July 2, 2024 • 26 mins
In this enlightening episode of the Teaching Tax Flow podcast, hosts John and Chris delve into the history of U.S. taxes, providing a timely reflection given the Independence Day holiday. Episode 90 offers a fascinating journey through the evolution of the U.S. tax system, from its early introduction during the Civil War era to the complexities of the current Tax Cuts and Jobs Act (TCJA) of 2017. The conversation also touches upon the future of tax policies with looming elections, making it a must-listen for anyone keen on understanding how past and present tax laws impact future strategies.
The hosts begin by setting the historical stage, explaining how the U.S. Constitution granted Congress the power to levy taxes and highlighting the Revenue Act of 1861, which introduced the first federal income tax to finance the Civil War. They discuss the evolution of the tax system through significant events such as the Revenue Act of 1913, which established a graduated income tax, and the high tax rates during World War I. Key legislative acts under Presidents Reagan, Obama, and Trump are explored, emphasizing how each administration's tax policies reflected their broader economic philosophies.
Key Takeaways:
- First Federal Income Tax: Introduced by the Revenue Act of 1861 to finance the Civil War, with a 3% tax rate on income over $800.
- Evolution to Graduated Tax System: The Revenue Act of 1913 marked a shift to a graduated income tax system, introducing tax rates from 1% to 7%.
- Significant Tax Reforms: Major tax reforms under Presidents Reagan (1986), Obama, and Trump (2017) significantly altered tax rates and structures, reflecting their economic visions.
- Modern Tax Environment: The TCJA of 2017 reduced corporate tax rates from 35% to 21%, simplified personal taxes, and introduced the Qualified Business Income Deduction.
- Future Tax Planning: With the TCJA set to sunset in 2026 and upcoming elections, understanding current tax laws and planning accordingly is crucial.
Notable Quotes:
- "Taxes are on sale right now under the Tax Cuts and Jobs Act of 2017." – Chris Picciurro
- "The U.S. tax system is very complicated; many people from foreign countries look at our tax system and just shake their heads." – Chris Picciurro
- "We have to understand that tax agencies are your involuntary business partner." – Chris Picciurro
- "By the way, if anybody knows their CPA, some of them are very, very cut and dry. Chris is not. He's very modern." – John Tripolsky
- "We are truly at a crossroads with the tail end of the TCJA and the upcoming presidential election." – Chris Piccurrio
Episode Sponsor:
Integrated Investment Group
- (00:04) - The History and Purpose of US Taxes
- (01:55) - A Lighthearted Discussion on History, Hot Dogs, and Independence Day
- (05:20) - The Evolution and Impact of US Tax Laws
- (09:04) - The Evolution of Federal Income Tax Rates in the United States
- (12:30) - Tax Laws, Consumer Behavior, and Al Capone's Infamous Tax Evasion
- (14:34) - The Evolution of Tax Policies from Bush to Biden
- (18:56) - The Evolution of the US Federal Tax Code from 1913 to 2010
- (20:43) - Understanding Tax Rates and Strategies for Legal Tax Reduction
- (23:10) - Humorous and Bizarre Tax Facts from Various States
- (26:06) - Educational Insights on Tax, Investment, and Legal Advice
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro (00:04):
Welcome to the Teaching Tax Flow podcast where the goal
is to empower and educate you tolegally and ethically minimize
taxes paid over your lifetime.
John Tripolsky (00:16):
Hey there, taxpayers. Welcome back to the
podcast, episode 90 today.That's right. We're only 10 away
from episode 100. We got alittle special surprise for you
come 102.
Not even gonna talk about thatthough, but today we're gonna
dive into the history of UStaxes. Taxes. So very fitting
given the holiday. But before wedo that, let's take a brief
(00:37):
moment as always and thank ourepisode sponsor.
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John Tripolsky (01:29):
Hey, everyone. Welcome back to the podcast as
mentioned here in the intro.Obviously, you've heard what
we're gonna talk about today,and we are gonna talk about
history, just a hair, and thepurpose of US taxes. So we're
not gonna be talking about whatthe Aussies are paying, the
Canadians necessarily, whatthey're doing over this you
know, over seas across the pond.Although we might bring them up
(01:49):
a little bit.
Got a fun little fact regardingthose guys and gals. But talking
history, Welcome back to theshow, Chris Pacquero, the guy
I've known for a the 2 and ahalf decades ish. But how's it
going, man? You ready for this1? Well, yeah.
Chris Picciurro (02:04):
Isn't a score 20 years? Oh, good. 4 score 20
yeah. I thought a score was 20years. Maybe we could we could
check that.
John Tripolsky (02:14):
That's a good question. Yeah. Let's look let's
verify this, actually. This isyou know, as funny as it is
because we're gonna talk abouthistory. Right?
And I can't say that I am ahistory buff by any stretch of
the imagination, but I am alwaysinterested in it because, you
know, it kinda makes me feelkinda makes me feel smarter in
some conversations when you candrop these nuggets. Right? Like,
(02:35):
totally unrelated. But ifanybody wants to really amaze
people at the dinner table, lookup how to actually squeeze a
ketchup bottle. Completelydifferent than you think it may
be.
It's a well, I
Chris Picciurro (02:47):
know that the ketchup bottle back in the back
in the day when they're glass,you'd have to tap the 57 on the
Heinz 57 and get the ketchupout. I used to work at a
restaurant as a busboy anddishwasher, and once in a while,
the ketchup would not come outof the bottle.
John Tripolsky (03:01):
Oh, I'm gonna I'm gonna bust that out 1 day.
Next time we get together, I'mjust gonna grab a knife, start
pounding the bottom of thatthing. Either that or people are
gonna think we're just you know,we think we're at a wedding or
something. I don't know. Alittle clink clink noise.
