The Income Tax Bait and Switch… How It Changed America | 4/16/26

Keith Malinank (00:00.91)

Here's a story about Billy Joe too. Two young lovers with nothing better to do. They sit around the house, kid I'm watching too. And here's what happened when they decided they couldn't do.

you

Phil Magness (00:07.246)

you

Keith Malinank (00:24.658)

I swear they ran into a great big hassle. Billy Joe shot a man while I was in his castle.

you

Keith Malinank (00:41.034)

take the money and ride

Keith Malinank (00:45.71)

Take a body in my

Keith Malinank (00:50.848)

Take your party and ride

Keith Malinank (00:55.692)

Take the money and run

Keith Malinank (00:59.97)

Mac is a detective down in Texas. You know he knows just exactly what the facts is. Ain't gonna let those two escape justice. Mix is living off of those taxes.

Keith Malinank (01:20.886)

Well, she's left the way. In a joke, up to her the very next day. But mommy, hey, you know they got away.

Hit it down south and they're still fun

Keith Malinank (01:44.096)

Take your money and run

Keith Malinank (01:53.73)

you

Yeah

you

Yeah

Phil Magness (02:39.406)

you

Keith Malinank (03:05.214)

If I had a million dollars If I had a million dollars Well I'd buy you a house I would buy you a house And if I had a million dollars If I had a million dollars Buy you furniture for your house Maybe an ice chester field or an ottoman And if I had a million dollars If I had a million dollars

Well I'd buy you a K-Car, a nice, reliant automobile, and if I had a million dollars, I'd buy your-

Keith Malinank (03:53.024)

If I had a million dollars I'd build a tree fort in our yard If I had a million dollars You could help, it wouldn't be that hard If I had a million dollars Maybe we could put a little tiny fridge in there somewhere We could just go up there and hang out Like open the fridge and stuff and throw away the food Pre-wrapped sausages They have pre-wrapped sausages but they don't have pre-wrapped

It's laid out for us little... things. Bacon! yeah!

Okay, we will see you

If I had a million dollars If I had a million dollars Well I'd buy you a fur coat But not a real fur coat that's cruel And if I had a million dollars If I had a million dollars Well I'd buy you an exotic pet Yup, like a lamb or an emu And if I had a million dollars If I had a million dollars

Well I'd buy you John Merrick's remains, ooh all them crazy elephant bones, and if I had a million dollars, I'd buy-

Phil Magness (05:05.858)

you

Keith Malinank (05:13.578)

If I had a million dollars We wouldn't have to walk to the store If I had a dollars We'd take a limousine cause it costs more If I had a million dollars We wouldn't have to eat Kraft dinner But we would eat Kraft dinner Of course we would, we'd just eat more And buy really expensive ketchup All the fanciest Dijon ketchup

No

Phil Magness (05:36.809)

with it.

Keith Malinank (05:46.452)

If I had a million dollars If I had a million dollars Well I'd buy you a green dress But not a real green dress that's cruel And if I had a million dollars If I had a million dollars Well I'd buy you some art A Picasso or a Garfunkel If I had a million dollars If I had a million dollars

Well, I'd buy you a monkey. Haven't you always wanted a monkey? If I had a million dollars, I'd buy your-

Keith Malinank (06:34.166)

If I had million dollars. If I had a million dollars. If I had a dollars. If I had a million dollars.

No!

you

Five hundred million dollars!

Keith Malinank (06:54.04)

Bitch.

Keith Malinank (07:06.67)

One, two, three, four. One, two,

Go!

Keith Malinank (07:14.584)

me tell you how it will

Keith Malinank (07:21.518)

This one for you, nineteen for you

Phil Magness (07:30.658)

Yeah, I'm the type to mind

Keith Malinank (07:37.134)

25 % of beer too small

Bye!

Keith Malinank (07:44.78)

I don't take it

Keith Malinank (07:51.778)

text

Yeah, I'm the type

Phil Magness (08:00.11)

I'm

you try to sit down, I'll touch your seat If you get too cold, I'll heat you If you take a long I'll touch your feet

Phil Magness (08:24.932)

you

Phil Magness (08:33.004)

Yeah!

tight

Phil Magness (08:41.346)

you

If you don't turn me some

Because I'm the taxi

Yeah, I'm the tight smile

I advise for those who die

Phil Magness (09:10.924)

That's right!

You

Phil Magness (09:17.646)

Because

Yeah, I'm the type to run And you're working for no one but me

Phil Magness (09:35.374)

you

Phil Magness (09:48.75)

you

Keith Malinank (10:06.798)

you

Keith Malinank (10:12.706)

Hey, hey, hey, welcome to this edition of At the Mic. I am your host, Keith Malinak. It is time for our Thursday deep dive edition for the week. I appreciate, you know, my guest, Phil Magnus coming up here in a second, he retweeted this show. So hello to all of his followers who maybe don't normally hang out with us. I appreciate you being here. Well, what we do every Thursday is we take a topic, we do a deep dive. Today it's, I'm not proud of this, but.

It needs to be discussed, the history of the federal income tax, because you want to talk about something that affects every day of our lives. It's the income tax. And so we're going to talk about that momentarily. We also hang out here on Wednesdays and Fridays at 3 PM. Tomorrow is going to be kind of like a drink with Keith. If you remember that, hang out on the back patio. I don't know that I'm going to be on the patio, but it'll just be you and me. And yesterday, if you missed it on the Wild Card show, Stubergear, one of my

co-workers, former boss over at the Blaze. Stu Bregeer joined us to talk about his new venture, predictableshow.com. That's gonna be fun. That starts, what did he say? Next Wednesday, the 22nd, right? Yeah, 22nd? Yeah. So be checking out that on his YouTube channel, Stu Does America. Let's see, anything else I got for you here housekeeping wise? I think that pretty much gets us going here. my goodness, y'all. It's taking me longer and longer to remember to take the banners off. I'm so sorry.

