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Ron Shafer: I think there’s still a great curiosity about what the wealthy pay in taxes and what they’re paying in terms of paying their fair share, but nobody really knows for sure what individuals are paying.
Stephanie Kelton: Welcome to the Best New Ideas in Money, a podcast from MarketWatch. I’m Stephanie Kelton. I’m an economist and a professor of economics and public policy at Stony Brook University.
Charles Passy: And I’m Charles Passy, a reporter at MarketWatch.
Stephanie Kelton: Each week we explore innovations in economics, finance, technology, and policy that rethink the way we live, work, spend, save, and invest.
Charles Passy: Tax season can bring a lot of anxiety. It can cause us to dive deep into our finances and hold ourselves accountable. But imagine this, what if on top of all your usual tax worries, you had to think about your return being made public?
Stephanie Kelton: Are you talking to me? Do you want to see my tax return?
Charles Passy: No, no, no, Stephanie, I’m not asking that. But believe it or not, that’s something Americans used to have to worry about. This week, we’re bringing you a forgotten story from American history about a time when everyone’s income tax return was a matter of public record.
Ron Shafer: Well, I write these articles and at certain times of the year I look for something that might be related and gotten to see just a sentence that once tax returns were public, I said what? So I went and looked it up and on the Newspaper Club (inaudible) and sure enough,
Charles Passy: That’s Ron Shafer.
Ron Shafer: I was a reporter and an editor at the Wall Street Journal for nearly 40 years and was The Washington political features editor and writer of the former page one column, the Washington Wire.
Charles Passy: Shafer is now a freelance writer, and last year he wrote about this little known time in American history for The Washington Post. The research took him back to the early 20th century, though not to the microfilms he used to rely on for looking up old newspapers.
Ron Shafer: Not anymore. That was the old days. Now I have a website I just go on and I can get newspapers back to the 1700s.
Stephanie Kelton: Our story today, about when tax records were public, doesn’t take us quite back to the 1700s, but to the birth of the personal income tax in the United States. It was signed into law in 1861 by Abraham Lincoln during the Civil War, but the measure was repealed after the fighting was done and the need to finance the war was over. In the early 1900s though, the 16th Amendment established Congress’s right to impose a federal income tax.
Ron Shafer: Federal income tax was established in 1913, and I don’t think anybody thought about making it public at that time. They were just starting the income tax.
Charles Passy: But according to Shafer, soon there was a shift.
Ron Shafer: Well, there was a rise of a lot of wealthy people at the time. One of them being the Vanderbilts, who had started building railroads and John Rockefeller who had Standard Oil and he was making tons of money, and Henry Ford had started the Ford Motor Company. So there was mainly a curiosity of, A, how much money were these guys making, and, B, were they actually paying their fair share of taxes? And it was first raised by President Benjamin Harrison
Stephanie Kelton: Shafer says in an 1898 speech called The Obligation of Wealth, Harrison advocated for the public disclosure of tax returns. “We are members of a great partnership and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it.”, he said. But still, there wasn’t much movement toward reforms until the 1920s.
Ron Shafer: The taxes stayed the same until Calvin Coolidge became president. In 1923, he became president after Warren Harding died of a sudden heart attack and his Treasury Secretary, Andrew Mellon, who was a rich Pittsburgh banker, they thought that the taxes were too high, so they went to Congress to cut the taxes and that’s when the liberals saw their opening.
Charles Passy: It’s worth noting, the political parties and their respective ideologies back then don’t entirely map to our modern counterparts. The group of liberals, Shafer mentions, was composed mostly of progressive senators and also included some Republicans from Coolidge and Mellon’s own party.
Ron Shafer: And the liberals in Congress said, “Well, okay, we’ll go along with you, but we want to make it, so that all the tax payments are made public.”. And that was the compromise to cut the top tax rate. I think it went from 58%, the top rate, to 46%, but they got this opening to create a public disclosure of all income taxes, which Coolidge and his Treasury Secretary hated, but they wanted the legislation.
Charles Passy: So, in the fall of 1924, the IRS released those details for the first time. Almost immediately taxes became the subject of newspaper headlines and in turn, a matter of great interest to the public.
Ron Shafer: This is a quote that is still heard today, but this is when it happened. Will Rogers was the leading humor columnist of the day, and this is when he said, “The income tax has made more liars out of the American people than golf has.”.
Stephanie Kelton: Despite the public support and interest in the story, some publications were hesitant to capitalize on the public’s fascination.
Ron Shafer: Some newspapers didn’t want to publish the tax returns, because it included not only the richest people in the country, it included everybody. So Joe the plumber down the street, his neighbors would all know what he’s paid on his income taxes last year.
Stephanie Kelton: Having that data about tax returns would make it relatively simple to figure out a person’s salary.