But
Chris Picciurro (03:13):
Well, when you think about hot dogs, you know,
it's like it's 4th July weekhere, independence day. I think
about there's always the debateof what goes on a hot dog. I
mean, to me, it's ketchup andmustard. I could go if I'm at a
baseball game, it's mustardonly. But a hot dog with ketchup
only is kinda,
John Tripolsky (03:33):
you know? Yeah. It's kinda weird. It's half
American. It's half American.
Speaking of, score.
Chris Picciurro (03:41):
It is 20 years, John. So we've known each other
for 1 score. Hey. It's prettyCongratulations.
John Tripolsky (03:47):
Yeah. 111.25 score. I'm gonna update my
LinkedIn and put that on there.But let so Yeah. So that's free.
And and this is funny. Soeverybody that's listening to
this and you've listened to anumber of our episodes. Right?
We we tend to take it kindaserious, but we have a good time
doing these podcasts. Right?
So this 1, I had to kinda twistCuro's arm here a little to do.
(04:13):
Because as I always say, and Iknow I know it annoys the crap
out of him sometimes, let's say,you know, let's do it. Let's
figure it out as we go. So youit's very, very hard to say that
to a numbers guy, by the way. Ifanybody knows their CPA, some of
them are very, very we won't saystraight laced, but they are
very cut and dry.
(04:33):
Chris is not. I mean, he's he'svery modern, we'll say. You're
not you're not your normal guy,but some of these, he's like,
nope. It's it's gonna be it'sgonna be difficult, but I don't
give a crap. I do the editing.
So there
Chris Picciurro (04:45):
you go. Exactly. Well, so history so we
figured it's Independence Day.Let's talk a little bit about
the history of taxes. And someof the sometimes we forget 1 of
the 3 laws of teaching tax flow.
We have to understand that taxagencies are your involuntary
business partner, which meansthat a portion of your income
(05:11):
gets paid to your businesspartner. The Internal Revenue
Service on the federal sidecould be a state. It could be a
local city, county, and tax lawsare written to encourage or
discourage certain behavior. Weknow that certain, industries,
certain types of income are moretax advantaged. So we're gonna
(05:34):
kinda dive into that because theUS tax system is very
complicated.
Many people from foreigncountries that look at our tax
system just shake their head andsay, what in God's green earth
are you guys doing over there?
John Tripolsky (05:50):
And these But Oh, no.
Chris Picciurro (05:52):
Go ahead. We're gonna dive into it. We're gonna
dive into it. We're gonna talk alittle bit about the history of
of tax here. Then we're gonnabring in more modern, over the
last score, for instance, andthen look at the environment we
are in right now.
We're truly at a crossroads. Weare under the in the in the tail
end of the last third of the TaxCuts and Jobs Act of 2017. And
(06:16):
we have a big election coming upin the United States, a
presidential election, which aswe know, congress and senate
trickle down from that. And thiselection is a huge pivot point
in our tax structure. So we'regonna talk about that.
We're also gonna do some specialthings in the fall where we're
gonna dive into eachpresidential candidate's tax
(06:38):
plan. And dive but that's thefuture. We're gonna talk about
history today.
John Tripolsky (06:42):
Yeah. See, we're we're we're looking forward
talking back, I guess, today.Right? So and and kinda looking
at you know, let let's start. Wewon't go too far back.
Because obviously, again, we'rewe're focused on US based tax
history. I mean, we could goback to the darn Romans if we
wanted to. And, you know, if,their taxes probably, you know,
(07:03):
you pay with a hand or orsomething crazy where, you know,
you're kicked off a cliff. Butlooking at the United States of
America. Right?
And and, Chris, I I believe I'mon this correctly. I do have to
admit though, again, not being atotal history buff, I cannot
give citations on all of thesefacts because they were found
(07:23):
online, and some of themprobably aren't the most
credible considering some of thestuff that I looked up on Google
and dates, things were spelledwrong. So anytime there's a
spelling error, it completelyshoots the credibility out the
window for me. But if I rememberright too, this 1 I'm not
looking up in front of me, but Ibelieve federal taxes were
actually created by or put inplace or call promoted by Abe
(07:47):
Lincoln back in the day. And andif I remember right, there was
really to help fund the civilwar, if I'm not mistaken.
So that was kind of the firstyou know, we're not talking tea
party tax here. We're talking USput in place and implemented
tax. Is is that correct?
Chris Picciurro (08:03):
Right. So the US constitution in when it was
ratified in 17/89 grantedCongress the power to levy
taxes. So Congress is, rememberthat Congress is the the the law
they are the lawmakers and partof that power is to write tax
(08:24):
law. It's not the president,it's not the judicial branch, it
is Congress. So Congress hasgiven the power to levy taxes,
and they levy all sorts oftaxes: payroll, income, tariffs,
excise, estate, etcetera,etcetera.
So that power was given in17/89, but it really wasn't used
(08:49):
until the civil war. So tofinance the war, there was
something called the revenue actof 18/61, and that introduced
the 1st federal income tax.John, do you wanna guess what
that that tax rate was?
John Tripolsky (09:04):
Oh, jeez. It was probably up there. I'd imagine.
Right? I mean, a lot of notes,it was probably pretty low
pretty low back then, all thingsconsidered.
Chris Picciurro (09:15):
It was 3% on your of any of your income over
$800. So the standard deductionwas $800, a flat rate of 3%, and
that was to fund the war. Sothat's really where the the
federal income tax got started,and then it obviously grew from
there. In in 1913, part of the16th amendment was the revenue
(09:41):
act of 19 13, and this was a bigpivot point. We went from a flat
rate of 3% to a graduated incometax system with rates from 1% to
7%.
And guess what? We are still ina graduated income tax system.