I'm so sorry. Oh yeah, and if you're keeping score at home, zero days, zero shows without a barking dog. Tanner ruined that for us yesterday, so we'll see if he stays quiet today. Let me get Phil Magnuson up in here. And you know, Phil, I appreciate you making time, Absolutely. You're a smart guy. I'll say that. And I could go through all of your bona fides here. I will say senior fellow at the Independent Institute,

David J. Thoreau, Chair in Political Economy. I mean, he's got a PhD from George Mason. Oh, George Mason, one of our most underrated founding fathers. So, I mean, just you're a smart guy. I've seen you on with Matt Kibbe, another smart guy. And I thought, you know what? This guy knows his history. He wrote the 1619 Project Myth that has tried to completely change American history right before our eyes.

Keith Malinank (12:36.686)

So I wanted to get you in here and have a discussion about the fun and exciting topic that is the federal income tax. So thanks for making time, man. I appreciate it. I will say America, believe it or not, we existed without an income tax for, I don't know, 140 years or whatever it was. And we need to talk about not only the pre-income tax history of America,

Absolutely happy to be here.

Keith Malinank (13:03.436)

but the possibilities of going back to a predominantly tariff system that President Trump would like to do. But I don't know where you want to begin this story, Phil. I just want you to kind of take the reins, and I'll just jump in with questions as they come up in my head. How's that sound? Thank you. All right. Well, fire away. Where do you want to start?

Absolutely, sounds like a plan.

All right, so where did it all come from? And we go back to 1913, which was the year that we ratified the 16th Amendment to the Constitution and that legalized the federal income tax.

Yeah, yeah. mean, I was looking up before we did this discussion today, I said, when was the last time they taxed your income, the first time they ever taxed your income in world history? And of course, it was Britain. We inherited so much fun stuff from them. 1799 to go fight a war against France, which is what we did with the Civil War. But that was a short term boost for income into the federal coffers. And then we were done with it. And then the Supreme Court even said when they tried it again in the late 1800s,

struck it down and that's why they needed a constitutional amendment. So basically if you go to the original constitution, it only allows a limited number of taxes to be assessed. says taxes shall be, it's in article one, there's a clause that specifically says, imposts, excises and duties are the main forms of taxation. And these terms kind of sound antiquated, but what that basically means is,

Phil Magness (14:32.898)

Taxes assessed against domestic production like whiskey and tobacco. So like a sales tax essentially on whiskey and tobacco. It meant tariffs on goods from abroad. And then the final category, which we don't use much anymore, referred to things like the stamp tax that they had before the American Revolution, which was one of the major reasons why we revolted against the crown.

Right, right. The fact that the founders put in there, this is how you can tax. We get to the progressive era and by then, we're so much more enlightened. We're so much smarter than the founders. So let's find new sources of revenue. Just an abuse of reference, man.

Indeed.

Phil Magness (15:12.766)

Yeah, yeah. the changes do start to come about because it's in the 1890s when there's a Supreme Court case that rules, wait a minute, you cannot assess taxes on income at the federal level because this violates this clause of the Constitution. And it's a pretty complicated case. It goes way into the weeds of what terminology means and tax law. But they basically held an attempt to tax income could not be put through the federal level.

And what that meant is over the next decade or so, the income tax movement starts to emerge and seeks a constitutional amendment, a measure to change the constitution, to legalize that. And that's what they get in 1913, although it comes about in 1909 as kind of a backstory of a tariff fight. So President William Howard Taft was in office at the time, and he asked Congress to revise the tariff schedule.

Tariffs had funded the federal government as one of the main sources of revenue up until that point, but they also had a problem because they tended to attract really corrupt crony interests that all descended on Washington like locusts every time they revised the tariff schedule to get favorable rates for their home districts. So it's the origin of lobbying in America.

That's how we, that's the thing, man. It's that there's a system that is set up, it gets abused and the government rides in and says, well, we have a fix and it just creates more abuse and it's just this cycle of abuse. And who's the one getting beaten all the time? It's American taxpayer. And I'm glad you mentioned that this started with Howard Taft because ultimately, and we'll get to that point in the story, but I just, want to put up the both villains here. got a lot of them.

Right there's Tapp Wilson

Keith Malinank (17:02.518)

We're bookended here with villains here. Republican and starts the thing in 1909 and then it finishes up with Wilson, but there's a long road between there. And it's interesting that you said, one of the things I was reading was that, I guess the congressman who introduced the bill, I can't even remember who it was, but like he even said when he introduced it, oh, this will never pass. But they were doing it because Taft wanted them to.

And the Republicans are the ones that had the power. To stop it, yeah. Yeah, and they're the ones that not only did they just push it through, it was overwhelming,

and

Phil Magness (17:39.544)

Yeah, it was a solid majority. They have to get two thirds majority to pass each house of Congress and then they have to get all the states to ratify it. And it went through relatively easily because...

votes right here. to nothing in the Senate. 318 to 14 in the House.

Yeah.

Phil Magness (17:58.658)

Yeah, yeah. And really what they thought they were doing, so they were kind of sold a bill of goods because they thought they were reforming the tax system. The tariff lobbying efforts were so corrupt, they were like, all right, well, we can take corruption out of Washington if we just create this new form of doing taxation. So that was the big mistake that they made. And you read the original bill that emerges after 1913 is when it finally gets enough states to ratify. So Woodrow Wilson is in office by then.

they put the bill up. The original bill, the authors of it basically say this will only be a low and limited tax just to replace the tariff revenue.

and the, you know, it, kicked in at a very high threshold to even be eligible to it. I think it was about $3,000 in income, which if you adjust for inflation, that's wealthy today. A six figure, salary today.

