Reforming the Tax System for Everyone

Rich people dress so boring now. When we see our wealthy, particularly the wealthy that that have come about in the last twenty or thirty years, our tech wealthy, they are very much just like the rest of us. Or you know, everybody in their t shirts and hoodies. Boston Law Professor Ray Matoff. We're talking live on stage at the Center for Brooklyn History. You see Elon Musk, he's just a regular guy. Don't go thinking he's somebody fancy or somebody rich. He's just like you and me. But once upon a time, it used to be extremely clear who was rich. In the turn of the last century, in the 1890s, 1910s, robber barons and industry tycoons announced their wealth proudly. They wore top hats and fancy things, tons of jewels. The daughter of Cornelius Vanderbilt wore tiaras. She actually wore crowns. She wore a crown walking around New York City. I'm like, man, they don't make rich people like that anymore. That's unbelievable parties, but not off on a private island you can't come parties. They had glass doors, glass walls, so that the regular people can actually see these elaborate parties that were going on. And you were talking about like they would hand out cigars wrapped in hundred dollars. At their parties, yes. At the parties they had like elephants. They would each, they would outdo each other, they'd be written on the society pages. And so they proudly announced themselves as being the elite and they wanted everyone to see just how very rich they were. So yeah, how did we get from this era? Taxes . Yes. Taxes. I know, taxes. You're like, uh, tax season just ended, I don't want to think about taxes. I know, no one likes to pay taxes, no one likes to think about taxes. But that's the thing, because they are so icky to confront, they really haven't been examined very closely. And that is how we're getting growing wealth inequality. And as Professor Madoff proposes in her excellent book, The Second Estate, How the Tax Code Made an American Aristocracy, Taxes are Part of why rich people dress so boring now. When we see our rich, they do look like us. And so they seem less alien. And they are alien in that they are separate from us because these ultra rich just don't pay taxes, almost none. And to be clear, when I'm talking about rich people, I'm not talking about like a doctor or a lawyer. For purposes of this book , the rich are anybody who doesn't need a salary. The lifetime earnings of a doctor, on average, are $6.7 million . A hedge fund manager earns on average, $84 million over a lifetime. Those are wealthy people by any measure. But they pale in comparison to Mark Zuckerberg's net worth, which is $237 billion. Jeff Bezos is worth 2 69 billion. And you know, the difference between a million and a billion is massive. It's literally a thousand times larger. So we're talking about phenomenally wealthy people, people. Pe whoople are above a paycheck. If somebody can get by without earning money, they have enough money that they can live off of. Those are the people who are able to grow their money tax-free. We are talking about people who are so rich that they do not need to earn an income. Because income gets taxed. Like people who earn a lot of money, the working rich, they pay taxes, they pay a lot of taxes actually. They are our comrades here. People with high income are much more aligned with people with low and moderate amount of income in that we all pay a lot of taxes. But people with huge amounts of wealth don't have to pay taxes at all. And this, in part, explains why we no longer see the top hats and the tiaras and the cigars wrapped in hundred dollar bills. All that visible excess attracted too much attention. They thought these people they're a bunch of lazy layabouts, they live these lavish lifestyles, and all of this is a big problem and therefore we need to have taxes on inheritances. The splashy largesse of the rich led to the creation of a tax code that was meant to curb all that behavior. And yet, in the years since, that fair tax system we made has been whittled away. It doesn't work anymore. The ultra rich are not paying their share. And so, you know, why would they want to wear tiers again? Why would they want to attract that kind of attention? I think that just like the rest of us look of the very wealthy has served a protective function. They want to look just like us and pretend they pay what we pay when they don't at all. And sometimes people say, I don't want to tax the rich because I'm going to be rich someday and then I don't wanna have to pay taxes. But the thing is, what people don't realize is that their likelihood of becoming rich is significantly limited by the fact that they have to pay taxes. People who have salaries or other gig workers or anything, right? They're moving two steps forward, one step back. Meanwhile, the richest Americans are moving two steps forward, four steps forward, six steps forward, a hundred steps forward, a thousand steps forward. Because they pay no taxes . So how do they do it? And how can we fix this? And you might be asking, wait, does this really have to do with clothing? Yeah, it does. Because our taxes and our tariffs ex plain so much. Not just about how rich people dress, but about how we all dress and how we all live after the break. Hey listeners, right now there are some amazing news stories coming out