What that means is that thehigher your taxable income is,
(10:02):
the higher rate of tax you payon that income. Now listen to
this 1, Johnny t. When World War1 was going on, the United
States needed to raisesignificant amount of money.
So if you're listening to thisand you're upset about your tax
rate, the tax top tax rate in1918 was 77%.
John Tripolsky (10:25):
Holy moly. So we're doing alright.
Chris Picciurro (10:28):
That is huge. Oh, we are and I've talked about
this quite a bit. Right now, ifyou are listening to this, under
the Tax Cuts and Jobs Act of2017, taxes are on sale. This is
the time to potentially, if youhave a taxable event that's
looming over the next 5 to 10years, to consider, as long as
(10:50):
you have the cash to pay thetax, accelerating that event.
Obviously, you should work witha tax planning professional and
a tax strategist to make surethat makes sense for you, but
taxes are on sale right now.
So, obviously, we are not in aabout a 100 years ago, we were
(11:10):
in a 77% tax rate environment.Tax reform occurred and taxes
ultimately went down. There's ahuge pivot point again under the
Tax Reform Act of 1986. Yes,John, I had a hairdo at that
point. I was in 5th grade.
And under president Reagan, alot of things changed. Our
(11:33):
depreciation schedules changed.Our passive activity loss,
passive activity rules changed,which pertains to real estate.
But the top individual tax ratein 1986 was 50%, and that top
rate went from 50% to 28%. Oh,pretty significant.
So very significant. We're notand I know that we're the most
(11:56):
of the listeners are pretty areprobably too young for this. And
quite frankly, I don't remembertons of this growing up, but I
remember there's that that termReaganomics, which in trickle
down economy, which basicallythe theory was that Ronald
Reagan felt was that, hey,reduce the taxes as much as
possible. They got reduced byalmost 50% because if people
(12:19):
have more money, they willactually spend money and put it
back into the economy, and theywill use it in a wiser fashion
than the government. So theconsumption by the consumer will
ultimately create a more faireconomic environment, And in
general, people will consumemore if they have more in their
(12:41):
pocket.
John Tripolsky (12:42):
And some of the I have tons of tons of little
fun facts. You know, we could wecould pick at certain states a
little bit. But I thinksomething that's super relatable
to everybody too. And, you know,Chris, back to our, our kind of
glowing, highlight that wealways make a teaching tax law
about, you know, tax laws arewritten to encourage and
discourage certain behavior. Wecan't forget about, mister
(13:05):
Capone from Chicago.
Right? Mister mister Chicagopizza man is, you know, some
people call him. But, again,we'll make fun of certain
cities. Being from Michigan,it's very easy to poke fun at
other states that surround us.But, I mean, Capone I mean,
again, I didn't know the guy,but, you know, he, he knocked a
handful of people, off thecensus, shall we say, but did
(13:29):
not go to jail for that.
The IRS is actually who took himdown. I think they sent him to
prison for, you know, 11 or 12or 15 years or something out in
California, for tax evasion.Right? So that's probably the
best Exactly. Most popularexample of the power of the IRS
in SummerGuard.
Right?
Chris Picciurro (13:49):
Absolutely. That's that's pretty that's a
famous fact, and, and it'scorrect. So we get into the 21st
century, right, and again,there's just theoretical
differences on how we shouldtax, how America should tax tax
tax its taxpayers. That is aThat's
John Tripolsky (14:13):
a tongue twister.
Chris Picciurro (14:15):
Correct. So as I got into this business in, you
know, 2, 000, 2, 007, 2, 008, wewere under what are called the
Bush tax cuts, where there werethere was a Growth Tax Relief
Reconciliation Act of 2, 003.Now that lowered tax rates. That
(14:36):
reduced capital gains, increasedchild tax credits, and,
ultimately, was, again, anotherlower tax environment. Then when
president Obama was elected,they he changed some things up
as well.
And some of the Bush Air taxcuts were made permanent, but
(15:00):
then there are also some somechanges to the what we call the
ACA, Affordable Care Act, thatmandated, people have a certain
type of health insurance andpenalize people significantly
based on your income incompanies, also, if they had a
certain amount of employees fornot being ACA compliant. Now,
(15:23):
2017 comes along, Donald Trumpwins election, he signs the Tax
Cuts and Jobs Act, TCJA, That'swhat we are in right now, and it
really overhauled the tax code.What it was try what this act
was intended to do was tosimplify things. And some say it
did simplify things, some say itdidn't. But, personally, I think
(15:45):
it simplified personal taxes andI think a complicated business
tax.
The corporate tax rates, a lotof people don't understand that
corporations, c corporations,pay a tax on their net income.
And that after they pay theirtax, so let's say General Motors
or Tesla, if it has net income,it has to pay a tax on that and
(16:09):
then from the remaining money,it can pay dividends to its tax
to its owners, to itsshareholders. Well, that
corporate tax rate was 35%before Tax Cuts and Jobs Act.
Tax Cuts and Jobs Act reducedthat corporate tax rate down to
21% because they wanted it tomore mirror a personal tax rate.
(16:31):
It also increased the standarddeduction, but it yet it limited
many deductions that that peopleused to take.
So for instance, unreimbursedemployee business expenses,
moving expenses, those sort ofthings were taken off the table
and it limited your SALT taxdeduction, state and local
income tax deduction. So taxrates went down significantly,
(16:54):
and that's the era we are now.We also have something called
the qualified business incomededuction, or QBI. That's also
known as section 199a. Sobusinesses are well, actually,
individuals can now obtain up toa 20% of net income deduction.
There are phase outs. There arerules based on their business
income. Finally, John, then wehad COVID hit. Right? The
(17:16):
pandemic hit in 2020.