And it was, what was it? 1 %?

1 % was where it started and then it ratcheted up to the multi-millionaire billionaire types, it ratcheted up to 7 % was the maximum rate. So it's next to nothing and they think, this will be more than sufficient to replace the tariff system. And it was for a couple of years. But then World War I breaks out. And Woodrow Wilson, remember, he's anticipating US entry into the war. He's actually kind of maneuvering the United States to that as

Phil Magness (19:26.83)

probably as early as 1917, maybe late 1916 or so. He is maneuvering us toward the war. So he says, well, we're going to need new tax revenue to pay for United States entry into the war, to make the world safe for democracy, was his famous line there. And he convinces Congress to raise the income tax rate. And they do so in a couple of different steps. So it's a succession of bills.

And they're pretty sizable hikes. It still mostly falls on the wealthy, so that threshold's still in place. But they raise the rates from like 7 % to above 60%, then above 70%, up to 80%. It's like really ridiculous hikes in rates. And they discover the government is suddenly flush with cash. Like all of this money, they didn't just need to replace the tariff revenue. They tripled and quadrupled the tariff revenue. And they're like, fun.

We have money to play with.

If I'm not mistaken, 50 years later, when Kennedy was president, and he wanted tax cuts, and thankfully after his death, they honored him and cut taxes. I think the highest rate I think got up to 97%.

Yeah, so we, FDR pushes it even further again during the Great Depression. You see this ratchet going on. It starts at a tiny little tax of only 7 % and then by the end of the decade, it's up in the 70 to 80 % territory. Now, Calvin Coolidge did manage to knock it back down to 25%. You got the Coolidge dollar there.

Keith Malinank (21:05.87)

That's my guy. That's right.

Yeah, so Zekulich brings it back down to earth again in the 1920s, although they never quite got it back to the original level. They had cut it to 7 % or eliminated it entirely. He got it down to 25%. Then the Great Depression breaks out and guess who? His successor Herbert Hoover goes on a spending spree as a way to counter the Great Depression. And he's trying to balance the budget. So in 1932, what does he do?

Isn't that fun?

Phil Magness (21:34.562)

he passes a big tax hike and raises the rates back up again to their Woodrow Wilson levels.

Yeah, it's just a cautionary tale here because this this always seems to Start so much with the the tax rate of the tax code and so on it's class warfare, right? Because that's where this whole thing started Originally with the tariff stuff, right? It was being abused and then it was like hey, let's get let's let's stick it to the rich people, right?

Because the claim was that, well, they found out that the lobbyists were often industrialists in the Northeast, and they were benefiting from all these favors in the tariff schedule. So it's like, well, let's tax them. And it turns out, like the first places the income tax amendments ratified are actually in the rural southern states. Yeah, yeah. There's a wave of rural southern states. They're like,

The manla first, you?

Phil Magness (22:32.556)

Finally, we can stick it to the Northeast and the rich fat cats in the Northeast because they may benefit from the tariff.

Yeah, right. It started in 1909, like you said, Alabama, Kentucky, South Carolina, Illinois, Mississippi. Those are your first five. was predominantly southern and western states. I just want to give a shout out. You want to talk about where did sanity flip? four states actually had their state legislatures vote against Connecticut, Rhode Island. What? Utah and Florida.

Yep. That's shocking. A few holdouts there. But yeah, I mean, it's actually kind of shocking just how quickly it was adopted. They thought, well, this is not controversial. It will never be abused. And it actually got so bad that by the end of the Woodrow Wilson administration, Senator Joseph Bailey of Texas, had been one of the original cheerleaders of the bill, comes out, he's retired by then and he gives a speech and at about 1919, 1920,

And he denounces the income tax that he had created a decade earlier. Wow. And says, we never intended rates to be this high. They're abusing it. This is not the system we wanted. Just completely repudiates it.

I feel like that's what happened with the Patriot Act too. I mean, do these guys not have any foresight whatsoever? Short answer, no.

Phil Magness (23:54.68)

Yeah, yeah.

Phil Magness (24:01.038)

Nope, the answer is no they don't. But you know, you got one of the authors of the original bill saying, wait a minute, you've gone too far. And I really the horse is out of the barn by this point. Yeah.

Yeah, I think this is a telling quote. I think one of the congressmen, the quote was something that the income tax was the only way idle wealth would ever pay its fair share of the growing cost of government. I mean, that's Marxism from today, right?

Yeah, I don't well, they have this obsession is like, like rich people don't do anything with their money.

It's maddening just to think that it's just the same tunes come back on the record player over and over and over again. And what's so frustrating is when you look at today, we can have a whole other discussion about spending and the federal government and all the fraud that's involved. But something that I heard the White House Deputy Chief of Staff Stephen Miller say the other day, I never really thought of this. It just kind of hit me like a ton of bricks.

I haven't sat down and done the math, but he said, if you get rid of all the fraud, then the income into the federal coffers would be enough to balance the budget every year. And then it occurred to me, holy crap, you know what? In my lifetime, just in the late 90s, we had a budget surplus for two years when we had a Democrat president and a Republican Congress. We can actually do this game.

Phil Magness (25:22.69)

Almost there.

Phil Magness (25:31.306)

In recent history, we have almost been there. And they also got very close to passing a balanced budget amendment, which has rained on a lot of this nonsense.

I knew you would know this answer, and you just reminded me of it. How long, is there a set time? Because you talked about how the state started to ratify quickly in 1909. long, does that last forever, right? Because I think there was, so once a state ratifies a constitutional amendment, any far out into the future that could still apply to that process for that specific amendment, correct?

