they are looking at.

DARRIN T. MISH:  News flash, pretty much everything causes cancer. We are in a studio here and there’s some microphones and electronic stuff and guess what? There’s probably some stuff in here that might cause cancer if you eat it which you probably shouldn’t do.

KATRINA MADEWELL:  I know a lot of Californians and they are so different than you. I know you were born in California, but you definitely do not belong there.

DARRIN T. MISH:  Which is partly going back to my comment that each state was supposed to be like a little laboratory. I decided to leave California after I graduated from law school. It was in part because of the political climate, in part because of the economic climate. At the time, in the 90’s in California, they had lost a lot of military bases which caused kind of like an avalanche to the economy. It caused the economy to sort of shrink and that was impacting lots of different areas. So, I had to decide where I wanted to live. When I sort of grew up, I was going to have to take the bar exam and I was going to go ahead and start a life as an adult.

KATRINA MADEWELL:  Well, why don’t you hold that thought cause we have to take a break. I know you hear the music. You are listening to the IRS Solution Attorney show. This show is all about the history of the income tax when we come back we will recap for you and we will continue to dive in. Back in a moment.

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KATRINA MADEWELL:  Welcome back. You are listening to the IRS Solution Attorney show.
DARRIN T. MISH:  I am the IRS Solution Attorney Darrin T. Mish.

KATRINA MADEWELL:  I am your co-host Katrina Madewell sorry to cut you short Darrin.

DARRIN T. MISH:  That’s ok. In the last segment, I was telling a sort of uninteresting story on how I ended up moving from California to Florida.

KATRINA MADEWELL:  You just said you didn’t fit.

DARRIN T. MISH:  And part of it was I just didn’t fit with the political climate cause it was always economic. But my point in the story was, I started to look for my ideal state that I wanted to live in. I have different criterias. I wanted there to be a good economic situation. I wanted housing to be cheap. I wanted it to be warm so I actually drew a snow line across the map of the United States and everything North of the snow line was not going to happen. Not my thing. I have friends who have to shovel snow like 6 feet out of their driveway. That’s not my deal, I’m a southern California kid. That’s not going to happen.

KATRINA MADEWELL:  I’m from here too, I can imagine that.

DARRIN T. MISH:  I wanted there to be good boating and fishing so the only place that really met all of those criteria’s was Florida. That’s why I’ve come to love Florida. I’ve lived here for a long time.

KATRINA MADEWELL:  Which is fitting. It’s funny that you say that you actually looked at a map. You drew a snow line and you picked a state and unfortunately Florida also hits the national news pretty often for all the crazies.

DARRIN T. MISH:  And I think part of that is; number one, we are like the 4th largest state by population so like that makes some sense. Also, Florida has this sort of vagabond thing going on where people from up north have a tendency to come down here often times to escape their trouble. I would see this in the criminal defense work all the time. They would leave Ohio because they had a warrant or whatever and they are like I am going to go someplace where it’s warm.

KATRINA MADEWELL:  And we have a beach and beer.

DARRIN T. MISH:  Exactly, Jimmy Buffet and all of that stuff. So that’s how they end up down here in Florida and that’s how we end up with all the funny stories. That and alligators contribute to funny stories all the time.

KATRINA MADEWELL:  Yes they do. Some not so funny, but some are funny. Going back to the history of income tax, which is pretty interesting, that pre-tax stuff that you shared in the beginning part of the show talked about how right after the golden era how people basically didn’t pay any taxes and it was good for the economy.

DARRIN T. MISH:  So, a lot of people figure that the income tax has been around forever and if we didn’t have the income tax what would happen to the Federal Government? It’s interesting because from 1791-1802 the US Federal Government was much smaller but it primarily supported itself on Tariffs and Excise taxes. Excise taxes are taxes on things, on special products. Right now in the US we have Excise taxes on fishing tackle, can you believe that?  One of the reasons fishing tackle is so expensive is because there is this big Excise tax on it. There’s an Excise tax on it because allegedly that money goes to improve fishing and conservation in the areas throughout the country. I mean that’s the theory. I don’t know if that happens.