President or Donald Trump wasnot the president anymore. Joe
Biden was a who is our currentpresident is was a president,
and he signed the AmericanRescue Plan Act, created the,
you know, the, the employerretention tax credit, which
(17:37):
created the economic impactpayments to people and to try to
keep our economy going. And andnow we're here now. So,
ultimately, like I said, thetheme is, if you're listening,
taxes are currently on sale.What is important is to make
sure you understand what thelaws are currently so the Tax
(18:00):
Cuts and Jobs Act sunsets in2026.
Depending on the electionresults, it could get extended,
it could be made permanent, orit could go away when it's
expected to go away. It would betough to probably repeal it. So
that's where you have to reallylook at your situation and
(18:20):
determine how you're going totax plan.
John Tripolsky (18:24):
And we always talk about tax planning. Right?
It's it's something that a lotof people don't know what it is
until they realize that theydon't know it. And then, I mean,
we're talking about taxes beingon sale. Right?
I think, again, disclaimer, Idon't know how true a 100% of
these are, but if you think youryour job is, you know, easier
now than it was back in the dayor anybody does, put your hands
(18:48):
in, in, we'll call, accountantbecause who knows how long the
CPA, call it accreditationlicense title, has been given.
But I'm seeing here, right, thatlooking all the way back to
1913. Okay? So we're going backa 100 plus years. I I won't even
say Chris had hair back then.
(19:08):
Chris wasn't around back then,obviously. But so I see here the
US tax code, right, was 400pages long in 1913. That's 400
pages. That's longer than mostbooks I've ever read. I mean,
maybe some textbooks in college.
Well, to be honest, I didn'tread those either. No. You
(19:28):
didn't. What? Come on.
I never read those things. I toobad AI is not around or wasn't
around when I'm when I wasthere. Although, let's say that,
you know, unrelated too. I kindaam a little bit jealous when
some students were around maybea year ago, year and a half ago
when AI started to get into itbefore all the professors and
everybody knew what it was. Youjust look like a genius.
(19:49):
But back to 19 13, 400 pages inthe US federal tax code.
Basically, the pub is I think werefer to it as now. I'll pause
for a second, and everybodyguess how many pages are in in
today's. Right? Even lookingback at 2010, I think, is what
it references.
400 in 1913, 70, 000 now. Yeah.I mean, you That's crazy.
Chris Picciurro (20:12):
And it's not easy reading. It's just not easy
reading. So let's think aboutthis when we're talking about
how to plan for taxes. And as asI've said a 1000000 times on
this episode already, taxes areon sale. So I wanna just talk
through as we wrap it up whatour tax rates are looking like
(20:33):
today versus where they were at6 years ago, pre TCGA, A couple
of things I wanna mention.
Understand that different typesof income are taxed at different
rates. Some income is taxed onyour net income, rental income
business, some is taxed on yourgross income, interest income,
dividends, W-two wages. So youdefinitely wanna be taxed at net
(20:56):
income. But when we talked aboutfederal tax rates let's talk
about the corporate tax ratesfirst. I mentioned that the
maximum corporate tax rate was35% before Tax Cuts and Jobs
Act.
That it started you know, thatcorporate tax rate starts at
15%, but it got in it as as highas 35. Now it's a flat 21%.
(21:17):
Someone that was a marriedcouple with a adjusted or
taxable income of $190, 000would have been in the 28%
marginal tax bracket. Nowthey're in the 22% marginal tax
bracket. A married couple with$80, 000 of taxable income would
(21:39):
have been in this 25% tax bracktax bracket, and now they're in
the 12%.
So my point is, really dive in.If you're listening to this, you
have a personal invitation tojump into teaching tax for our
educational library, which iscomplimentary, and learn about
(22:00):
what how to calculate yourmarginal tax rate and figure out
what strategies you shouldimplement to legally and
ethically reduce the tax you'repaying in your lifetime. And
once you start getting thatknowledge, then we can start
talking about, well, bonusdepreciation and research and
development credits and the taxadvantage of owning real estate
and the section 121 exclusionand the Augusta rule. All those
(22:22):
are really cool tools that youcould put in your tool belt, but
you first have to understandthat that this is you know, that
these laws are written toencourage incur discourage
certain behavior. Some of thatbehavior is financial, It's
quite frankly, some of it issocial.
John Tripolsky (22:42):
And then, Chris, too, as as we wrap up here,
right, I'll I'll kinda end uswith some some more funny facts.
We won't even call them fun.We'll call them funny. And
they're not federal. These aremore state.
Right? So if somebody's listenedto this, I am not responsible
for the milk or water or pop orany beverage coming out of your
nose because some of these arekinda ridiculous. Not to mention
(23:04):
1 thing that I see here is thatCanadian cereal companies
receive a tax break for puttinga toy inside the box. Kinda
weird, but okay. Oh.
Interesting. So there's theCanadian knowledge. So here's a
couple things. So here here is 1federal 1. Okay.
In 1987, the IRS began requiringtaxpayers to list their
dependent's Social Securitynumber on returns. Again, I
(23:25):
don't know if that's a 100%correct. But that being the
case, it is mentioned that 7,000, 000 children vanish from
tax returns when they requiredthat. So who would've who
would've thunk? Right?
So it's at least once a yearsomeone asks, maybe, with tongue
in cheek, can I deduct my pet?Ultimately, people were putting
their pets on
Chris Picciurro (23:45):
their tax return as a dependent until they
started requiring a SocialSecurity number, and that's
exactly what happened. 7, 000,000, 000. They were in the
house. It didn't say chose it.It said dependents.
John Tripolsky (23:57):
Very true. And speaking of things being worded
incorrectly. Right? So again,now these are a couple state.
Was it I got 4 of them here?
I'll I'll breeze it reallyquick. So Madison Square Garden.
Right? The entertainmentfacility, we'll call it, in New
York. Okay?