Ron Shafer: If you knew how much they paid in taxes, you could kind of figure out what they made, because the tax rate under the law, the highest rate had been cut to 46%. So if you did some calculation, you could go back and figure out what they made.
Well, the main problem with some average people was that their neighbors didn’t know what they were making. Maybe some of the men, their wives didn’t know what they were making. Who knows, back in those days. So newspapers didn’t want to antagonize their readers, but they weren’t sure that it was legal for them to publish it. This was settled in 1925, when the US Supreme Court got involved and they ruled that papers couldn’t be sued, just because they published a list of taxpayers names
Charles Passy: After the Supreme Court decision, newspapers that hadn’t previously published the information started rolling out the tax data.
Ron Shafer: One was The Washington Post and the biggest taxpayer in Washington actually was the publisher of The Washington Post, but they also printed, on their front page, the names of local residents starting with the letter A: the barber, the grocer, just about anybody. This is what actually the opponents of the law used to try to counter these disclosures, saying that it was hurting just the average person who didn’t deserve to get all this kind of publicity.
Stephanie Kelton: Some papers still opted out. The Boston Herald said the new policy violated privacy and called it an outrage, but many leaned into the coverage and for those papers, the returns of the ultra wealthy made for especially good headlines.
Ron Shafer: Suddenly people knew who was paying the most taxes. The biggest taxpayer was Rockefeller. He was paying like what’d be the equivalent of $123 million today. A lot of the wealthy people today pay in the billions of dollars, but at that time, that was the highest of anybody at all. The second was Henry Ford and he paid, what would be today, $41 million. The biggest income movie stars were Douglas Fairbanks and Gloria Swanson, and as they continued along the next year, president Coolidge, they even reported what he paid and he paid would be equal to $219,000 now.
Stephanie Kelton: The newspapers also reported on the way the wealthiest Americans used write-offs to their advantage.
Ron Shafer: William Ripley Jr. in Chicago, the chewing gum guy, his taxes went from $865,000, that was in terms of today’s dollars, to only 44,000 in terms of today day dollars, because it said he had written off losses over the past 10 years. So the public saw that the rich people were paying taxes, but they also had loopholes that (inaudible) them to not pay as much as they might have otherwise.
Charles Passy: The new transparency didn’t just offer insight into who made the most money or found the best loopholes, it was often telling who didn’t make the list of highest earning taxpayers.
Ron Shafer: The Pittsburgh Courier was a African-American newspaper and it noted that among all the high taxpayers, there were no black people. Matter of fact, they called it the most astounding fact about the listing and The Chicago Tribune noted some other missing names and they said they searched all over and they could not find the tax payments by the city’s underworld. The beer runners, the bootleggers, the crooked politicians, the gunmen, the gang leaders, there was no indication they were paying taxes at all.
Stephanie Kelton: For all the headlines, headaches and hoopla the so-called big reveal caused, it didn’t last for very long. In 1926, just two years later, Congress repealed the disclosure provision.
Ron Shafer: Well, the law was basically undone, because of pressure from Andrew Mellon, the Secretary of the Treasury, the wealthy Pittsburgh banking family member. Republicans controlled Congress at this point, and Coolidge was able to get through a legislation to cut the top individual tax rate and we’ve never looked back.
Charles Passy: Coolidge’s Congress cut the top rate to 25% and taxes became private once again. But public interest in who is paying what in taxes couldn’t be undone as simply as the law.
Ron Shafer: Even to this day, you’ll see newspaper stories reporting on incomes of very wealthy people with guesses, and sometimes very educated guesses, about what kind of taxes they pay. So the debate has continued, even though the law was killed in 1926. I think there’s still a great curiosity about what the wealthy pay in taxes and what they’re paying in terms of being their fair share. Certainly, I think a lot of lower income people doubt that they are, but nobody really knows for sure what individuals are paying.
Charles Passy: Coming up, this full public disclosure died in the 1920s, but could we ever have it again? Plus, when it comes to taxes, what does paying your fair share really mean? That’s after the break.
Stephanie Kelton: Welcome back to The Best New Ideas in Money. Before the break, we went back to the 1920s to learn about the brief time that taxes were public record. The law was abandoned after two years, but a century later, the idea that there should be more transparency when it comes to taxes hasn’t gone away.
Andrew Keshner: I think a lot of it might be rooted in this feeling that a lot of people have that the super rich guy, they’re not paying their fair share.
Charles Passy: That’s Andrew Keshner. He reports on taxes for MarketWatch.
Andrew Keshner: There’s polling, like a Gallup poll, where 52% say the government should be taxing the rich much more than they are. And so I think there’s this mistrust and there should be more eyes on how they’re getting away with it or how much they’re actually paying.