In-

Phil Magness (26:07.022)

Four old amendments. So they started putting limits on them in the 1970s. Oh. Yeah. So anything before the 1970s that was a past amendment. There are a few dormant amendments out there. There's one from the 1800s that disqualifies people who have titles of nobility from the European crown, from holding office and stuff like that. And it's kind of like, all right, well, this is dormant because it's kind of antiquated.

but it's still technically out there and pending and if states wanted to come together and they can ratify that they could. So since the 1970s they started saying, well, wait a minute, we got to put a time limit on these things. it's the amendment would say if it attains enough state ratifications within 10 years of adoption. So that's the territory we're in right now.

Because I was a little bit concerned that that stuff was still hanging out there, know, if it was something really, really evil, because there's been some really interesting proposals in recent years. Okay, so Taft was president, the Republican president, Congress is Republican. And so, I mean, it's sailing along nicely. There's a sea change in our government in 1912. And Katie, bar the door, huh?

That's exactly it. So Taft, when he asked them to revise the tariffs, he was like, fine tune this for improving the revenue. They did this about every decade or so because the old rights would get outdated and you need to go through and refresh them. But the lobbyists descended and they moved in on the Senate side in particular in 1909. So the House did a quick approval of the bill. It had cronyism involved in it, but

the Senate really went overboard. And the person there was the Finance Committee Chair, Nelson Aldrich. And some of your listeners may know the name. He's also the guy that crafted the Federal Reserve bill. He's that guy. he really is a twirling mustache villain from that era. was actually Rhode Island. he's a wealthy.

Keith Malinank (28:17.804)

What state was he from? Any idea?

Phil Magness (28:24.974)

you know, upper class senator from Rhode Island looks like the Monopoly man with the throwing mustache and the top hat.

Phil Magness (28:55.761)

there we go.

Essentially, what's going on? Yeah, so Aldrich is the guy and he takes control of the tariff bill and then he just opens the floodgate to basically that type of a thing, passing money to get favors. And he goes so over the top that it causes two things. One, it sparks a backlash in his own party, in the Republican Party. So there's a breakaway group, they called them the insurgents and they basically...

Aldrich, they told him, you're going way overboard and rewarding your friends and cronies. So we're going to side with the Democrats who want this new income tax to replace your system. So you got that going on. And Aldrich does eventually get his tariff bill through. The voter backlash against it is so strong, it sweeps the Republican Party out of office in the next election. So in 1912,

and crap.

Democrats take all three, they take both chambers in the presidency. And that's right when the amendment is coming through to be ratified. Because Aldrich cut a deal. said basically, to save my tariff that I've given all my friends and cronies favors in, I'll also basically sponsor the income tax amendment and let you pass it through. And that was the deal that they struck. And we've been paying for it ever since, quite literally.

Keith Malinank (30:20.462)

Holy crap, I swear. mean, it's always these, just, when you can step back and look at history, it's like we live these cycles over and over again, whether it's the income tax, whether it's the great society, whether it's Obamacare, it's just to take a step back and watch how it's happening in front of us. It's just so demoralizing. So,

So cool. 1913. Wilson's inaugurated. The states. It's like the perfect storm, man.

storm, they get the Federal Reserve and then they pass this low income tax. Then World War I comes along, they ratchet it up and it never quite goes back down to earth. And then every successive president after Coolidge, it's let's expand this thing, let's expand it further, let's expand it even more. So Herbert Hoover, he raises taxes to pay down all of his deficit spending, he had public relief programs for the Depression.

Franklin Roosevelt runs for office and says, I'm going to come into office and balance the budget and rein in the excesses of Herbert Hoover's spending. I mean, there are elements of that that come in there. But Roosevelt gets into office. He doesn't really have a plan. He doesn't know what he's doing. It's the great secret of it. But he discovers, well, wait a minute. I can create this thing called the New Deal. It'll be politically popular. And I use the government to do all these payouts to every industry and call it relief programs.

Which he does and he passes all that through because he sweeps into office But then he realizes wait a minute who's going to pay for all this stuff He turns around and does the exact same thing Hoover did and says we need to raise taxes even more

Phil Magness (32:10.134)

So the whole decade of the 1930s and well into World War II, and that's the next phase of the story, FDR is ratcheting the tax rates up even further to pay for all his New Deal spending programs. Didn't you get World War II that breaks out?

you

always have a reason. We always have a reason to raise the rates, And see, that's the thing though. And I want you to talk about how World War II plays into this and buckle up for defense spending, y'all. It's like, I haven't played SimCity in forever, but when I was a kid, I would play that stuff. Like bathroom breaks be damned. was just playing SimCity around the clock.

And when you needed a shot of cash, you would raise the rates to the highest level for a year or two. then you would go and you'd build stuff and play. And I needed to repair some roads. But the population would run away. And so that would screw you up because then you had to get the taxes back to a normal level to attract people to come back in. Well, are we leaving the greatest country to ever exist? I don't think so. mean, the states are their own experiments, obviously.

Bye!

Keith Malinank (33:22.786)

But we're gonna stay in this country.

we're going to stay in, especially at a time when the rest of the world's facing Nazism and stuff. That's exactly what happened at the eve of World War II. FDR has run out of options on how to soak the rich. He's raised rates up into 80 % and higher on the top brackets. But remember, the original system, it had that high exemption threshold.

Thanks.

Keith Malinank (33:33.538)

They have us!

Phil Magness (33:54.37)

were basically lower and middle class people didn't have to pay federal income.

I'm so glad you said that.

And that had mostly been retained. They did expand a little bit into the upper middle class, but that had mostly been retained from the original income tax bill in 1913. So in the outbreak of World War II though, suddenly the government needs much more money to basically fight the war, defense spending, all of the elements of that come into play.

And FDR goes back to Congress again and says, well, we need a wartime tax measure to deal with this situation. And they pass a succession of bills. And basically what they do is they keep the rates high on the rich people, but they remove that exemption threshold. So now everybody pays the income tax, the rich and the poor as well.