KATRINA MADEWELL:  There’s a lot of perception over if you are trying to build a house and you see a spotted owl, you are done.

DARRIN T. MISH:  I will tell you what there’s…I won’t say it on air.

KATRINA MADEWELL:  See  a spotted owl, it’s not happening.

DARRIN T. MISH:  I won’t say it on air, but I have some acreage and if I see a endangered species, I’m not exactly sure how that is going to turn out.

KATRINA MADEWELL:  Well, you don’t even know. I don’t know if I would recognize all the endangered species.

DARRIN T. MISH:  Did you see there there was, we might have talked about this on air a couple of weeks ago, I saw a video ythat there is ring video doorbells?  They take video of who shows up at your door?

KATRINA MADEWELL:  Yes, I had a property like that.

DARRIN T. MISH:  So, I saw somebody in Tampa had their ring video doorbell and a panther dragged a doe up on to their front porch and ate it. This was in suburban Tampa.

KATRINA MADEWELL:  That’s bad, really?

DARRIN T. MISH:  They say that there are no panthers in the Tampa Bay area. Well there definitely are.

KATRINA MADEWELL:  Oh, there are. We’ve seen them. Yes there are. There used to be one, my grandparents lived pretty much right off of Dale Mabry. You could hear Dale Mabry in their backyard and there was a panther that frequented that little pack of woods forever.

DARRIN T. MISH:  Interesting. Everybody says, oh, no, it can’t possibly be a panther. Sometimes bobcats get really big. Well, let me tell you the difference, bobcats don’t have tails, they don’t have long tails. A panther’s tail is long and this particular video that panther had a long tail.

KATRINA MADEWELL:  And the Florida panthers to there is a lot of them here.

DARRIN T. MISH:  I don’t know about a lot. It depends.

KATRINA MADEWELL:  They are out living in your backyard.

DARRIN T. MISH:  So, anyway, back to the history of the income tax and not ring video doorbell in camera footage.

KATRINA MADEWELL:  It’s pretty cool technology, you have to admit.

DARRIN T. MISH:  So, it’s been interesting that throughout our history as a country, wars have brought on the necessity for income tax. So when the war of 1812 came along, which is really like Revolutionary War part 2, because we are fighting the British again. By the way, my Canadian friends like to tell us that they won because they burned the White House down. Which actually might not be a bad idea. But, anyway, so when the war of 1812 was being fought, they actually contemplated briefly passing an income tax. Then the war ended and so they didn’t do it.

So by 1817 Congress did away with all internal taxes, all the Excise taxes. There was no income tax, they did away with everything. All they had were Tariffs and Tariffs are taxes on imported goods.

Something Donald Trump keeps talking about. These other countries like China are kicking our butts because their stuff is too cheap and we need to pass Tariffs. A lot of people think that that is a Revolutionary idea and it’s going to be the end of the world, but Tariffs have been a part of this country’s history for the last 200 years.

DARRIN T. MISH:  Now, I’m not passing judgement on whether it’s a good idea or a bad idea. I don’t know, I don’t have enough information. But in 1817 our country was running entirely on just he taxes from Tariffs.

KATRINA MADEWELL:  It’s interesting too that some of the first sale taxes were on gold, silverware jewelry and watches. Interesting.

DARRIN T. MISH:  It sounds to me like that makes sense because those were sales taxes on sort of higher end goods. I think so the poor guy wasn’t going to get crushed. In 1812, when that was passed, the sales taxes on gold, silverware, jewelry and watches. That’s not like the poor homestead dirt farmer have to pay that, that was like the money land owner class was paying that. I think that was probably more palatable at that time than it would be today.

KATRINA MADEWELL:  So what about in 1862?