Stephanie Kelton: That’s not the only polling we have on Americans’ views on taxes. Last year, more than half of Americans said the amount of federal income taxes they had to pay was too high, and this year, 43% said they were very dissatisfied about the amount Americans pay in federal taxes.
Charles Passy: What there’s not much polling on in recent years, is how people feel about the kind of transparency we had back in the 1920s. Contemporary conversations about public disclosure of tax returns have mostly stemmed from former President Donald Trump’s refusal to release his returns, both as a candidate and as president. Michael Bloomberg also declined to release his tax returns, during his 2020 democratic presidential campaign. Those examples went against what’s been the reigning convention for presidential candidates for as long as many of us could remember, which got us curious about the origin of the practice.
We mentioned in the first part of the show that then President Calvin Coolidge’s return made news as part of the 1924 tax disclosure law, but the expectation that presidents and candidates released their returns actually took hold in the 1970s, back during the Nixon administration and gave us one of Nixon’s most famous phrases.
Andrew Keshner: What was happening was the press was raising questions on his tax liability and how much he was paying on his taxes, and he said, well, take a look at this.
Richard Nixon: I have never profited, never profited from public service. I’ve earned every cent and in all of my years of public life, I have never obstructed justice. And I think too that I can say, that in my years of public life, that I welcome this kind of examination, because people have got to know whether or not they’re president’s a crook. Well, I’m not a crook.
Andrew Keshner: And he released his tax returns and the tradition, it stuck for decades. It just became part of the expectation of being the president or running for president.
Stephanie Kelton: What could public disclosures about our income taxes bring? Well, for one, it just might encourage people to pay them. In Norway, tax records have been public since 1814 and have been made available online since 2000. A study found that in the first three years, these tax records were available online, there was a 3.1% increase in the amount of income reported by self-employed taxpayers. The authors of the study suggest that the increase cut tax evasion, among self-employed people, by about one fifth.
So why does this matter? Because in the United States, there’s actually a big difference between what Americans owe in taxes and what they pay. That’s known as the tax gap, and it includes people not filing their taxes, under reporting and underpay. Here’s Keshner again.
Andrew Keshner: Because of the transparency problems in understanding where all the money is coming from, it’s difficult to pinpoint how big the gap is between what’s owed and what’s paid. But one thing is for certain, is that it’s a huge number.
This tax gap thing, there’s many different numbers out there. The IRS said that between 2014 and 2016, they estimated the gap to be $496 billion. We have the Treasury Department saying, well, it actually might be more like 600 billion a year. And then the former IRS Commissioner, Charles Rettig, during one congressional hearing, he was asked this question.
Charles Rettig: I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year.
Charles Passy: A trillion dollars is a serious amount of money. How could it go unaccounted for? Here’s Keshner.
Andrew Keshner: One of the big theories, one of the main reasons that this happens, people say, is that it’s wealthy taxpayers who are under reporting how much they make through sophisticated tax entities or offshore accounts, and one of the big parts of the IRS funding bill in Congress recently would be getting more enforcement to sniff out where all the money is. So this isn’t public transparency, but it’s trying to apply more eyes to rich taxpayers and where their money is.
Stephanie Kelton: That bill is one we’ve mentioned on the show before, the Inflation Reduction Act passed back in August. A lot was packed into that law and one part of it was allocating $80 billion to the IRS over the course of a decade. As Keshner notes, over half the funding is set aside to increase enforcement, which the Biden administration has said will focus on corporations and households making over $400,000 a year. But the money would also go to much simpler things, that would improve the taxpayer experience, like hiring more staff to answer phones and updating the agency’s antiquated IT system. The IRS aims to fill about 19,000 jobs this fiscal year.
Andrew Keshner: The IRS always likes to emphasize that pretty much all of the tax revenue that the federal government gets, comes through the IRS. When the money is there, it’s up to policy makers on how they want to use the money, but one thing is for certain is the IRS itself has been saying that it needs more money to upgrade its systems, to improve customer service and to bring on more enforcement staff to really audit corporations and the wealthiest taxpayers
Stephanie Kelton: When it comes to the income taxes that are paid. The question at the heart of it is one that we’ve touched on throughout this episode; are the wealthy paying their fair share? That of course depends entirely on your perspective. Recent polling has found that nearly 70% of Americans agree that upper income individuals and corporations are paying too little. But from a policy standpoint, the issue generally divides along party lines.
Andrew Keshner: It’s easy to find dueling numbers on if the rich are actually paying their fair share. For example, the Biden administration says that billionaires are paying around 8% of their income and that includes their wealth that is untaxed. It’s kind of like all their stock holdings then are just laying and waiting and appreciating value. But then you have think tanks like the center-right, The Tax Foundation, and they say that actually rich taxpayers are paying a heavy amount of the tax burden.