Right.

Phil Magness (34:50.586)

And they reduced it to just very low level. So basically anyone that was making any full-time salary at doing anything now has to pay income tax. And then in 1943, they made it even more insidious. discovered, you know, if you're at the bottom of the income bracket and you're right at the threshold of whether you want to pay or not, and the tax form arrives, it's self-reported. And let's say you made a thousand dollars in income and that made you eligible.

But if I report $975 in income instead of $1,000 in income, I don't have to pay income taxes. Well, you've got a very low audit risk if you're in that category. Auditors only care if the Rockefellers and the Treasury Fords are cheating on their taxes. They don't care if the auto mechanic or the grocery store clerk or who's

I

Phil Magness (35:46.85)

that the

I know, right. And now you get to do your taxes in addition to withholding, but let's stop right there because I want to point out that you made a great point there. So 1943 is when everybody gets skin in the game. As opposed to, this is how quickly things can change in just a generation. when the income tax passes with Woodrow Wilson, and then by the time FDR, we've gone from 98 % of Americans

were not paying any income. It was stick it to the rich and then it became everybody.

not paying income tax.

every then it's like 90 % plus now have to pay it.

Keith Malinank (36:47.118)

And you mentioned Rockefeller there. This is fascinating. The first year of the federal income tax, $71 million went to the federal government. D. Rockefeller accounted for $2 million of that $71 million. so, mean, pretty clear what the aim was there. So, okay, you've got us to 1943. Now that's the Revenue Act, right?

Gorgos taxpayer.

Keith Malinank (37:16.398)

That's what really changes everything. So what happens between the relationship between all Americans and the government at that point?

Now, not only is everybody paying taxes, if you are making money in the private sector, you are paying taxes. Now, there were some other real weird twists in there. Until 1939, there was a strange clause that actually exempted public employees at the state and local level from having to pay income taxes.

isn't that every freaking time if I mean same thing with insider trading right up to today they're exempt in fact listen salary the president's salary was exempt

Yeah, yeah.

Phil Magness (37:59.161)

And if you think about it, this is the reason why they finally had to repeal it because of backlash in 1939. Plus FDR was like, all right, finally, I want to get some get more money. But they discovered that, you think public employees, you're thinking, oh, maybe the local construction worker and the public works department, the teacher, you know, people that are kind of middle class or lower, lower middle class incomes. But they discovered university presidents.

at public universities with these massive salaries were exempt from paying taxes. So they have a congressional hearing and they're like, well, why is the president of the state university system, who's a very wealthy guy, exempt from taxes? he's a public employee.

Ha ha!

So they had to get rid of that. But by 1943, everybody more or less is paying income taxes. They did to ease the process and make it politically popular. So they really appealed the patriotism as like we're doing this because of the war. And they also put in an exemption that said, if you're a soldier in the army and you're all fighting the war, you don't have to pay taxes on your income.

Seriously, I honestly don't understand why that's not a thing today. Why is the military? mean, there's a risk in their lives.

Phil Magness (39:21.378)

Yeah, if you were in a combat zone, it made sense. that's why it, but you think about it, most of the male workforce in the United States now is diverted over to the war effort. So they aren't there being taxed as an auto mechanic or a grocery store clerk or just a normal job. They're all fighting the war and their taxes are free. Meanwhile, Congress is putting through what would otherwise be this unpopular measure back at home.

Mm-hmm.

Phil Magness (39:50.222)

So they use the war to really get it through and then the war ends in 1945 but the income tax stays around. That's again the same theme keeps playing out. It's like we do this for the war, we do this for the depression, we do this for the temporary measure and then it just never goes away.

I'm sorry. just I apologize. I'm just over here seething and I you know what else comes to mind is FISA That if I'm not mistaken Members of Congress and maybe their staffs are exempt from 702. I need to I need to double-check that but I

Phil Magness (40:28.384)

notorious for carving out exceptions.

I'm so sick of it. It's the same thing with Obamacare, like I said, insider trading. It's just it's one thing after another. it's like there have been so many reasons in 250 years to get out in the streets. I don't know that we're ever going to do it again for some of the things, especially if you go back to 2020 and 2021. If we're not going to get out in the streets for vaccine mandates, I don't know when we'll ever do that. But I digress.

I mean, it's like maybe the Boston Tea Party was a one-time deal. One hit, one- There's our hurrah moment.

Yeah, here's a quote from Wilson by the way on the income tax. We need to abolish everything that bears even the semblance of privilege. But I would like to juxtapose that with the check that everybody had to write yesterday. Did that feel like a... If I hadn't written that check after a year's worth of withholding, the privilege, I would just be overwhelmed with all privilege that I've got in my lap.

Bye.

Keith Malinank (41:36.854)

All right, where are we now? We're into World War II and we're still getting screwed.

Yeah, so the high rate structure remains. And the next major reform comes about in 1954. And there's kind of backlash after the wars, like, why aren't you reducing taxes? Well, and the answer was that Congress had a lot more money in peacetime to spend on. Plus, you have the Cold War emerging between the United States and the Soviet Union. So the defense contractors, the military industrial complex, as Eisenhower called it.

emerges and they are more than ready to take up public contracts on all sorts of spending.

We always have a always have an excuse man. Yeah, we all tax them then you're must be a commie

Support Pyr-

Phil Magness (42:23.662)

Yeah. So what they do, but nonetheless, taxes were, these high rates were pretty unpopular after the war. in 1954, what they did is they overhauled the tax code and they decided, you know, they were going to leave the rates more or less in place, but to give people relief, they came up with all these exemptions and deductions and special carve outs. And some of them we still have today. So one of the things they did in 1954,

is they created a bunch of tax incentives for employers to offer health benefits. And this replaced a component of the old income tax system where you could either record and deduct your medical expenses. So they kind of internalized that. essentially what's happened to the American medical industry has been all the result of that tax privilege in 1954.