It looks like they were exemptfrom property taxes since 1942
only because I mean, the term ofthe agreement looks like it was
(24:19):
for 10 years long because it wasworded incorrectly. So as long
as the Rangers and the Knicksare playing there, they're
actually property tax exempt forexistence because of miswording
of something. So, again, kindakinda different from, you know,
we're not talking US based, butthese are US cities and state.
Same thing as, you know,Washington. Right?
State of Washington, bottledwater is taxable. However, if
(24:43):
you can convince a doctor togive you a prescription, you can
request a sales tax refund. Sokinda interesting. New Mexico,
you no longer have to pay, stateincome tax, it looks like, once
you turn a 100 years old. So youcan be old and cheap at the same
time.
(25:03):
You'd be good. And then Texas,this 1 was kinda funny. It's
kind of a stinky 1. Texas lookslike they charge a sales tax on
deodorant, but not onantiperspirant because the FDA
requires a a drug facts label tobe on there. So I don't know if
that's, you know, specific toTexas or not, but it sounds
legit.
(25:24):
And then it looks like here,Pennsylvania charges an an 18%
flood tax for every bottle ofalcohol sold. The law was
originally designed to helprebuild Johnstown after the
flood of 1936, but still remainsin effect today. So as long as
people are paying the tax, youknow, why pope to bear? But just
reading some of these, I thoughtwere kind of funny. So I know,
(25:45):
Chris, thank you for for divinginto the history here.
We can kinda say, you know,class is no longer in session.
Everybody's free to go. Yourattendance has been recorded and
documented, and we appreciateit. But as always, we'll see
everybody back here next week onthe Teaching Tax Flow podcast.
Disclaimer (26:06):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(26:28):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
Welcome to the Teaching Tax Flow podcast where the goal
is to empower and educate you tolegally and ethically minimize
taxes paid over your lifetime.
John Tripolsky (00:16):
Hey there, taxpayers. Welcome back to the
podcast, episode 90 today.That's right. We're only 10 away
from episode 100. We got alittle special surprise for you
come 102.
Not even gonna talk about thatthough, but today we're gonna
dive into the history of UStaxes. Taxes. So very fitting
given the holiday. But before wedo that, let's take a brief
(00:37):
moment as always and thank ourepisode sponsor.
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John Tripolsky (01:29):
Hey, everyone. Welcome back to the podcast as
mentioned here in the intro.Obviously, you've heard what
we're gonna talk about today,and we are gonna talk about
history, just a hair, and thepurpose of US taxes. So we're
not gonna be talking about whatthe Aussies are paying, the
Canadians necessarily, whatthey're doing over this you
know, over seas across the pond.Although we might bring them up
(01:49):
a little bit.
Got a fun little fact regardingthose guys and gals. But talking
history, Welcome back to theshow, Chris Pacquero, the guy
I've known for a the 2 and ahalf decades ish. But how's it
going, man? You ready for this1? Well, yeah.
Chris Picciurro (02:04):
Isn't a score 20 years? Oh, good. 4 score 20
yeah. I thought a score was 20years. Maybe we could we could
check that.
John Tripolsky (02:14):
That's a good question. Yeah. Let's look let's
verify this, actually. This isyou know, as funny as it is
because we're gonna talk abouthistory. Right?
And I can't say that I am ahistory buff by any stretch of
the imagination, but I am alwaysinterested in it because, you
know, it kinda makes me feelkinda makes me feel smarter in
some conversations when you candrop these nuggets. Right? Like,
(02:35):
totally unrelated. But ifanybody wants to really amaze
people at the dinner table, lookup how to actually squeeze a
ketchup bottle. Completelydifferent than you think it may
be.
It's a well, I
Chris Picciurro (02:47):
know that the ketchup bottle back in the back
in the day when they're glass,you'd have to tap the 57 on the
Heinz 57 and get the ketchupout. I used to work at a
restaurant as a busboy anddishwasher, and once in a while,
the ketchup would not come outof the bottle.
John Tripolsky (03:01):
Oh, I'm gonna I'm gonna bust that out 1 day.
Next time we get together, I'mjust gonna grab a knife, start
pounding the bottom of thatthing. Either that or people are
gonna think we're just you know,we think we're at a wedding or
something. I don't know. Alittle clink clink noise.
But
Chris Picciurro (03:13):
Well, when you think about hot dogs, you know,
it's like it's 4th July weekhere, independence day. I think
about there's always the debateof what goes on a hot dog. I
mean, to me, it's ketchup andmustard. I could go if I'm at a
baseball game, it's mustardonly. But a hot dog with ketchup
only is kinda,
John Tripolsky (03:33):
you know? Yeah. It's kinda weird. It's half
American. It's half American.
Speaking of, score.
Chris Picciurro (03:41):
It is 20 years, John. So we've known each other
for 1 score. Hey. It's prettyCongratulations.
John Tripolsky (03:47):
Yeah. 111.25 score. I'm gonna update my
LinkedIn and put that on there.But let so Yeah. So that's free.
And and this is funny. Soeverybody that's listening to
this and you've listened to anumber of our episodes. Right?
We we tend to take it kindaserious, but we have a good time
doing these podcasts. Right?
So this 1, I had to kinda twistCuro's arm here a little to do.
(04:13):
Because as I always say, and Iknow I know it annoys the crap
out of him sometimes, let's say,you know, let's do it. Let's
figure it out as we go. So youit's very, very hard to say that
to a numbers guy, by the way. Ifanybody knows their CPA, some of
them are very, very we won't saystraight laced, but they are
very cut and dry.
(04:33):
Chris is not. I mean, he's he'svery modern, we'll say. You're
not you're not your normal guy,but some of these, he's like,
nope. It's it's gonna be it'sgonna be difficult, but I don't
give a crap. I do the editing.