of Ear Hustle, our fellow Radiotopia show and the podcast about the daily realities of prison life. There's one episode called My Favorite Color, where we hear the conversation between a father and daughter who haven't seen each other in 26 years, partly because the daughter followed in her dad's footsteps and paid a heavy price for it. In another, we meet a guy who at the age of 13 got a tattoo job on his face that would influence the course of his life. And you know what? He's got no regrets. There's a story about what it's like to be betrayed by a dog, and another that explains how to hug someone when hugging itself is against the rules. These are the kinds of stories you hear on Ear Hustle. They're raw, they're deep, often very funny, and what Iraglass calls decidedly untragic. Listen wherever you get your podcasts. Also, check out their live show, which is swinging through the northeast US at the end of May. Details are at earhustles q.comslash tour. This episode is brought to you by Progressive Insurance. Insurance isn't one size fits all. That's why drivers have enjoyed Progressive's Name Your Price Tool for years now. With the name your price tool, you tell them what you want to pay, and they'll show you options that fit your budget. So whether you're picking out your first policy or just looking for something that works better for you and your family, they make it easy to see your options. Visit progressive.com. Find a rate that works for you with the Name Your Price tool. Progressive Casualty Insurance Company and Affiliates, Price and Coverage Match Limited by State Law. Macy's has really outdone themselves. They're introducing a new collaboration with the Emmy Award-winning costume designer behind some of the most iconic fashion TV shows and movies , Molly Rogers. And in this collection, she's imagined some of the most iconic looks from her career and translated them into wearable pieces through Macy's own private brand on 34th. Molly Rogers has clothed so many iconic New York celebrities. Let her be your personal guide. Shop Macy's online or in store today . Back in the 1900s when rich people used to wear tiaras and rent elephants for their parties at their huge mansions, it's not like it was the good old days. Poor people were being completely taken advantage of in their horrible working conditions, their horrible living conditions. Almost everyone was poor. U.S. life expectancy was 47 years old, and the economy was in such a bad recession that it introduced the term unemployment. Like people were living in tenements barely scraping by in starving conditions. These two worlds were being presented at the same time. There was extreme excess right next to utter destitution in the same city. So let's start with the first transition that caused the wealthy to be subject to taxes. Because in the time when we had all of this lavish wealth and lots of poor people, the tax system that we had was tariffs. For the first 137 years of the United States, there wasn't really an income tax. I mean, it was instated occasionally, like it was put up to fund the Civil War and a few other wars , but it was an aberration. And it was in part because collecting income tax, like gathering all that paperwork and enforcing it, that's kind of logistically complicated for a young growing country to manage. Tariffs, on the other hand, are simple. A tariff is a tax that is imposed on the product that is imported. This is Steve Lamar. We're just gonna call him a tariff expert for now. I'll tell you his real job in a little bit. Tariffs have played a big role in American history for many, many years up until the beginning of the last century. Tariffs were the primary way that the US government collected revenue. We financed our entire government through tariff collection. Tariffs are a really simple system for a scrappy, poorer country. Like Alexander Hamilton could just send a thousand people with money That's the narrative, and it's gonna appear to be something that's not gonna hurt the US. This was of course super appealing to the Founding Fathers because taxation was a touchy subject at the beginning of the country. We fought a war over it, quite literally the whole reason we fought the revolutionary war is we had taxation without representation. I mean these words are drummed into our souls. So tariffs were a nice simple system. Our country will be funded by imports. Great. Put it in the Constitution. This is why the founders put tariffs in Article 1, Section 8. And what was seen as an added benefit was that tariffs made foreign goods more expensive. So then our goods could be more expensive. People who had businesses, they got to benefit when there were tariffs. It allowed domestic providers to raise their prices too. Professor Ray Matoff again. So they was like a very happy system for the industrial ists and not so great for consumers and everyone else. So everything got expensive. And then once you had the cigars being passed around with $100 bills, it was clear who the tariff system was benefit So you had these super rich people, and you had a lot of people who weren't doing well at all, and a lot of people began to be concerned that the people that weren't doing well would, not be so happy with this system of capitalism. And at the time there were actual alternatives. This is back when there were options out of