You see where I'm going, it didn't work out so well. It like set the stage for Obamacare. They also put in a bunch of deductions that allowed you to like business travel and personal home office expenses. And some of these deductions were really broad. the interesting thing that happens here is by the end of the reform package in 1954,

Everyone has a sticker rate of the tax that they're supposed to pay for their income that's written on the statute books. And then they have an actual rate, the effective rate of what they're really paying. And the sticker rate and the effective rate, they start to diverge. So it would say you're taxed at the 80 % bracket, but you're really paying about a 50 % bracket because of all the exemptions and deductions. And this is the way that they staved off popular revolt against

post-World War II tax system is they just gave everybody a chance to deduct. And if you're making any sizable amount of income, well, what could you do? By the end of the 60s, early 70s, you started seeing all these schemes popping up everywhere. It's like, take a cruise ship to Hawaii. And if you attended a real estate investing seminar on board the ship, you could deduct your entire trip as a business expense.

Keith Malinank (44:39.768)

Hahaha!

So that came about and you look at the newspapers in that era, like cruise the world tax free. And so people started deducting their vacations because they would attend the real estate seminar or a business convention for one day and then vacation for a month. it's exemptions and loopholes that are put in there. There was a famous case where there was a guy that

deducted music lessons to play the flute or the clarinet or something. And he claimed that it was research for his dental business because he was a dentist and he was trying to figure out how music affected his teeth or something. And the IRS comes in and says, all right, okay, you can deduct that. So there's all sorts of just crazy things that happen. And by the mid century, he got

really high rates on the statute books, the average rich person is paying 40 to 50 % was their real rate.

That's incredible, And look, the dentist guy playing the flute or what have you there, I'm not mad at him. I'm actually mad at him. that's kudos to you. I wish I were that smart. I mean, Donald Trump himself, remember that 2016 debate with Hillary? He even says, look, because she's trying to, I'm going to get him. He doesn't pay enough taxes. Hey, these are rules that you guys created. I'm just following them. Back off.

Phil Magness (46:12.098)

It was all legal throughout. And the IRS was actually fairly generous. mean, you go on for dozens of pages of books about all these weird little exemptions that they had. this takes place. So again, you mentioned John F. Kennedy. He actually does call for a tax cut in 1963. And I think it was part of the State of the Union or another one of those big speeches he gives. And he says, well, we need to modernize the tax system. This is

It's too high. It's an economic drag. And we want to be competitive in the world. This is essentially one of the more free market things you've gotten out of Kennedy.

about to say if you go back and listen to some of his speeches during his presidency you think what party was this guy in again.

Yeah, yeah. He's defending free enterprise. says, we need to do this to free up our economy so we can outcompete the Soviet Union, basically. And you know, he's assassinated, but they carry through the policy had already been in the works and they do pass the tax cut. And what it does is it consolidates those rates down, it braches down. It's not an extreme tax cut in the sense, but it moves like

the 90 % plus rate drops down to maybe like 70 % on the books. But still you have generous exemptions. It's a move in the right direction. It's kind of like what Coolidge did in the 1920s is they took an exorbitant tax system and they consolidated it and pushed it down closer to earth again. Yeah, the point is

Keith Malinank (47:44.568)

mean, it's Overton window. At that point, you're at 97 % and some margins, you're like, OK, 70 is pretty good, you know?

Yeah, this is what's so shameful is, is it is ridiculous as all of this is in this history that you're laying out for us. It's not near enough for the appetite that Washington DC has and

There's relationship appetite to spend and the federal government is, you know, they always want more. So that's been the great problem is no matter how bountiful the income tax is, they always manage to outspend what it raises.

Yeah, and so we get the 60s. I guess the next tax cuts not until Reagan, right?

Yeah, so you get two successive tax cuts when Reagan comes into office. And the interesting thing here, he does two things. One is he actually gets the rates back down to earth again. think he lowered it down to 28 % was the bottom, that he brought the top rate down to 28%. It's gone up a little bit since then, but it's still in the neighborhood of where Reagan bumped it down to. And the second thing, part of the deal, and I actually think it was good for efficiency reasons.

Phil Magness (49:08.898)

is he cut a deal with the Democrats and said, okay, if we're going to cut the rates, let's get rid of all these deductions and exemptions and crazy real estate scheme, cruise ship carve outs and all of that mess. So when they passed the Tax Reform Act, the second of the two bills, they basically consolidated everything down and said, we're getting rid of the loopholes.

We're cutting the rates down, bringing them back down to earth. It'll simplify the tax code. That way people actually know what they're paying. It says right there on the sticker. And as a result, we should get economic growth because we're still having a net reduction in the overall tax burden. And it succeeded. Washington still had a spending problem because if you remember, simultaneous to Reagan doing this, he signed the Graham-Rudman Act.

which was an attempt to bring the budget deficit down. It triggered automatic cuts to programs if they didn't hit their budget targets. And that bill, well, you know what happens? It was challenged in court. Part of it's kind of gutted by the Supreme Court. And then the next time the deadlines come up for the automatic cuts to take place, Congress just votes against it and they over target. They exempt themselves. So they go spending again. You do get to the 1990s.

Bill Clinton does raise taxes a bit, but it's not like back to the FDR levels. It's moving from 28 % up into the 30s, kind of where we are today. But at the same time, with the Republican Congress, they come together and they actually finally balance the budget for a brief moment.

And then and then it's Yeah, then it's off to to the middle east fight wars and it's that that's about the time that NGOs discover how to how to abuse the system through the Democrat Party and and The trough is open again. and then that's where that leads up to the insanity that we face today I mean the original the original these are fun facts here. The original 1040 form was just four pages long

Phil Magness (50:50.968)

Then it's off to the races.

