Tax Debate in Historical Perspective

american history economics and business history of entrepreneurs presidential & political history speech or interview Oct 29, 2020


I presented to a great group of patriots at Hillsdale College about the tax debate and helped to put it into historical perspective.

From Hillsdale

Ever since the beginning of taxation, Americans have debated how taxes should be levied. Professor Larry puts all of this into perspective.


- Tonight I have the pleasure of introducing Dr. Larry Schweikart. Larry Schweikart is a historian, author and television producer. He received his BA and MA from Arizona State University and his PhD from the University of California, Santa Barbara. From 1985 to 2016, Dr. Schweikart taught history at the University of Dayton. His articles have appeared in numerous academic journals including Business History Review, Journal of Southern History and the Journal of Economic History. His PBS documentary, Rocking the Wall, considered Rock music's role in bringing down the Berlin Wall. He is co-author with Mike Allen of A Patriot's History of the United States and the author of several other books including Seven Events That Make, excuse, Made America America, 48 Liberal Lies About American History and How Trump Won, forthcoming in January 2018. Please join me in welcoming, Dr. Larry Schweikart.

- Thank you Maddie. As an old rock and roller, I can scream over anything so I wasn't concerned about the microphone. But thank you again for having me back to Hillsdale, thanks to Doug Jeffries for putting all this together and although he's not here, I'd like to thank Burt Folsom. I suspect he had a hand in my invitation here. Seems like throughout my career, when big things have happened, Burt Folsom was always behind them so I owe him a particular debt of gratitude here. By the way, How Trump Won, which Maddie referred to, came out last January and I'll get into that later in the talk. This is, let's just jump right in. This could be a pretty boring talk. I mean it's about taxes, you know. One of my favorite movies is Meet Joe Black, yeah, a 1998 film with Brad Pitt, Anthony Hopkins. And Pitt plays Death in the form of a young man whose killed by a car. I need a body Bill. And Hopkins plays Bill, a multi-millionaire whose led an exemplary life loving his daughters and building his business. Death grants Bill a little bit more time if Bill will just show him the ways of the world. What it means to be alive. In the climatic scene, Bill has been betrayed by his daughter's boyfriend, Drew, whose attempting an inside takeover. Death is taking Bill that night to his final resting place but Bill asked for just enough time to thwart Drew. When Drew meets Bill and Joe, Death tells Bill, I'm gonna tell 'em who I am tonight. And of course Bill, no, no, don't do that. Looking straight at Drew, Death says, I am an agent of the IRS. Anyone who got that joke, for many people you know what it's like to be told you're about to be audited by the IRS. It's almost as bad as death. Americans have had issues with taxation for a very, very long time. Each colony had its own taxation policy including excise taxes, import taxes, poll taxes, and property taxes. And there were not many tax revolts in colonial times prior to the French and Indian War. Remember this is the time the British governance known as benign neglect. But after that, changes in the British imperial policy in 1763, American colonists and the British government, were constantly fighting over taxes. Given that most Americans were farmers, it shouldn't be surprising that most of those battles were over taxes on food products, including sugar and tea and if you're married to Blasio, big gulps. Indeed other than the infamous Stamp Act of 1765, the Tea Act became the most resisted tax in colonial history. Of course, the most ironic thing about the Tea Act was that it officially lowered the price of tea but simultaneously greatly expanded the enforcement of merchants meaning that colonists would no longer be able to buy the much cheaper smuggled tea. Hence the actual price of tea went up for most people and yes there were other tea parties in other towns that we never heard of because Sam Adam wasn't around to write about those tea parties. Most historians of the American Revolution conclude that no specific tax, not even the Tea Act, caused the American Revolution so much as the process by which the taxes were imposed. Virtually all the British duties fell on merchants or ship owners who passed the cost along to consumers. That meant that at least initially few outside of those groups had many concerns about taxes going up or down. During the war, the Second Continental Congress Place requisitions on the states and the states usually ignored these requests. Instead as most of you know, Congress simply printed money to finance the war. In 1777, under the new Articles of Confederation, Congress and Article VIII allowed for levying taxes but approval was left to the states. No national taxes were yet considered. Lacking a national taxation system, Congress turned to its only marketable resource, land. With the Land Ordinance of 1785, Congress banked on the national resources in the new nation to finance its operations. The state continued to resist any form of taxation on them. Meanwhile the states owed the federal government and when the Massachusetts, the state of Massachusetts, for example, raised property taxes to pay off the national government, the burden fell on the western farmers and led