So there
Chris Picciurro (04:45):
you go. Exactly. Well, so history so we
figured it's Independence Day.Let's talk a little bit about
the history of taxes. And someof the sometimes we forget 1 of
the 3 laws of teaching tax flow.
We have to understand that taxagencies are your involuntary
business partner, which meansthat a portion of your income
(05:11):
gets paid to your businesspartner. The Internal Revenue
Service on the federal sidecould be a state. It could be a
local city, county, and tax lawsare written to encourage or
discourage certain behavior. Weknow that certain, industries,
certain types of income are moretax advantaged. So we're gonna
(05:34):
kinda dive into that because theUS tax system is very
complicated.
Many people from foreigncountries that look at our tax
system just shake their head andsay, what in God's green earth
are you guys doing over there?
John Tripolsky (05:50):
And these But Oh, no.
Chris Picciurro (05:52):
Go ahead. We're gonna dive into it. We're gonna
dive into it. We're gonna talk alittle bit about the history of
of tax here. Then we're gonnabring in more modern, over the
last score, for instance, andthen look at the environment we
are in right now.
We're truly at a crossroads. Weare under the in the in the tail
end of the last third of the TaxCuts and Jobs Act of 2017. And
(06:16):
we have a big election coming upin the United States, a
presidential election, which aswe know, congress and senate
trickle down from that. And thiselection is a huge pivot point
in our tax structure. So we'regonna talk about that.
We're also gonna do some specialthings in the fall where we're
gonna dive into eachpresidential candidate's tax
(06:38):
plan. And dive but that's thefuture. We're gonna talk about
history today.
John Tripolsky (06:42):
Yeah. See, we're we're we're looking forward
talking back, I guess, today.Right? So and and kinda looking
at you know, let let's start. Wewon't go too far back.
Because obviously, again, we'rewe're focused on US based tax
history. I mean, we could goback to the darn Romans if we
wanted to. And, you know, if,their taxes probably, you know,
(07:03):
you pay with a hand or orsomething crazy where, you know,
you're kicked off a cliff. Butlooking at the United States of
America. Right?
And and, Chris, I I believe I'mon this correctly. I do have to
admit though, again, not being atotal history buff, I cannot
give citations on all of thesefacts because they were found
(07:23):
online, and some of themprobably aren't the most
credible considering some of thestuff that I looked up on Google
and dates, things were spelledwrong. So anytime there's a
spelling error, it completelyshoots the credibility out the
window for me. But if I rememberright too, this 1 I'm not
looking up in front of me, but Ibelieve federal taxes were
actually created by or put inplace or call promoted by Abe
(07:47):
Lincoln back in the day. And andif I remember right, there was
really to help fund the civilwar, if I'm not mistaken.
So that was kind of the firstyou know, we're not talking tea
party tax here. We're talking USput in place and implemented
tax. Is is that correct?
Chris Picciurro (08:03):
Right. So the US constitution in when it was
ratified in 17/89 grantedCongress the power to levy
taxes. So Congress is, rememberthat Congress is the the the law
they are the lawmakers and partof that power is to write tax
(08:24):
law. It's not the president,it's not the judicial branch, it
is Congress. So Congress hasgiven the power to levy taxes,
and they levy all sorts oftaxes: payroll, income, tariffs,
excise, estate, etcetera,etcetera.
So that power was given in17/89, but it really wasn't used
(08:49):
until the civil war. So tofinance the war, there was
something called the revenue actof 18/61, and that introduced
the 1st federal income tax.John, do you wanna guess what
that that tax rate was?
John Tripolsky (09:04):
Oh, jeez. It was probably up there. I'd imagine.
Right? I mean, a lot of notes,it was probably pretty low
pretty low back then, all thingsconsidered.
Chris Picciurro (09:15):
It was 3% on your of any of your income over
$800. So the standard deductionwas $800, a flat rate of 3%, and
that was to fund the war. Sothat's really where the the
federal income tax got started,and then it obviously grew from
there. In in 1913, part of the16th amendment was the revenue
(09:41):
act of 19 13, and this was a bigpivot point. We went from a flat
rate of 3% to a graduated incometax system with rates from 1% to
7%.
And guess what? We are still ina graduated income tax system.
What that means is that thehigher your taxable income is,
(10:02):
the higher rate of tax you payon that income. Now listen to
this 1, Johnny t. When World War1 was going on, the United
States needed to raisesignificant amount of money.
So if you're listening to thisand you're upset about your tax
rate, the tax top tax rate in1918 was 77%.
John Tripolsky (10:25):
Holy moly. So we're doing alright.
Chris Picciurro (10:28):
That is huge. Oh, we are and I've talked about
this quite a bit. Right now, ifyou are listening to this, under
the Tax Cuts and Jobs Act of2017, taxes are on sale. This is
the time to potentially, if youhave a taxable event that's
looming over the next 5 to 10years, to consider, as long as
(10:50):
you have the cash to pay thetax, accelerating that event.
Obviously, you should work witha tax planning professional and
a tax strategist to make surethat makes sense for you, but
taxes are on sale right now.
So, obviously, we are not in aabout a 100 years ago, we were
(11:10):
in a 77% tax rate environment.Tax reform occurred and taxes
ultimately went down. There's ahuge pivot point again under the
Tax Reform Act of 1986. Yes,John, I had a hairdo at that
point. I was in 5th grade.
And under president Reagan, alot of things changed. Our
(11:33):
depreciation schedules changed.Our passive activity loss,
passive activity rules changed,which pertains to real estate.
But the top individual tax ratein 1986 was 50%, and that top
rate went from 50% to 28%. Oh,pretty significant.