DARRIN T. MISH:  So 1862 comes along and we remember from American history class in high school that that’s right about when the civil war started and…

KATRINA MADEWELL:  I think they should make you take that stuff later in life.
DARRIN T. MISH:  So you can actually appreciate why..

KATRINA MADEWELL:  And I think you can relate to stuff because you have an idea how Economic works. I mean think about this, you are a kid and they are making you learn all this Civil war history stuff. You are like this is so boring. I don’t want to learn about any of this. But when you grow up and you realize how that could actually impact your life, it’s more interesting.

DARRIN T. MISH:  I think one of the reasons we are talking about the history of the income tax on the show today is because a thorough understanding of history allows us to prevent those mistakes that were made in the past. I think that’s one of the things that kids don’t get because they don’t have enough life experience, period. So they don’t understand how it was a mistake or how they might to be able to apply that to their life. In 1862, the Civil War is going on. People don’t realize this, but the civil war was the most deadly conflict that we’ve ever engaged in as a country by far. There were hundreds of thousands of people killed during 4 years. Actually, yeah, it was 1862-1865. Some huge number. Over 500,000 dead and uncounted casualties that were maimed and missing limbs. Compare and contrast to the wars that we have been engaged in now for the last 15 years. The total death toll is under 5,000. Not to discount those 5,000 and their sacrifice at all, but it’s , in order of magnitude, different.

KATRINA MADEWELL:  They were just so wild. They would just run in in droves and fight each other head on and now they fly planes into buildings and crazy stuff.

DARRIN T. MISH:  Not to mention that back then there was really no medicine to speak of. So if you got shot you were probably going to die of infection or they were going to cut your arm off or your leg or wherever you were hit. So a lot more people died because there wasn’t good medicine. They didn’t even understand sanitation and germs and bacteria and that kind of thing. That’s what lead to a lot of extra people dying. It was such an epic struggle that the Union went ahead and passed an income tax because they just needed to do it. They had the industrial base to win the war far in excess to what the Confederacy had, but they still needed money. Wars cost money and that’s one of the things as a modern society really think about. At the beginning of or after 9-11, I doubt many people knew and what had been behind a war that was going to last 15 years and cost a trillion dollars.

KATRINA MADEWELL:  No, but it depends on who you ask. You talk to some of our military folks, are going to give you a different opinion.

DARRIN T. MISH:  And I don’t want to go too far down that road about how they could have done things differently and better. So, in 1862 Congress went ahead and enacted the first income tax law for the country. It was kind of a fore runner of our modern system and it was based upon a progressive taxation scheme. What we have here back then was if a person was earning between $600 and $10,000 a year, they paid tax at the rate of 3% which sounds kind of laughable to us now.

KATRINA MADEWELL:  Yeah cause we are like 25%+.

DARRIN T. MISH:  If you made over $10,000 a year, which was a lot of money in 1862, then you paid tax at a higher rate. Probably around 5%.

KATRINA MADEWELL:  Which is kind of crazy when you think about it. A higher rate at 5%. Now some of these people pay to have tax rates well into the 30’s and you have to look at that and go, how did we get here?

DARRIN T. MISH:  We talk about this from time to time on the show. I’m not sure a person who makes money, makes more money paying a higher percentage of taxes and makes that fair. It doesn’t make any sense to me. Maybe I’m just feeble minded but I think it’s kind of wrapped up in these bizarre notions  that of if you make more money then you have enough. What is enough? I mean based on who’s opinion or…

KATRINA MADEWELL:  It’s all relative and it’s all about perspective. It’s about that time we are going to take a quick break. You are listening to the IRS Solution Attorney show. If you want to get Darrin you can reach him at his off air number which is 888-get-mish.

DARRIN T. MISH:  888-438-6474

KATRINA MADEWELL:  We’ll be back in just a minute.

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KATRINA MADEWELL:  Welcome back this is the IRS Solution Attorney show.