Phil Magness (51:17.669)

Right.

And that includes a title!

Keith Malinank (51:24.97)

It's madness, man. Let's see, the tax code, let's see, four pages, now it feels, oh yeah, the tax code itself was only four pages long. And now it feels, how many volumes of books stacked up are we at now?

but not even gets it in thousands when you'll get all these manuals that the IRS has released on how to apply each clause and code.

see here's here's more fun in quotes fun facts the top one percent of earners pay over 35 percent of all federal income tax while the top 50 percent pay 97 percent again top one percent the richest one percent are paying more than a third of all federal income taxes the top 50 percent pay 97 percent i'm tired of hearing they don't

They're for sure. In fact, they shoulder almost the entirety of the government.

I don't think that a lot of people understand what a graduated tax system does and how Marxism and its evil roots dig in. And the more you earn, the higher the rate. In other words, I'm surprised how many people don't realize that at the lower end of the income, you're paying a lower rate. And then the tax burden for you goes up. There's no incentive.

Keith Malinank (52:40.75)

to really continue to do really well because the higher you get, the more the government gets percentage-wise. It's absolute madness, man. Why do we tolerate this, Why?

Yeah. Yeah. It's, it's an absolute wildness of it. But yeah.

Okay, so yeah, all right. So before we got to the whole income tax fund, 1913, we had the tariff situation. is it, I have this theory and I have no idea how accurate it is, but I have this theory that during the 2024 campaign, President Trump,

Keith Malinank (53:20.778)

had to have been either he read a book from the 1800s about the tariff system or he had a great talk with someone that explained it to him because that really became his thing and it lasted into the second term. And so I guess, you help us kind of get to that mindset of the 1800s? And is going back to that a strictly tariff system? Are we just in a painful transition phase right now?

where he keeps sticking tariffs on everybody. And at the same time, we're still looking at April 15th on the calendar as a punishment day. Thank you, sir. May I have another? Is it viable to think that we could just exist on tariffs again?

Well, and that's the risk here. I pointed out when Trump started floating this idea of, we'll replace the income tax with tariffs. First off, I'm like, yeah, I want to replace the income tax. But what I warned at the time, if you don't repeal the 16th Amendment first, you get stuck with both. That's just the reality of it, because government never gives up revenue, if it's willingly at least. You have to get rid of the tax mechanism. So what differed in the 19th century and before,

Yes, sir.

Phil Magness (54:32.556)

It all goes back to the founding and the Constitution. Remember, the Constitution only allows certain types of taxes, duties, imposts, and excises. Those are the three categories permitted in that clause. Well, duties, imposts, and excises encompasses tariffs. So it becomes one of the predominant sources of revenue in the 19th century. And the reason why is because they weren't allowed the tax directly. They weren't allowed to take your income away. Supreme Court keeps striking it down.

as it happened in the 1890s when they attempted it. So as a result, your tax system is constitutionally constrained to just a few simple items, tariffs, then as I mentioned, excise revenue off of mostly whiskey, tobacco, things that the federal government taxed out of domestic production.

So if you're writing an amendment, and I'm sure it's already out there floating around, that would switch us back over to just tariffs exclusively. Like you can, I'm asking, I'm not saying. Can you write the amendment to cancel, to eliminate the 16th Amendment? Can it be written into a, okay, we're doing tariffs and this amendment when it passes will revoke the, or is it a separate vote? Any idea?

I don't want to put you out here, but I just I'm just trying to figure out if can you kill two birds with one stone and one?

You potentially could, I mean, if it was crafted in such a way. basically have to, so what the 16th Amendment does is it legalizes taxation on income as an additional category. And those ones that are spelled out in the Constitution, says, so that's essentially how they did it. You know, there are other types of direct taxation that are not on income. So like a wealth tax, even though Elizabeth Warren floats it today, it would probably be unconstitutional.

Keith Malinank (56:16.365)

Hey.

Phil Magness (56:30.126)

Because the 16th Amendment only says you can tax income. doesn't say you can tax wealth.

right right right that that's a whole and that i i mean it's laughable but it's terrifying at the same time when hear people say well we should just tax your capital gains elon musk bro hasn't even cashed out that stock

Yeah, I realize capital gains

Unreal, thank you. I check my stats every day. Are you saying when I have a good day? Is that when I write the damn check every day? What are we doing here? It's just insane. The fact that it's even discussed among the politicians.

They don't understand what they're doing and they clearly haven't read the Constitution or the 16th Amendment because it doesn't permit Congress to do that.

Keith Malinank (57:13.646)

When would that stop them? Yeah. So I mean, So what is the solution? And I really don't know your answer to this. Is it the fair tax? Is it a national sales tax? Is it just go back to the tariff system? Is it to just fix the income tax system? What does Phil Magnus think is the solution to our income fairness problem here?

In an ideal world, if we could go back to the 1890s tariff system, abolish the income tax amendment, but that would also require cutting federal spending to 1890s levels of federal spending when we did generally come pretty close to balancing our budget in most years. I don't think there's a political will today to cut federal spending like that. either it's going to be forced by a national debt crisis or a

see change and congressional ideas where you bring balanced budgets back onto the table and pass a balanced budget amendment and something like that.

Hold up, I have a question. Sure. 40 trillion in debt and that number isn't static. That doesn't count outlays. So I'm just curious, when do we reach crisis levels with our spending problem if we're not already there,

Yeah, that's the great thing. one of the big concerns they see is the interest payments to sustain and service the debt, they continue to grow. So it can get actually very, very large. And there's all sorts of accounting trickery that can be done to spread that out. But one thing you can't get away from at the end of the day is there's going to be some sort of interest payment on the to service the debt itself. And that's every year that becomes a bigger and bigger part of the federal budget.