capitalism. Socialism was really quite big and with sweeping parts of Europe. I think it's so ironic today that capitalism suffers from a lack of competition. Because of the threat of socialism, people that wanted to keep capitalism felt they needed to show that capitalism could serve the public well. The way to keep capitalism competitive and to show that it could serve the public would be taxes. A lot of them. Even the conservative Wall Street Journal advocated for heavy taxes on particularly on people with inherited wealth. And Andrew Carnegie in his famous gospel of wealth wrote, We have to have heavy taxes on inheritance because all of these rich people running around living on their inherited wealth is a problem. There was this push from lots of different people across the political spectrum to create the modern tax system. Congress enacted rules that were designed to tax the richest Americans. In 1913, the income tax became And in fact, only applied to the richest 5% of Americans. Nobody else paid any taxes at all. Over time, the income tax, as we all know, became applicable to pretty much all Americans. We had a progressive income tax that had higher rates for those who had higher income. And this was all meant specifically to rein in the rich people. And in 1916, it was an additional This is a tax on inherited properties. And for a while, the systems worked very well. And in fact, the system kept growing to continue to compete with socialism. Like when FDR created social security, this was his way of being like capitalism can take care of people. With massive industrialization, people didn't live near their families anymore. So they couldn't rely on the kids will take in the parents or whatever. And so he created this system of social security benefits and unemployment benefits. Old age benefits and unemployment benefits. When FDR created social security, he wanted all Americans to feel a buy-in so that it wouldn't like a charity. He wanted it to look like an insurance program. Which meant all Americans had to chip in to funding it. He wanted it to look not like taxes, but they are very much taxes. It is money that is taken out out of current workers to pay the retirement benefits of current retirees . The systems of social security and Medicare are paid for by payroll taxes, which are really quite hidden. If you work for an employer, the payroll taxes are taken right out of your paycheck. I earned this. I wiped tables for it, I steamed milk for it, and it was totally not worth it. Like that moment in Friends when Rachel got her first paycheck. Who's FICA? Why is he getting all my money? FICA is the Federal Insurance Contributions Act. That's the payroll tax. There's a lot of ways that it's hidden from the public, right? It's called FICA. They use words like contributions, making you think like you're doing it voluntarily. Very odd, you know, but it's intentionally done that way to make it politically strong. Because people do feel that they've paid into the system, they've somehow earned it. On the other hand, by not calling it taxes, by not calling it what it was, they made it easier for these taxes to increase and increase, and payroll taxes have like more than doubled over that time. Payroll taxes are the second largest source of federal taxes right after income taxes. So they're much higher than people see, and they are really quite burdensome, particularly for Avery, and other self-employed workers who have to pay the full fifteen point three percent themselves. I mean I'm a freelancer, so I see it though. I see it. But even when the employers pay the half of it, like which they do for people who have jobs Economists believe that that is actually money that would otherwise go in the form of higher salaries to people. You might remember Mitt Romney and the 47 percent, right, of takers, not makers, right? In twenty twelve, Mitt Romney was caught saying this at a fundraiser. Forty-seven percent of Americans pay no income tax. And so I'll never think they said that they should take first responsibility and care for their life. Oh come on. He said they don't pay income taxes. The most recent number is 40% that don't pay income taxes. But the vast majority of that group pays significant payroll taxes at quite high rates . So working people are paying the income tax , the payroll tax, and get this, working people are still paying most of the tariffs left over from that old outdated system. We often say that tariffs are the hidden tax. This is our tariff expert Steve Lamar again. And I think that it's important for folks to understand that these tariffs, even when they don't see them, even when the headlines disappear, they still exist. To be very clear, tariffs existed long before Trump went all trigger happy with them, and tariffs still exist after his flagrant abuse of tariffs was deemed unconstitutional. But very critically, this whole narrative that tariffs are something that other countries pay, that's not true. The reality is tariffs are taxes that are paid on US imports. They are paid by the U.S. importer, the importer of record. They're not paid by foreign countries. They're not paid by foreign companies. They're paid by U.S. interests. And ultimately, when tariffs make their way through supply chains, the tariff cost is felt by the ultimate consumer. And the ways that we, buyers of stuff, feel