Charles Passy: For 2019, The Tax Foundation estimates that the top 1% of taxpayers paid on average a little more than 25% in federal income tax. They say that’s more than seven times higher than what taxpayers in the bottom 50% paid.
Stephanie Kelton: There are places where this kind of data is publicly available. As we mentioned earlier, Norway has had public tax records since the 1800s. In Finland, tax data is published every year on what’s known as National Jealousy Day, and it’s also happening here at home. In Wisconsin, information about an individual’s state income tax is available upon request, for a fee of $4 per return. That’s not the only cost to being nosy. The government also notifies the person whose information has been requested.
Andrew Keshner: It’s kind of like the LinkedIn profiles. It’s like unless you hit the settings, you’re like, “Oh, is this person going to know that I looked at them?”.
Charles Passy: While a return to full public disclosure of tax returns would likely further debates around what exactly paying your fair share means, that’s not the only qualm some people would have. For one, many would likely have privacy concerns regardless of their level of income.
Andrew Keshner: Your tax return can reveal a lot about you. There’s tax breaks for medical expenses, there’s tax breaks for gambling losses. There’s even the number of dependence you have. And what if someone were to look at your return and say, “Oh wow, you had $50,000 in medical expenses. What happened to you?”. That would be more than a little uncomfortable or looking at, “Oh wow, you had a lot of gambling losses there.”. Your tax return is about numbers, but it’s about a lot more.
Charles Passy: For now, full transparency of tax returns isn’t high on the priority list for anyone in government, but taxes in general are an area politicians have turned their focus to. Keshner points to a couple of proposals from the Biden administration; a billionaire’s minimum income tax and increasing capital gains taxes.
Andrew Keshner: But what’s really waiting in the background, is the expiration of the Trump tax cuts. The Trump tax cuts, they were passed in 2017 and they were this sweeping array of changes for corporations, for small businesses, for individual taxpayers. On the individual side, five of the seven tax rates were reduced. The Child Tax Credit was doubled. The top rate went down from 39.6% to 37%, and it was this huge change to the tax code, but on the individual side, it was temporary.
Stephanie Kelton: Those changes expire at the end of 2025.
Andrew Keshner: And that’s going to force a lot of these issues. It’s going to go past rhetoric to people actually… There’s got to be decisions made, because a lot of tax rates, and not just for the rich, are going to go up. And so that may be the time when we really see more proposals actually become law on what it means to be taxed in America, when you’re super rich, and how much visibility we get in all that. But I think it could all be coming up a lot faster than we think.
Stephanie Kelton: So full transparency of tax returns probably won’t happen anytime soon.
Andrew Keshner: I’ll be honest, in this day and age when we are all so sensitive about our data and our personal information, I think it’s a very tall task to consider any sort of radical transparency that would enable us to look up your neighbor’s tax returns. I just don’t think it’ll happen in this time.
Charles Passy: Looking at it from a historical perspective, Ron Shafer, who we heard from earlier, agrees.
Ron Shafer: I don’t think we can ever go back to full disclosure of income tax payments. I know many people would support it, but we’re talking about disclosures of the nation’s wealthiest people, and these are people who have enormous political power. Besides paying enormous taxes, they make enormous political contributions. So unless it was really a scandal of some kind, where we found out that just about every rich person was not paying hardly any taxes, I don’t really see, in a realistic world, that we’ll ever go back to disclosures of taxes. But hopefully someday we could have at least, available to the public without naming names, just sort of categories about what different levels of people of different incomes make and what percentage of their taxes are made. And that way we would basically get the same kind of insights, without necessarily seeing who they are. Though obviously we could kind of figure it out, but at least that would be one way to get a better picture about who’s paying their share of taxes.
Charles Passy: We asked Shafer if there was anything else he wanted to add.
Ron Shafer: No, I don’t think so. Unless you don’t think I’ll get audited for this, do you?
Stephanie Kelton: Thanks for listening to the Best New Ideas in Money. You can subscribe to the show wherever you get your podcasts. If you like what you heard, please leave us a rating or review, and if you have ideas for future episodes, drop us a line at [email protected]. Thanks to Ron Shafer and Andrew Keshner. To learn more about new ideas in taxes, head to marketwatch.com. I’m Stephanie Kelton.
Charles Passy: And I’m Charles Passy. The Best New Ideas in Money is a podcast from MarketWatch. The producers are Michael McDowell, Mette Lutzhoft and Katie Ferguson, who also mixed this episode. Melissa Haggerty is the executive producer. Tim Roston was our newsroom editor on this episode. The Best New Ideas in Money theme was composed by Sam Retzer. Stephanie Kelton is an economist and a professor of economics and public policy at Stony Brook University and not part of the MarketWatch newsroom. We’ll be back next week with another new idea.