DARRIN T. MISH:  I am your host THE IRS Solution Attorney Darrin T. Mish.

KATRINA MADEWELL:  I am your co-host, Katrina Madewell. If you are just now joining us for the show, today’s show is all about the history of the income tax in the United States and its good  content.

DARRIN T. MISH:  We started out as a country with really no income tax at all and the first income tax was not passed until about 1862. It was for the war effort, for the civil war on the side of the Union. A little factoid, in 1866 the tax revenue reached the highest point in the nation’s history to that point and that was 310 million dollars. Another interesting fact was the treasury would not collect that much again until 1911. That’s almost 50 years that it took them to get to 310 million dollars again.

I think part of that is because the Federal Government’s scope of that time was just so much smaller. The Federal Government was just designed to do fewer things. It was designed to protect the border, wage war and post tariffs and that kind of thing. Not have 37 different Federal agencies with a huge cabinet.

KATRINA MADEWELL:  Which changes over time. Is there some fat that could be trimmed? For sure I think that most people would agree with that. So the act of 1862?

DARRIN T. MISH:  Well, this is the first commissioner of the Internal Revenue now. It wasn’t called the Internal Revenue service and I would argue it might not. It should be called the Internal Revenue service. It ain’t either because they don’t provide a whole lot of service. But, anyway, the commissioner’s office was formed in 1862. He was given the power to access  levy and collects taxes. The right to enforce the tax laws through the seizure of property and income and assets and that kind of thing. So, that was the first time in our history that that office existed and that power existed.

KATRINA MADEWELL:  It’s interesting watching this time line here and this outline in front of me in this progression. But, in 1868 Congress again focused it’s taxation efforts on Tobacco, distilled spirits and eliminated the income tax in 1872.

DARRIN T. MISH:  That’s kind of cool, right? So they put an income tax in place in 1862 and they used it to fight the war. That sort of makes them legitimate. The country needed money to do that. What I think is cool is that somehow, and I don’t know all that much history about how in particular, Congress decides to abolish it 10 years later in 1872. So, all these people who are talking about abolishing, Ted Cruz in this last Presidential Election was a big proponent of we should abolish the IRS and go to like a flat tax or a fair tax that kind of thing.

KATRINA MADEWELL:  That would be interesting…

DARRIN T. MISH:  It could happen. We tend to look at things in really short time frames. But if we just look back a hundred years ago, it happened where they abolished the whole taxation bureau or at least the income tax.

KATRINA MADEWELL:  So, I’m curious what happened to those people that have offers on the table or owe this money?

DARRIN T. MISH:  I don’t know, you might need a lawyer to figure that out when that happens. From about 1869 to about 1913, like we said in the first segment of the show, that was the highest rate of sustained growth in the Nation’s history. It was over 6% during that entire time frame and in part I would argue that that was because there was no income tax in place for that time.

KATRINA MADEWELL:  Short lived.

DARRIN T. MISH:  So, it came back in 1894-1895 real briefly. What happened in 1895 is the US Supreme court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the constitution. So what does that mean?

KATRINA MADEWELL:   It’s laughable at best.

DARRIN T. MISH:  What does that mean? I think what it means, is that the states were not contributing revenue in a proportionate share to their population. I think that’s what it means. I’ve not read that case, to be honest with you, but I think that’s what that means.

In 1913 the 16th Amendment to the Constitution was passed, which is unbelievable. What that means is they had to carry both houses of Congress and 3/4’s of the states to agree to impose a Constitutional Amendment. That is so difficult to do because 3/4’s of the states means, most states have 2 legislative bodies and they have to pass both of 3/4’s of the states. Now, there weren’t 50 states back then.

KATRINA MADEWELL:  But that’s still a lot.