to Shay's Rebellion. Ultimately, Shay's Rebellion led to debt or relief legislation in that state but there was no question that fiscal issues helped prompt cause for a national constitutional convention. Once the convention met, founders recall their experiences with King George and Parliament which were all opposed without the consent of the governed or any participation by the general public. Hence, the war was over and the colonists established a constitutional republic with all taxation power originating in the House of Representatives, the legislative body closest to the people. It was a tax regime that lasted until the Civil War and it consisted of two main characteristics. First, that the non-national entities would handle most of the taxation. States and localities would until about 1863 constitute the major funding source for any government activities. Second factor was that the US government determined to use the great expanse of landed assets which produced as taxation historian, Elliot Brownlee called, the creation of the assets state as well as a pure fiscal state. This necessarily produced some contradictions. Americans did not dislike property taxes. And in fact, generally saw them as a legitimate way to fund public activities. But there did exist a tremendous as we know today well founded suspicion of national government taxation powers especially in the form of a direct tax on individuals. Madison and Federalist 10, expressed his concern about factions and quote the most common and durable source of factions he said, would be quote the various and unequal distribution of property. Thus in the Constitution reflecting Madison's ideas all duties and impost were to be uniformed throughout the United States so that Congress could not single out any particular group for punishment through taxation. Moreover, Madison was himself suspicious of the power of the federal government. Hence the Constitution prohibited a direct tax on individuals. Instead, based on Alexander Hamilton's fiscal plans, the United States would rely on two revenue sources, the ongoing sale of public lands, and a new import tariff system. Hamilton has been greatly misunderstood particularly I think by conservatives. He hated debt and sought to establish good credit for the Unites States not perpetual debt. His Sinking Fund would have required Congress to use an American Express form of paying off the existing debt before new debt could be incurred. But even the tariffs themselves are usually mischaracterized. The goal in Hamilton's mind was to protect infant American industries. See, cried conservatives, he wanted to pick winners and losers in business. Not at all. Hamilton's two most emphasized industries to protect were iron and textiles, both of which were critical to national defense. Hamilton knew that in any war, especially any war arising soon, the young Republic would need both iron for cannon and muskets and textiles for uniforms to survive. To Hamilton it was a national security issue not an economic or business issue. As he said, the ultimate goal must make the United States self-sufficient in arms and to support quote, an annual purchase of military weapons to aid the formation of arsenals, unquote. From the adoption of the Constitution to the War of 1812, the most heated controversies involved excise taxes as opposed to tariffs. But Hamilton went too far instituting an excise tax against a particular group of farmers, leading to the Whiskey Rebellion, yet another food related tax. Nevertheless, the result of the Hamiltonian program to all but a few of the most virulent Hamilton haters, with a solid fiscal structure that served the young Republic extremely well and was allowed his despised rival, Thomas Jefferson, to reduce the national debt significantly until it was entirely expunged by another anti-Hamiltonian, Andrew Jackson. Thus in one of the great ironies of history, both small government which they really weren't, Jefferson and Jackson ended up beholden to the big government, Hamilton's ideas in order to shrink government. Meanwhile under James Madison, the federal government activated the lesser known half of the Three-Fifths Compromise where in three out of every five slaves were counted for purposes of both representation and taxation. Now most of you know about the representation part. It gave the south a permanent advantage up to the Civil War in Congress. Some historians have estimated that the voting power of the south in the House was increased by about 6% up to about 1861. The taxation part of the compromise was seldom used but Madison's administration imposed direct taxes on slaves, houses and land, all via the state's. So there still is no direct tax from the federal government to an individual. Madison continues Hamilton's low tariff policies but in 1824, after the federalist party was gone, Congress enacted a 35% tax on imported iron, wool, cotton, as well as on raw material such as hemp, flax, molasses and lead. How damaging this tariff was to American industry and consumers has been debated and is murky due to the lack of sources. In 1828, an increase created a massive outcry from the south in particular and was known as the tariff of abominations, ultimately reduced through compromises. By 1842, the Walker Tariff reduced rates to 1816 levels where most Americans had not objected to them. As Brownlee again put it, quote, to the American pubic, when tariffs were low, they seemed to represent a legitimate and reasonable exercise of power by the federal government. At