So very significant. We're notand I know that we're the most
(11:56):
of the listeners are pretty areprobably too young for this. And
quite frankly, I don't remembertons of this growing up, but I
remember there's that that termReaganomics, which in trickle
down economy, which basicallythe theory was that Ronald
Reagan felt was that, hey,reduce the taxes as much as
possible. They got reduced byalmost 50% because if people
(12:19):
have more money, they willactually spend money and put it
back into the economy, and theywill use it in a wiser fashion
than the government. So theconsumption by the consumer will
ultimately create a more faireconomic environment, And in
general, people will consumemore if they have more in their
(12:41):
pocket.
John Tripolsky (12:42):
And some of the I have tons of tons of little
fun facts. You know, we could wecould pick at certain states a
little bit. But I thinksomething that's super relatable
to everybody too. And, you know,Chris, back to our, our kind of
glowing, highlight that wealways make a teaching tax law
about, you know, tax laws arewritten to encourage and
discourage certain behavior. Wecan't forget about, mister
(13:05):
Capone from Chicago.
Right? Mister mister Chicagopizza man is, you know, some
people call him. But, again,we'll make fun of certain
cities. Being from Michigan,it's very easy to poke fun at
other states that surround us.But, I mean, Capone I mean,
again, I didn't know the guy,but, you know, he, he knocked a
handful of people, off thecensus, shall we say, but did
(13:29):
not go to jail for that.
The IRS is actually who took himdown. I think they sent him to
prison for, you know, 11 or 12or 15 years or something out in
California, for tax evasion.Right? So that's probably the
best Exactly. Most popularexample of the power of the IRS
in SummerGuard.
Right?
Chris Picciurro (13:49):
Absolutely. That's that's pretty that's a
famous fact, and, and it'scorrect. So we get into the 21st
century, right, and again,there's just theoretical
differences on how we shouldtax, how America should tax tax
tax its taxpayers. That is aThat's
John Tripolsky (14:13):
a tongue twister.
Chris Picciurro (14:15):
Correct. So as I got into this business in, you
know, 2, 000, 2, 007, 2, 008, wewere under what are called the
Bush tax cuts, where there werethere was a Growth Tax Relief
Reconciliation Act of 2, 003.Now that lowered tax rates. That
(14:36):
reduced capital gains, increasedchild tax credits, and,
ultimately, was, again, anotherlower tax environment. Then when
president Obama was elected,they he changed some things up
as well.
And some of the Bush Air taxcuts were made permanent, but
(15:00):
then there are also some somechanges to the what we call the
ACA, Affordable Care Act, thatmandated, people have a certain
type of health insurance andpenalize people significantly
based on your income incompanies, also, if they had a
certain amount of employees fornot being ACA compliant. Now,
(15:23):
2017 comes along, Donald Trumpwins election, he signs the Tax
Cuts and Jobs Act, TCJA, That'swhat we are in right now, and it
really overhauled the tax code.What it was try what this act
was intended to do was tosimplify things. And some say it
did simplify things, some say itdidn't. But, personally, I think
(15:45):
it simplified personal taxes andI think a complicated business
tax.
The corporate tax rates, a lotof people don't understand that
corporations, c corporations,pay a tax on their net income.
And that after they pay theirtax, so let's say General Motors
or Tesla, if it has net income,it has to pay a tax on that and
(16:09):
then from the remaining money,it can pay dividends to its tax
to its owners, to itsshareholders. Well, that
corporate tax rate was 35%before Tax Cuts and Jobs Act.
Tax Cuts and Jobs Act reducedthat corporate tax rate down to
21% because they wanted it tomore mirror a personal tax rate.
(16:31):
It also increased the standarddeduction, but it yet it limited
many deductions that that peopleused to take.
So for instance, unreimbursedemployee business expenses,
moving expenses, those sort ofthings were taken off the table
and it limited your SALT taxdeduction, state and local
income tax deduction. So taxrates went down significantly,
(16:54):
and that's the era we are now.We also have something called
the qualified business incomededuction, or QBI. That's also
known as section 199a. Sobusinesses are well, actually,
individuals can now obtain up toa 20% of net income deduction.
There are phase outs. There arerules based on their business
income. Finally, John, then wehad COVID hit. Right? The
(17:16):
pandemic hit in 2020.
President or Donald Trump wasnot the president anymore. Joe
Biden was a who is our currentpresident is was a president,
and he signed the AmericanRescue Plan Act, created the,
you know, the, the employerretention tax credit, which
(17:37):
created the economic impactpayments to people and to try to
keep our economy going. And andnow we're here now. So,
ultimately, like I said, thetheme is, if you're listening,
taxes are currently on sale.What is important is to make
sure you understand what thelaws are currently so the Tax
(18:00):
Cuts and Jobs Act sunsets in2026.
Depending on the electionresults, it could get extended,
it could be made permanent, orit could go away when it's
expected to go away. It would betough to probably repeal it. So
that's where you have to reallylook at your situation and
(18:20):
determine how you're going totax plan.
John Tripolsky (18:24):
And we always talk about tax planning. Right?
It's it's something that a lotof people don't know what it is
until they realize that theydon't know it. And then, I mean,
we're talking about taxes beingon sale. Right?
I think, again, disclaimer, Idon't know how true a 100% of
these are, but if you think youryour job is, you know, easier
now than it was back in the dayor anybody does, put your hands
(18:48):
in, in, we'll call, accountantbecause who knows how long the
CPA, call it accreditationlicense title, has been given.
But I'm seeing here, right, thatlooking all the way back to
1913. Okay? So we're going backa 100 plus years. I I won't even
say Chris had hair back then.
(19:08):
Chris wasn't around back then,obviously. But so I see here the
US tax code, right, was 400pages long in 1913. That's 400
pages. That's longer than mostbooks I've ever read. I mean,
maybe some textbooks in college.
Well, to be honest, I didn'tread those either. No. You
(19:28):
didn't. What? Come on.