DARRIN T. MISH:  But it’s still a big hurdle and it was intentionally designed that way when the Constitution was enacted. It was designed to make it somewhat difficult to amend. It’s hard to imagine what the political climate was and what the real need was in 1913 for the Federal Government to get the 16th Amendment passed so that they could collect and levy and collect an income tax. It’s hard to imagine what the rationale was back then. I think there was a progressive movement in the United States at that time and Woodrow Wilson was president and Woodrow Wilson was…

KATRINA MADEWELL:  I’m glad you didn’t ask me that question.

DARRIN T. MISH:  He was a strong progressive and he believed in advancing social programs and he wanted more money to run these experiments. So that we could have a bigger and allegedly better social programs. That is where it all started which blows my mind.

I think if we, this is controversial, but I think if we were allowed to keep more of our money, number one there would be more economic activity…

KATRINA MADEWELL:  People would spend it.

DARRIN T. MISH:  And number 2, and people will definitely disagree with this, but I think we would give more money to charity and charity would be able to do more good.

KATRINA MADEWELL:  I think so too.

DARRIN T. MISH:  If you count on the government to tax some other guy…because that’s what some people do. They vote for higher taxes because it is always going to be on some other guy. Some rich guy, some fantasy rich guy. Then there’s a government overhead. If you’ve ever dealt with any government bureaucracy like I do every single day you can see the waste and incompetence. Even if you’re talking about welfare. Let’s say there is a hundred dollars worth of welfare benefits that you want to administer. Well, I guarantee it doesn’t take a hundred dollars worth of a tax bill to generate that hundred dollars worth of benefits.

My best guess, and I will have to look this up, is probably like $150.00 or $200. Because of that government tax in there you’ve got all of these government workers that are running the program and they all get Cadillac benefits. Health care, retirement, pension, all these days off. I mean they get Columbus day off.

KATRINA MADEWELL:  It’s ridiculous the days they take off, here look at that, there are a ton of Federal holidays.

DARRIN T. MISH:  Every October 12th I’m at work and I’m like why am I not getting calls from the IRS? Oh, that’s right, it’s Columbus day. But we can’t even call it that. It’s like National indigenous people’s day.

KATRINA MADEWELL:  I don’t even understand that. But, so, on this timeline, looking at it  in 1918, that’s where stuff really started changing.

DARRIN T. MISH:  So, remember when we said in 1866 we got to 310 million dollars, by 1918 after we’ve passed the income tax like the second or third time, the revenue rose to 5.4 billion…

KATRINA MADEWELL:  That’s a crazy difference in that short amount of time.

DARRIN T. MISH:  That’s huge. What that means to me, just looking at the stats, is there was an explosion of what the Federal government was actually involved in. It’s a relatively short period of time. You can argue Industry, revolution and all that kind of stuff. Ok, fine, don’t machines make it easier and cheaper for people to live better? The need for taxes should have gone down, not up. That would be my argument.

KATRINA MADEWELL:  Well, it’s interesting too because there is a big gap in our time line and what happened in between these things was. Remember the Great Depression and the collapse of the…

DARRIN T. MISH:  We haven’t got to the Depression yet. So, in 1918 tax revenue went to 5.4 billion. If you remember from history, WWI was from 1914-1916. At least our involvement. So that makes some sense. You’ve got to ship all those guys and all that stuff over to Europe to save the world. So they had to collect some more money.

This is also an interesting fact. Before 1943, there was no withholding tax from your paycheck. We were talking about that FICA guy and who’s this FICA guy and why is he taking all my money?  Well, before 1943, they didn’t withhold any money from your paycheck. What happened is everybody filed a tax return on April 15th and everybody owed money. So what did that do? It made it hard to collect the money because so many people would get so far in they couldn’t afford to pay it.

KATRINA MADEWELL:  Well, if you think about it, if you’ve never owed money and now all of a sudden you do…

DARRIN T. MISH:  Right. So in 1943 we are right in the middle of WWII and they are having trouble funding the war. They need more and more money because this is a struggle for humanity at this point. They have to put their heads together. They are like how are we going to make it so the taxpayers actually pay their taxes as it goes. How are we going to get this money?  I have an idea, we will take it straight out of their paycheck before they even see it.