the same time, public lands provided an enormous buffer against taxation. The land ordinance provided for the orderly distribution of land but Americans being Americans, we just rushed off into unsurveyed land, providing possibly the greatest threat to law and order and the nation's stability in its young history. Wisely based on common law, the articles congress chose to follow the lead of the people. If they wanted to settle an area before surveys were completed and you can see, it starts right down there in southern Ohio. Congress allowed this through a system called preemption which we know today better as squatter's rights. This proved to be one of the four pillars of American exceptionalism that Dave Dougherty and I outlined in our book, A Patriot's History of the Modern World. It's truly the first time government bowed to the will of national behavior rather than demanding people tailor their behavior to the national law. The founders proved even more brilliant by instantly understanding that land without political representation meant nothing so they provided a path to citizenship with a subsequent northwest ordinance of 1787. Taken together, the land ordinance of 85 and the northwest ordinance of 87 were astounding pieces of legislation that at the time no nation on Earth had even considered. But land sales remained in the hands of the federal government while projects such as canals and railroads were built at the state level. Once again, although taxes themselves proved too little to fully finance such ventures, states partnered with individual businesses by offering loan guarantees in what was known as the Canal Era. Before long however railroads exceeded even the ability of states to provide finance. Again, wisely, the states mostly avoided entanglements with the railroads which in turn set off a whole new revolution that we today call, the managerial revolution in american business. This not only radically changed business in America but leapfrogged across the Atlantic to the rest of the developed world. In short, both the national and state governments found ingenious ways to avoid taxing ordinary citizens. In the process, forcing American businesses to adapt and overcome. Republicans who by now had replaced the wigs continued to campaign on a few industrial tariffs, mostly iron and textiles and these issues provided the basis for key support in northern states and for the rapid expansion of the Republican party among working groups. Even before Abraham Lincoln took office in 1861, Republicans passed the Morrill Tariff, a major reversal of lowering rates. But even that proved inadequate for what was about to descend on the United States. Abraham Lincoln won a highly contested election in 1860 and the south promptly succeeded. Soon, South Carolinians began firing on Fort Sumpter and the war was on. Civil War placed a new burden on the US government for funds and an unbearable one on the confederate states of America. Federal expenditures soared from 2% of GNP to almost 15% of GNP. This is Salmon Chase, Secretary of the Treasurer. Who names a kid Salmon? I mean what's his sister's name? Perch? Brother, trout. You know, you may know that the Admiral of Pearl Harbor was named Husband Kimmel. Now can you imagine, you're a wife and you're taking Husband to a party. This is my husband, Husband. Glad to meet you, meet you. Anyway, neither land, sales nor tariffs could raise sufficient money to fight the war in the short term leading Secretary of the Treasury Chase to examine a wartime taxation system. In July 1861, Congress created the federal government's first national direct tax and realized that gaining popular support for new taxation to replace the tariff was a major public relation's task. Congress ruled out a large scale property tax and turned to an income tax. Like its successor in 1913, in August 1861, the income tax had two components that would be easier to sell to voters. Rates were low, 3% maximum. And there were generous personal exemptions up to then $800 which would be you know, hundreds of thousands of dollars today, which would leave large numbers of Americans outside the tax paying system. Yet even that proved inadequate to support the soaring costs of the vast armies in the field. Quickly Congress increased the rate with a second tier, a 5%, sound familiar? And enacted consumptions sales taxes, creating an office of the commissioner of Internal Revenue with quote, the largest government department ever created to date. They hiked import duties that raised the top rate again. By 1865, revenues of 61 million in a single year accounted for 21% of federal revenues while tariffs accounted for slightly more, 29%. Borrowing and printing greenbacks filled out the rest. Slowly excise taxes were phased out and Congress allowed the wartime income tax to expire in 1872. I just included this image 'cause it triggers so many people on the PC. Any snowflakes out there? Okay. The confederacy of course, enacted its own tax but without the collection super structure of the union government. This proved a major problem. The south relied on its states to collect confederate taxes and states simply didn't want to do it. As a result, the Confederacy collected a paltry 8% of all the money it needed to fight the war from taxes. Instead the Confederacy turned to inflation and most of you know how that story turned out. The Confederacy's money became worthless. Taxes it seems are the worst way to finance government operations except for the alternative. At least one historian