the effects of tariffs is not always simply in raised prices. We as consumers are going to experience this differently. It could be a back to school sale or a Black Friday sale that instead of being fifty percent off is now forty percent off. Or it's not three for ten dollars, it's now two for ten dollars. And there is one category of products that was and is particularly subject to tariffs. We're the most heavily tariffed industry. Steve Lamar, our tariff expert, is actually CEO of the American Apparel and Footwear Association. This is the trade association for the apparel , footwear, industry, textiles, really the whole ecosystem of produc ers, suppliers, service providers that helped you get dressed this morning. We are still the most heavily tariffed industry. Aaron Powell This is what gets tariffed. Clothing. One Bloomberg estimate from 2015 claimed that 75% of tariffs that U.S. households pay are from apparel. Trevor Burrus We've had a very high tariff system for clothing since the tariff act of eighteen sixteen. Ed Gresser, Vice President of the Progressive Policy Institute. And so for over several decades the system evolved into a very very kind of ugly way. And as you say, it developed into mainly a way to tax clothes and shoes. The United States used to make a ton of clothes. We invented ready to wear. And we also had our domestic cotton and our mills. We had a whole homegrown industry. Tariffs were a way to protect our domestic clothing industry by making foreign clothes, at that point, usually from England, more expensive. The Industrial Revolution businesses, Rhode Island and Massachusetts and sometime New York felt that they needed a kind of very heavy level of tariff protection to get started and never gave it up. So it's just inertia. Clothing is so heavily tariffed, even though we don't really make a lot of clothing in the US anymore. What's the material of your shirt? Can I ask? Oh, it's uh denim, I think. Denim, okay. That's probably there's a six teen percent tariff included in that. But luxury items have almost no tariff, while cheaper items do. Cheap mass market things are tariffed very heavily and expensive luxuries very lightly. So like my shirt, this is cotton, and it's also 16%. If it were silk, it would be 0.9%. And if it were polyester, it would be 32%. And that is very, very typical. Cheap sneakers have a forty-eight percent tariff , while leather dress shoes have only an 8.5% tariff. Acrylic sweaters have a 32% tariff, cashmere sweaters only 4%. A canvas bag has a 16% tariff, snakeskin leather, 5.5 The type of system we had is not a good one. Why who decides this? Why is this? Why is in attention more than it is like maliciousness. Really? When we had big clothing industries, if you go back to the nineteen fifties and sixties and seventies, people who were making silk shirts and patent leather shoes and snakeskin purses. Companies that make those sorts of things didn't really care much about what the tariff rate would be because they weren't competing on price with foreign rivals. Like you don't buy cashmere sweaters or silk shirts for the bargain. You buy them because they're a fancy expensive product. They're competing on image and kind of glamour. Right. Whereas people who make polyester shirts are competing kind of only on price. And anything they could do to keep their competitors' price high, they would want to keep that. Those cheap domestic industries once advocated for higher tariffs, and then those just stayed, even though it doesn't make any sense Especially because now it's so rare that something is made entirely in the United States. We live in such a global economy. If you say heavy tariff on clothing, also heavy tariff on sewing machines and building materials and dyes. This isn't gonna work. All you're doing is raising costs across the board. And this kind of blanket tariffing is really bad. I mean I, too would like more clothes to be made in the United States, but tariffs are not the way to do it. But it'll be very expensive and there'll be a large drop in living standards in the United States. And I also have to admit, like when the Trump tariffs were beginning, I was like, oh, maybe these tariffs will end over consumption in fast fashion. But that's really elitist. Like tariffs are not the way to do that. Opinions can differ, but I kind of personally tend to think it's a nice thing that we have cheap appliances in the United States. It's a nice thing that lower income young women have fashion choices. If there are environmental problems or labor problems that come with that, then sometimes those nice things should be secondary, but not always. Tariffs, Ed Gresser would argue, are not the way to address these larger, deeper problems. Tariffs tend to hurt any industry that makes Farmers, manufacturers, restaurants, and retail and construction pay a lot. Intangible white collar industries are not impacted as much. It's a very inequitable sort of tax. And not just on a business level, on an individual level. Tariffs are tax on purchase of physical goods, basically. The types of people who spend a lot of money on goods are low-income people. Like a single mom family, about 40% of the income goes to buying goods of various sorts, food and clothes. Uh very wealthy families, more like 10%. Can I ask about that? Why is it that lower income people buy more stuff? Like, don't