KATRINA MADEWELL:  And then FICA was born.

DARRIN T. MISH:  Actually FICA is related to Social Security, which we don’t get until a little bit later, I think. But Social Security was passed in the 30’s but that’s when withholding actually came to being was in 1943. They did it because everybody was owing taxes.

KATRINA MADEWELL:  Had to think about that too in the 30’s. Within not even a hundred years we created this and now it’s bankrupt. Only the Federal Government could do that.

DARRIN T. MISH:  We’ll see. I think Congress passed withholding because it’s sort of like a lemmings situation. Lemmings will just follow the lead lemming right off the cliff. If you take the money out of people’s paychecks before they see it, you can kind of see it on your paystub but it never goes through your hands.

KATRINA MADEWELL:  You don’t count on it unless you are 15 with your first job and you realize you can’t…

DARRIN T. MISH:  It just get’s ripped right out of there before you even see it and they did that to hide the taxation rate from the population. I mean this is why they do this. It’s so you don’t understand how high the tax rate is so you don’t get angry and vote them out, that’s kind of the way I see it.

KATRINA MADEWELL:  Again, we went from 3% to 30%.

DARRIN T. MISH:  At various times throughout our history the highest tax rate has been as high as 50% or more…

KATRINA MADEWELL:  When was that?

DARRIN T. MISH:  That was in the, well prior to the tax reform act in 1986. When Ronald Reagan came into office the highest tax rate was 50% and the highest tax bracket was like that fantasy rich guy who’s going to pay all the taxes.

KATRINA MADEWELL:  Which is ridiculous. But, he also had the largest tax cut in history and he was also one of the most loved Presidents in history.

DARRIN T. MISH:  Exactly. In part because by overhauling the tax system with the tax reform act in 1986. He lowered everybody’s taxes that stimulated economic activity and created a whole bunch of jobs. He proved that trickle down economics works. Now I just made a bunch more people mad. But trickle down economics is the idea that if tax breaks are given to larger companies, they will reinvest that money…

KATRINA MADEWELL:  Which they do. They hire people.

DARRIN T. MISH:  They will hire more people, they will create more jobs. Then the taxations on those people will actually go into the treasury and you have a net gain of tax because that money is working. It’s churning away. That’s one of Donald Trump’s theories that I think we are going to see. I think it’s going to be fascinating. He is trying to recreate all that money that Apple and all of these various big companies have offshore. He’s going to give them a break to bring the money back here to the US so that it will work here in the United States. We’ve talked about the fact they are talking about building iPhones in California, of all places, instead of China. I think the additional cost of an iPhone built in California versus China it is going to be like $50 or something.

KATRINA MADEWELL:  Everybody would pay an extra 50 bucks if that would get US jobs.

DARRIN T. MISH:  I think probably so. Especially if they repatriate the billions that they have overseas that are working in the Irish economy and the Chinese economy and the Singapore economy. If they brought that money back here that would be good.

KATRINA MADEWELL:  Well, you are listening to the IRS Solution Attorney hang tight we’ve got to take a quick break we will be back in a minute. When we come back we will talk about some more relevant changes that have happened probably that you might be able to remember. It’s all about the history of the income tax we will be back in just a moment.

(commercial break)

KATRINA MADEWELL:  Welcome back. Thanks for sticking with us through the break. You are listening to the IRS Solution Attorney show.

DARRIN T. MISH:  With THE IRS Solution, Attorney Darrin T. Mish.

KATRINA MADEWELL:  And I’m your co-host Katrina Madewell. Today is kind of an interesting topic, even though I am definitely not the history buff. This show is all about the history of the income taxes in the United States which has been pretty interesting.