Douglas Ball placed the blame for the Confederate defeat squarely on its failure to establish a working financial structure. After the war, high tariffs remained and dominated post-war finances over land sales. But in 1913, with the Underwood Tariff and this is no relation to Kevin Spacey and Frank Underwood. Some of you might think that. Rates were substantially reduced. But the problem with tariffs, even beyond the philosophical issues, free marketers have with them, was nearly insurmountable. As the nation grew, fairness demanded more and more business and industries receive some protection somewhere. If everybody had to pay for higher priced products, then it was reason, everyone should benefit from their own products being price-protected. Practically speaking, this of course was a disaster. Congressional committees battled over half percent increases and the duty on flax or lead or copper or any other product that had a constituency some place. Determining fair rates got to be too much work for Congress. Indeed as we see it today, any work is likely to be too much work for Congress. And it's always legislature's search for an alternative so they didnt' have to take the heat from revising rates regularly. At the same time, the government developed a very bad habit in the form of wartime consumption taxes on certain luxury products which now more than ever meant injecting morality into the taxation system. Taxes on alcohol for example became increasingly popular for it allowed Congress to reduce tariff rates while imposing a financial punishment for sin! Other argues that in fact taxes sinful products protected them from abolition. And that booze could never be prohibited as long as it was being taxed. I recommend a fascinating fictional book to you by Kyle Mills. He has taken over the Vince Flynn Mitch Rapp series. And in smoke screen, the tobacco industry finally gets fed up with over-regulation and demands that the federal government either ban cigarettes altogether or let them be sold like any other product. And until that happens in the book, the tabacoo industry goes on strike. I can't imagine what fun that would be. You ought to see what happens when millions of smokers suddenly can't get their ciggies or when the gov-urn-ment, to use Ronald Reagan's term, can't get its tax revenue. At any rate, you can see that raising government revenue has multiple components, each affecting voter's constituencies, some often contradictory with others. The Republican party was known as pro-business because it supported the Gold Standard. But it was also viewed are pro-labor because it supported tariffs. The Democrats were known as the party of low taxation because they opposed tariffs but instead favored simply printing money. The issue came to a head in the election of 1896 when Gold Standard advocate William McKinley ran against the opponent of the Gold Standard, William Jennings Bryan. He made his famous Cross of Gold speech and lost. However, some party realignment had already begun as the Democrats had begun picking up poor farmers in the south and west and adding immigrants to their ranks. At the same time, large corporations became tainted as too big and were assailed as monopolies whether they were or not. Authors such as Henry George, Progress and Poverty, began to call for property taxes on profits in the price of land. Popular pressure for redesigning the taxes then began to build especially in the farm sector, this still represented about half of America. As tax historian Elliot Brownlee concedes, support for a radical, progressive income tax had more to do with the search for social justice in an industrializing nation than for an elastic source of revenue. Gee, that bears repeating because it usually is still true today. Arguments about taxation have very little to do with paying governments bills and more to do with making people at the bottom feel like they're sticking it to somebody at the top. This was a founding component of evil that still affects us today. Progressivism or the view that man in human societies are perfectible in the hear and now if only we establish the right system with the right person at the controls. When Democrats got control of both Houses in Congress in 1893, they promptly passed a new income tax with a separate tax on corporations. It lasted about a year until the US Supreme Court struck it down a unconstitutional in 1895, in Pollock, the Farmers Loan and Trust Company. Progressive historians have railed that this was yet one more example of the elite's establishing, quote, an anti-redistributive principle into constitutional law. Pst, it was already there. Obviously the major challenge for the progressives was that they had to change the constitution. By then many Republicans had become fans of the income tax including Teddy Roosevelt, William Howard Taft. I'm gonna tell you a story about Taft. When he was the governor of the Philippines, he got sick and he cabled back to Washington to Ella Heuer Root, took ill, rode a horse up to a mountain retreat to recover. Root wrote back, how's the horse? Taft was about 350 pounds. Anyways, so we got TR, we Taft, we got Robert LaFollette. They saw this as a means to knock corporate interests down a peg while retaining the support of the working groups. They got support from farmers who resented the constant increases in farm property taxes. States had already made end roads into finding new taxes. So trying to get ahead a popular sentiment, many wealthy people signed onto the taxation provision