rich people also need food and clothing and materials? Uh yeah. Rich people spend more in dollar terms than poor people. But the money that wealthy people spend is much more likely to go to vacations and education and entertainment and poor people typically have less money for those things. So it's going to hit the poor people harder. Oh and also this tariff system is overtly misogynist. Men's silk underwear 0.9%, women's two point one, cotton seven point four for men, seven seven for women, polyester is fourteen point nine percent for men, sixteen percent for women, is this okay? On average, there is a three percent tariff gap between women's and men's clothes. And that translates to about two and a half billion dollars extracted from women each year. And again, Ed Gressor doesn't think this was malicious. I think it's m less like a group of people think we're and we're really gonna stick it to women and we can high five each other. Businesses making women's clothes were more aggressive in defense of tariffs than those making men's clothes. They weren't really thinking about what the outcome was going to be. But these tariffs are outdated and no one in Congress has thought to be like, well, maybe we should reconsider them. There weren't that many people who are I mean in Ferris Bueller's day off, it's what the teacher was droning on and on about. Anyone? A tariff bill? Anyone? Aaron Ross Powell Generally, people don't want to really think about these boring tariffs, although Trump's abuse of tariffs has really brought attention to them. There's not been this type of interest in tariff policy among the public uh in many probably more than a hundred years. And now there's a proposed bill in Congress called the Pink Study Act. Which would require a Treasury Department study and report to Congress on gender bias and regressivity in the tariff system. So we're very enthusiastic about that. But in the meantime, all the tariffs are still there on clothing. If you want to avoid high tariffs and by silks and cashmere, that will work. So rich people can get away with paying fewer tariffs by owning nicer stuff. And in addition, rich people have somehow managed to wiggle out of all the other taxes out, of the payroll tax, out of the estate tax, out of the income tax, out of so many other measures that were supposed to make sure they contributed fairly to society. Some people might be wondering, how do rich people avoid taxes? And can I avoid taxes too? I'm gonna tell you what their tricks are, and I'm gonna forewarn you, chances are you can't do them. After the break . When you think of New York City style. What do you think of? I mean, you can think of any number of movies or TV shows, and I bet those movies or TV shows that you're thinking of were costume designed by none other than Molly Rogers. Molly is an Emmy -winning costume designer behind some of the most iconic fashion-forward New York TV shows and movies of the last decades. And now she's distilled all of her fashion philosophies into one distinct collection where you can dress like the stars of some of your favorite New York fashion fantasies. Molly has created fun, unique pieces that will make you look like you have your own personal costume designer. It's one of those fashion collaborations where the pieces all feel really unique, like you're finding something special that nobody else has. And they're only available at Macy's. It's a quintessential New York store for a quintessential New York designer. Get the look. Shop Macy's online or in store today . Most people don't realize how much of their personal information is being bought and sold every day. Data brokers are making billions pulling details about you from public records and the internet That's how your information lands in the hands of scammers, spammers, even stalkers. It's why you get endless robocalls, and why ads seem to follow you everywhere. That's where Aura comes in. Aura actively removes your data from broker sites and keeps it off. They also instantly alert you if your information shows up in a breach or on the dark web. But Aura goes beyond data protection. With one app you get a VPN, antivirus, password manager, spam call protection, dark web monitoring, and even up to five million dollars in identity theft insurance, all backed by 24-7 US-based fraud support. Other companies might sell just credit monitoring or just a VPN. Aura gives you all of it together at the same price competitors charge for just one service. Start your free trial today at aura.com/slash safer. Protect yourself now at aura.com slash safer . I hate paying taxes. Even though I'm a good little liberal and I believe in more paved roads and universal health care and big government, still don't like it. It's not like you like paying taxes, right? No. Nobody likes paying taxes. And that's okay . We're not supposed to like it. Professor Ray Madoff doesn't like paying taxes, even though she studies taxes and teaches tax law and wrote a great book about taxes called The Second Estate. But, as she once told me, taxes are supposed to be like this cat and mouse game where we citizens try to pay fewer taxes and find loopholes, and the government goes, nah uh-uh, and we go, oh man, and we grumble and we pay up. Like that's how it should be. Right? And Congress is like, what something happening here? They're literally