DARRIN T. MISH:  As you can probably tell I’m a history buff and I like the study of history. One of the things that I like to do when we are going on family vacations and what not is, has a tendency to drive my kids a little crazy…

KATRINA MADEWELL:  For now.

DARRIN T. MISH:  Is we stop at historical locations and civil war battlefields or forts or where battles were fought. That type of thing. I like to see where it actually happened. This country is actually young enough that you can sort of, you can almost feel your ancestors there.

KATRINA MADEWELL:  Viking ancestors.

DARRIN T. MISH:  Well at least my American viking ancestors. It’s an inside joke, I found out recently that I’m 9% Scandinavian so when I saw that on my DNA report I quite normally or quite typically…

KATRINA MADEWELL:  You went out and bought the Viking cuff links is what you did.

DARRIN T. MISH:  I decided that 9% Scandinavian meant that I was in fact Viking and I’ve really embraced the Viking thing.

KATRINA MADEWELL:  I love the cuff links, that was something. You have to follow Darrin online on Twitter and on Facebook and you will see the various cuff links. He has more cuff links then anybody I know.

DARRIN T. MISH:  Yeah, you will know more about my personality if you follow me on Facebook then you will probably ever care to but I like to have fun. To me life is nothing if you are not having fun.

KATRINA MADEWELL:  That’s right. So going back to Mr. Ronald Reagan.

DARRIN T. MISH:  So, Ronald Reagan one of my idols, honestly. Grew up in Southern California, he was the Governor when I was born. What he did was he overhauled the tax system in 1986 and he lowered the top tax rate from 50% to 28%. The lowest that it has been since 1916. So right there he is my hero already, he does nothing else he is my hero. He reduced income tax dramatically. When I was a kid my parents weren’t in that 50% bracket and I wouldn’t be in that 50% bracket now if that had still been in place, but it just doesn’t seem fair to me that anybody should toil away and give up 50% of their income, to me…

KATRINA MADEWELL:  It’s high enough.

DARRIN T. MISH:  To me its a disincentive to continue to work and be productive. The other thing that he did was he eliminated some tax preferences to make the system for fair basically.

KATRINA MADEWELL:  Like what?

DARRIN T. MISH:  There was a lot of hinky tax deductions before 1986. You could invest in oil and gas and you could lose more then you invested and still get a break. There was a lot of real estate stuff that happened and it’s hard for me to speak real clearly about it because I was in high school at the time or I was just out of high school…

KATRINA MADEWELL:  And I was a kid so I don’t remember any of it.

DARRIN T. MISH:  But there was a lot of stuff that you could, there was a lot of ways to have like paper losses where you could actually make money prior to 1986.

KATRINA MADEWELL:  You know we’ve got to look that up.

DARRIN T. MISH:  And he closed a lot of those loop holes because it really wasn’t fair. The schemes were where you could buy into an oil well for 5 grand and have a $10,000 loss and so that’s not really…

KATRINA MADEWELL:  And I’m like hey where does the 5 grand go exactly?

DARRIN T. MISH:  That was some of the tax reform acts of 1986. And then Bill Clinton comes along in 1993 and he passes another tax act…
KATRINA MADEWELL:  We almost had to specify which President Clinton right?

DARRIN T. MISH:  Well, thankfully, President comes along in 1993 and he does some good stuff. It’s in part because he has a Republican Congress and they have to work together. Which is not happening right now or hasn’t happened with Obama. They have not been able to work together at all. What he does is goes ahead and cuts the Capital Gains taxes. This I do remember. Capital Gains taxes in my mind are really unfair. If you invest in a house, for example, and you take all the risk and then it depreciates in value and then you have to pay Capital Gains tax. Like Uncle Sam is always your silent partner and that doesn’t seem fair to me. He is not your partner in the loss so much he just wants to be partner in the gains and that happens in gambling too.

KATRINA MADEWELL:  Well, I am a big proponent on that and you can bet that NAR National Association of Realtor, they are all on board for that.