I never read those things. I toobad AI is not around or wasn't
around when I'm when I wasthere. Although, let's say that,
you know, unrelated too. I kindaam a little bit jealous when
some students were around maybea year ago, year and a half ago
when AI started to get into itbefore all the professors and
everybody knew what it was. Youjust look like a genius.
(19:49):
But back to 19 13, 400 pages inthe US federal tax code.
Basically, the pub is I think werefer to it as now. I'll pause
for a second, and everybodyguess how many pages are in in
today's. Right? Even lookingback at 2010, I think, is what
it references.
400 in 1913, 70, 000 now. Yeah.I mean, you That's crazy.
Chris Picciurro (20:12):
And it's not easy reading. It's just not easy
reading. So let's think aboutthis when we're talking about
how to plan for taxes. And as asI've said a 1000000 times on
this episode already, taxes areon sale. So I wanna just talk
through as we wrap it up whatour tax rates are looking like
(20:33):
today versus where they were at6 years ago, pre TCGA, A couple
of things I wanna mention.
Understand that different typesof income are taxed at different
rates. Some income is taxed onyour net income, rental income
business, some is taxed on yourgross income, interest income,
dividends, W-two wages. So youdefinitely wanna be taxed at net
(20:56):
income. But when we talked aboutfederal tax rates let's talk
about the corporate tax ratesfirst. I mentioned that the
maximum corporate tax rate was35% before Tax Cuts and Jobs
Act.
That it started you know, thatcorporate tax rate starts at
15%, but it got in it as as highas 35. Now it's a flat 21%.
(21:17):
Someone that was a marriedcouple with a adjusted or
taxable income of $190, 000would have been in the 28%
marginal tax bracket. Nowthey're in the 22% marginal tax
bracket. A married couple with$80, 000 of taxable income would
(21:39):
have been in this 25% tax bracktax bracket, and now they're in
the 12%.
So my point is, really dive in.If you're listening to this, you
have a personal invitation tojump into teaching tax for our
educational library, which iscomplimentary, and learn about
(22:00):
what how to calculate yourmarginal tax rate and figure out
what strategies you shouldimplement to legally and
ethically reduce the tax you'repaying in your lifetime. And
once you start getting thatknowledge, then we can start
talking about, well, bonusdepreciation and research and
development credits and the taxadvantage of owning real estate
and the section 121 exclusionand the Augusta rule. All those
(22:22):
are really cool tools that youcould put in your tool belt, but
you first have to understandthat that this is you know, that
these laws are written toencourage incur discourage
certain behavior. Some of thatbehavior is financial, It's
quite frankly, some of it issocial.
John Tripolsky (22:42):
And then, Chris, too, as as we wrap up here,
right, I'll I'll kinda end uswith some some more funny facts.
We won't even call them fun.We'll call them funny. And
they're not federal. These aremore state.
Right? So if somebody's listenedto this, I am not responsible
for the milk or water or pop orany beverage coming out of your
nose because some of these arekinda ridiculous. Not to mention
(23:04):
1 thing that I see here is thatCanadian cereal companies
receive a tax break for puttinga toy inside the box. Kinda
weird, but okay. Oh.
Interesting. So there's theCanadian knowledge. So here's a
couple things. So here here is 1federal 1. Okay.
In 1987, the IRS began requiringtaxpayers to list their
dependent's Social Securitynumber on returns. Again, I
(23:25):
don't know if that's a 100%correct. But that being the
case, it is mentioned that 7,000, 000 children vanish from
tax returns when they requiredthat. So who would've who
would've thunk? Right?
So it's at least once a yearsomeone asks, maybe, with tongue
in cheek, can I deduct my pet?Ultimately, people were putting
their pets on
Chris Picciurro (23:45):
their tax return as a dependent until they
started requiring a SocialSecurity number, and that's
exactly what happened. 7, 000,000, 000. They were in the
house. It didn't say chose it.It said dependents.
John Tripolsky (23:57):
Very true. And speaking of things being worded
incorrectly. Right? So again,now these are a couple state.
Was it I got 4 of them here?
I'll I'll breeze it reallyquick. So Madison Square Garden.
Right? The entertainmentfacility, we'll call it, in New
York. Okay?
It looks like they were exemptfrom property taxes since 1942
only because I mean, the term ofthe agreement looks like it was
(24:19):
for 10 years long because it wasworded incorrectly. So as long
as the Rangers and the Knicksare playing there, they're
actually property tax exempt forexistence because of miswording
of something. So, again, kindakinda different from, you know,
we're not talking US based, butthese are US cities and state.
Same thing as, you know,Washington. Right?
State of Washington, bottledwater is taxable. However, if
(24:43):
you can convince a doctor togive you a prescription, you can
request a sales tax refund. Sokinda interesting. New Mexico,
you no longer have to pay, stateincome tax, it looks like, once
you turn a 100 years old. So youcan be old and cheap at the same
time.
(25:03):
You'd be good. And then Texas,this 1 was kinda funny. It's
kind of a stinky 1. Texas lookslike they charge a sales tax on
deodorant, but not onantiperspirant because the FDA
requires a a drug facts label tobe on there. So I don't know if
that's, you know, specific toTexas or not, but it sounds
legit.
(25:24):
And then it looks like here,Pennsylvania charges an an 18%
flood tax for every bottle ofalcohol sold. The law was
originally designed to helprebuild Johnstown after the
flood of 1936, but still remainsin effect today. So as long as
people are paying the tax, youknow, why pope to bear? But just
reading some of these, I thoughtwere kind of funny. So I know,
(25:45):
Chris, thank you for for divinginto the history here.
We can kinda say, you know,class is no longer in session.
Everybody's free to go. Yourattendance has been recorded and
documented, and we appreciateit. But as always, we'll see
everybody back here next week onthe Teaching Tax Flow podcast.
Disclaimer (26:06):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(26:28):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
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