Phil Magness (59:03.15)

And what it means is your tax revenue is going in, it's just paying off the minimum interest. As long as you get a credit card and you only pay the minimum payment every month and your credit card keeps accruing, you're going to be in a problem at some point. We don't know exactly when, but it doesn't get better if that's your strategy.

Right, America, I got news for you. We don't have a rich uncle that we're waiting for him to keel over and leave his estate to us. This is bad, man. And it affects the cost of everything, too. I don't think people realize that everything is connected. it's, this audience realizes it. And the people that read your stuff, mean, they understand that. But I'm talking about the population in general is just like, you put a microphone on a camera and some randos on the street's face.

and ask them, do you think that the rich pay their fair share? No, I don't. should raise their rate. You moron. Do you realize that it's the rich people that enable you to have a job so you can go in and buy video games for your large screen TV that you bought? I guess, it's frustrating as hell, man. It's just a class warfare. And it just, it feels like we're on the losing end. And it doesn't feel like.

Well, yeah, it's the same old bad arguments. They keep coming back over and over again is the problem. And it's like, yeah, you're, you're whackable. keep refuting them and you know, a of years later, they're back again.

Yeah.

Keith Malinank (01:00:22.518)

Yeah.

Keith Malinank (01:00:27.116)

Okay, so I guess our to-do list is to repeal the 16th Amendment, gotta get rid of the income tax, and then what? Go back to the tariff system and let Trump do what he wants with that, guess? I guess, sorry, let Congress do this? I don't

So Congress would really need to step in there.

Yeah, codify this stuff if that's how we're to do this. But then we need a balanced budget amendment, right? And to keep everything in check. I still don't know how we're paying off the debt though in all this scenario. But I mean, it's just do we have, is there anybody, and I'm asking you, if there's any person that has the political will to really push this stuff and see it through, I don't know, Thomas Massey, Rand Paul, I mean, who really cares this much?

about the U.S. debt and the national deficit.

Right now, unfortunately, I mean, you just name the only people in Congress that seem to raise it on a recurring basis and they always get voted down. Both parties are offenders here. Republicans and Democrats have been spending like crazy and they'll always blame the other one. But you look at the history of it, every new administration, doesn't matter who's in, they spend more than the last.

Keith Malinank (01:01:43.32)

Say that again, it's very important.

Yeah, every new administration spends more than the last in recent memory.

and it doesn't matter what party they're in. That's a fact, yeah. man, I tell you, this is, mean, it's important to have these kinds of conversations because we have to know our history or we're gonna repeat it and boy, we sure as hell do every day. And I just wanted to, exactly what you did there. I wanted you to take us through the history of the income tax and get us right into today. And it's just incredible how

This cycle just repeats itself on so many fronts. It's frustrating, it's history that we need to know and understand so that when you're having these conversations and you're trying to change hearts and minds, you know where we came from so that hopefully we don't keep going back there. Well, my goodness. But before we go, though, I want to make sure that people know about your book, The 1619 Project Myth, because this is something that book.

You want to talk about taking our history or that project, the 1619 project, where we're basically we're going to brainwash kids into hating this country and every aspect about it. Explain what your book, The 1619 Project Myth is all about.

Phil Magness (01:03:02.958)

Well, it is a refutation of the New York Times, the 1619 project. As you mentioned, you this was the big thing that they rolled out in 2019 is this reimagining of American history around the story of slavery. And it came with a complete packet of like school curricula. had a Hulu documentary series attached to it, books.

They're so organized, Phil.

ads, everything just to promote this. they dumped millions upon millions of dollars into this massive project that they were doing. And yet its basic message was, the founding was tainted by slavery. America got wealthy out of exploiting the slaves. Therefore, in the modern day, we need redistributive taxation to end capitalism, to make recompense.

to all the people that America has victimized in the past. So even though it's a history project, but it's really just dressing up a political agenda of kind of like socialistic, well, free distribution. So it has an income tax angle in it. Nicole Hannah Jones, creator of the 1619 project, one of her big things is we need to rewrite the tax system to extract more from the rich to pay those who are descendants of the victims of slavery.

And that was the full extent of their political agenda is in the present day, but using the past. And what I do is I go through and refute it line by line, myth by myth, including documenting with pretty strong evidence that slavery does not become the engine that makes America wealthy. If anything, slavery, that portion of the country lagged behind the entire remainder of the country.

Phil Magness (01:04:50.746)

in its industrialization and its economic might. And it's precisely because slavery is like this medieval throwback of a system in addition to being morally horrendous. It's just not a very good way to produce things.

Right, right. Yes. I would encourage people to check out that book, The 1619 Project Myth, because just because it's not being talked about in the news cycle every five minutes like it was a few years ago, it's still happening in your kid's school. They're still getting brainwashed. And maybe they change the window dressing and they don't say that they're teaching The 1619 Project. They're definitely teaching the components of it. If you're not at the school board meetings or talking to your teachers.

your kids teachers, your kids principals, and this book would do a great job at pushing back on that, 1619 Project Myth. Phil, I got your ex handle up there, at Phil W. Magnus. Is there other places that people need to know where you hang out?

It's independent.org, which is our main website.

Okay, independent.org. Well, I appreciate it, man. I appreciate you spending time with us. We gotta have you back on again sometime. I'll say that to the audience, I have no idea what you can expect next Wednesday, but Thursday, the deep dive, Scott Horton will be here and we'll go over all of the lies that got us into the Iraq war. I mean, we got a lot of things to talk about coming up here. So I wanted to just give you a sneak peek on next week. And then tomorrow,

Keith Malinank (01:06:19.102)

We're just hanging out y'all. But Phil, thank you so much for making time. appreciate everybody hanging out here. ATMshow.com if you need to catch up on shows. And thanks again, Phil. I appreciate it,

Sounds good.