DARRIN T. MISH:  I think there is a reasonably good chance that the Capital Gains tax could be abolished under President Trump. We’ll see, it’s that one thing that would certainly stimulate the economy.

KATRINA MADEWELL:  He is a real estate tycoon so that would be expected.

DARRIN T. MISH:  That would certainly stimulate it. So, another thing that Clinton’s second tax act was, he cut taxes by 152 million dollars. He cut the Capital Gains tax. He gave us the $500 per child tax credit. Which I am a fan of since I have a couple of kids. He gave us some of that tax incentives for education like the Hope Scholarship and all that stuff. Wich is good for people who are in school, I guess. George W. comes along and I don’t know if you remember this, but George W. gave us those weird rebates, you remember that?

KATRINA MADEWELL:  Yes.

DARRIN T. MISH:  He did it twice…

KATRINA MADEWELL:  It was just out of the blue.

DARRIN T. MISH:  One of them was like, and here’s his theory was if we give you 300 bucks you are going to go out and spend money well I guess…

KATRINA MADEWELL:  I don’t think it really happened quite the way they expected.

DARRIN T. MISH:  It didn’t really work, he did it twice as I recall.

KATRINA MADEWELL:  People were confused when they got those checks they were like is this a trick what am I doing with it..

DARRIN T. MISH:  And I was doing tax problem resolution work at the time so what you would see is…my client files a tax return, doesn’t pay his taxes he owes 8 grand or whatever and then you would see this stupid $300 credit like that doesn’t make any difference it didn’t help any of my people. I can tell you for sure that not one single client that I was representing had there tax bill eliminated because of the $300 not one.

I do recall getting the checks and I do recall running out and spending it on groceries or something that I would of spent it on anyway but I also can tell you I didn’t run out and buy something specific with the $300. I just don’t think that it was big enough. I mean $300 per taxpayer is a lot of money but I mean our economy is big and I don’t think it was big enough.

KATRINA MADEWELL:  There’s a lot of things that you can spend $300 on but there is a lot of things that it doesn’t touch.

DARRIN T. MISH:  And then there has been a couple of tax bills here and there along the way, but that’s pretty much the history of the income tax here in the United States.

Let’s talk about real quick a couple of the options. Ted Cruz was talking about in the election, the primaries, he was talking about we could have a flat tax. Well, a flat tax would be where everybody pays the same percentage. I kind of like that idea.

KATRINA MADEWELL:  I do too.

DARRIN T. MISH:  The other one is a fair tax. I think the fair tax and somebody can call in and correct me if I’m wrong, but I believe the fair tax is more like what Trump is proposing. Where there’s fewer brackets and there is still some graduation based upon how much money you make but it’s more fair because it’s slimmed down. Most deductions would be eliminated under that system, which you and I would not like because that would eliminate the home interest deduction. Which would be bad for real estate.

KATRINA MADEWELL:  Well they’ve been talking about that for a long time, but you have a lot of lobbyists every year, a whole bunch of realtors get together and they lobby stuff. Not only in Tallahassee but they lobby nationally  for that type of stuff.

DARRIN T. MISH:  I think it would be really unfair to get rid of the home interest deduction because there is a lot of us who have based our financial life on that deduction. If you just rip the band aide off and it goes away in 1 year or 2 years or 3 years or something like that, it could be really rough. I think it would have a really bad impact on the real estate market, especially on the higher end stuff.

KATRINA MADEWELL:  It would have some impact and you have got to think Capital Gains ties right into here, I mean that’s all, they work hand in hand so it’s... We are already out of time Darrin.

DARRIN T. MISH:  Oh wow.

KATRINA MADEWELL:  You are listening to the IRS Solution Attorney Show. Sorry we missed the train wreck this week. We also have some great questions we are going to answer for you next week we promise. Thanks so much for joining us this week but for this week.

DARRIN T. MISH:  We’re out.

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