doing nothing. Congress is engaged in complete quiet quitting and has done nothing to close any loophole since 1990 . Here is how the wealthiest Americans pay no taxes. The first step of the tax avoidance playbook is to avoid salaries. Anyone who's getting a salary, complete sucker. You're paying income taxes, you're paying payroll taxes, it's all being withheld. Some of the richest Americans only take a small salary. I mean it's small for them. It's only a tiny percentage of what their companies are worth. Warren Buffett, he takes a hundred thousand dollars in combined salary and bonus. Never more than that. Jeff Bezos makes eighty-two thousand enough for him to claim the child tax credit, which he does. Um Mark Zuckerberg makes a a dollar. Mark Zuckerberg makes a dollar. Larry Ellison also paid himself a dollar a year. Elon Musk once violated California labor laws by paying himself too little. But they are not like just foregoing salary. Instead, they are being compensated through the enormous growth in value of their stock. Enormous growth. Zuckerberg's has grown by 100 billion. Larry Ellison's has grown by more than 200 billion. Okay, this is just over the past couple of years. And all this accumulated wealth is just sitting there in their investments and they do not sell their stock. They don't sell. It enables them to continue to control their companies, but it also enables them to avoid taxes because under our tax system you do not pay any taxes unless you sell. So these guys are worth a lot, but it's all just sort of hoarded. Now you might say, but yes, they must sell though because they want to support their lavish lifestyles. How else is Larry Ellison gonna buy his island of Lanai, which he owns all the businesses, all the real estate. Here is how they own all their fancy stuff. They borrow money. The way that they do it is they borrow against those funds because there is always somebody available to lend them money at quite favorable rates. And borrowing is entirely tax-free. A lender is del ighted to loan to Larry Ellison or Elon Musk. And as long as their wealth grows faster than that rate of interest that they're charged, which it does, then they are just always end up ahead. So you take out a loan to pay the loan. Yeah. To pay the loan. Or they just or the whoever first lent it to you is happy to keep lending it to you because they're carrying a loan for which they're being paid. If somebody lends Larry Ellison a hundred million dollars and Larry Ellison is paying them whatever interest rate they want, they're happy. These are people in the business of making loans. And they're happy to keep those loans outstanding. So that's how a lot of these big tech billionaires do it. They take a small salary and then they just keep some asset that's ballooning in value, they don't let it go, and they keep borrowing money against it. A lot of these guys do borrow heavily. They get quite favorable rates, and paying the interest is much cheaper than taxes. The other way to have a lot of money without paying taxes is acquire money the old-fashioned way and inherit massive wealth. Inheritance is tax-free. Because under our income tax system , no matter how much you inherit, you don't pay any income taxes on it. It's entirely excluded from income taxes. Someone who inherits $10 million or $100 million or even $100 billion dollars doesn't have to report it on their income tax returns. So we have this really comprehensive income tax system, except inherit you inherit $100 million . Ah, don't worry about it. Right? So we have a very different system for people who inherit wealt So why is that the case? Well, because the rules were put in place on the assumption that we have a robust estate tax. That tax on inherited property, the estate tax . But it doesn't actually work . It has become functionally elimin ated. It's just there, a ghost of itself. Estate and gift tax rates have come down from like 90% to 40%. Payroll taxes have gone up and tariffs have gone way up. And meanwhile, the shrinking, ineffectual estate taxes over there pretending to level the playing field. So this is all a result of a campaign that was funded by 18 of the country's richest families, the Koch, the Waltons, the Mars family. The Mars family are big players in this story. Who knew candy was so profitable? Although then you read, like, they also do pet food. I'm like, okay, but that's crazy. These people have so many, many, many billions. These families got together because they were like, we gotta get rid of this estate tax. And so they funded this campaign to get rid of the estate tax . An amazingly effective campaign. They hired this guy by the name of Frank Luntz. Remember when we used to talk about global warming? And remember how scary that was? It's getting hotter. It's awful, right? Frank Luntz gave us climate change No. It's just different. Not necessarily worse. It's it's just a change. He's a genius. He's a genius. Anyway, he is the one that came up with this phrase death tax. He rebranded the estate tax as the death tax. Because a death tax sounded both scary and mean. You know, like 10% of Americans want to get rid of an estate tax, but like 90% wanted to get rid of a death tax. Even though the vast majority of Americans would not be rich enough to be subject to the so-called death tax, like the estate tax only applied to 0.0