including a group of quote, urban economist and attorneys who were tax experts including Edwin R.A. Seligman of Columbia University and Charles J. Bullock of Harvard. Senator Nelson Aldrich led the charge for the 16th Amendment, secretly hoping it would fail ratification in the states. The major faced defeats and delays that ultimately benefited it when a new single payer tax system was proposed causing fence-sitters to see the income tax as preferable to single payer. The income tax measure was enacted as part of the Underwood-Simmons Tariff Act of 1913 which slashed tariff rates and made up the revenue with the income tax. This is the first income tax form. The whole form. It was deviously clever in its design and appeal to ordinary people. First it exempted many Americans entirely with rates starting at $3,000. Now back then that was just a ton of money. After that rate started at a half percent at the lowest bracket and topped out at 6%. When I lived in Ohio a year and a half ago, our state income tax was 6.5%. This astonishing level given that many states alone have high rates, meant that few people would pay the tax and those who did wouldn't pay very much at all. Second the taxes are extremely easy to comply with. Its form being only one page. I've heard Rush Limbaugh say his annual tax form, annual form is 2,400 pages. Anyway, it worked. Since people had become convinced that equal taxes meant proportional taxes, the income tax promised to quote, equalize tax burdens born by the various classes and ensure it was paid by the wealthiest classes. The income tax has as one proponent said, quote, little to do with revenue and everything to do with reform. While some liberal historians have complained that the income tax was quote, a conservative measure designed to placate the lower classes with a pretend form of punishment of the rich, it didn't help ordinary Americans. By 2013, those ordinary Americans worked until April 18th every year just to pay the federal taxes where as that same American only worked till January 19th each year to purchase all the food he would eat in a year. Similarly tax payment day, the day taxes were due, was put at April 15th, nearly as far away from an election on either side of the calendar as humanly possible. Now when I am elected dictator of America in 2024, my personal government reform is I will move tax day to November 1st, right before the election and oh you must pay all taxes in cash or check. That would stop high taxes in a hurry. Even then politicians didn't think income taxes should become a major source of revenue for the federal government but no one counted on World War I. Almost instantly, the low rates of 1913's skyrocketed up to 65% for the wealthiest. Remember their rate was 6. And to 30% for the lowest bracket up from a half. Corporate rates doubled. Only about 15% of Americans paid all the income taxes so those wishing to soak the rich were in fact very successful. As if that weren't enough, there was an excessive profit's tax that made up two thirds of all federal revenue during the war. The system was pure redistribution as Wilson and administration proudly admitted. Woodrow Willson and his administrators overreached and failed to build any consensus for the new structure which was quickly repealed and scaled back dramatically by his successor, Warren Harding and his Secretary of the Treasury, Andrew Mellon. Republicans cut the top rate on the rich from 78% to 58%, then more, finally arriving at 25%. This was an astounding slashing of taxes but note this. After Mellon worked his magic, rates were four times higher than where the system started. Mellon correctly claimed that quote, the prosperity of the middle and lower classes depended on the good fortunes and liked taxes of the rich. He was famous for the rising tide theory, that a rising tide lifted all boats and that tax cuts spurred investment. Because wealthy people and business owners had more money to invest and expand their businesses. It's common sense. I use to ask my students, how many of you have ever gotten a job from a homeless person. Nobody ever raised a hand. The answer of course, is none. While this may vary, my own limited experience in running a little film company, suggested a business needs to reach a level of about a million dollars capitalization to reliable sustain a single employee in 2017. Mellon, aware that his political opponents would seek to renew their progressive tax increases convinced businesses to accept some progressivity in the system by preserving the estate tax and the corporate tax, both terrible ideas. While certainly not all Hardings or Mellons or Calvin Coolidge's doing, the decade was known as the Roaring Twenties and businesses had more money to invest. Government revenues fell some but not much. And both Harding and Coolidge chopped spending so that the United States had a surplus. Everybody say that after me.


- [All] Surplus.


- Okay, surplus right. The United States had a surplus for most of the decade. And in 1926, the unemployment rate reached an astounding 1.6%. Even anti-Republican historians such as Elliot Brownlee, glumly admit that the National Debt shrank steadily for 10 years under the Republicans from 25.5 billion in 1919 to 16 billion in 1930. In fact, as assured GDP shrinkage was even more amazing from 33% down to 16%. If the tax cuts hadn't exactly quote, paid for themselves, they did a heck of a job. Oh and that fairness thing, the share of taxes paid by the rich in 1921 was 29% but in 1926 after the tax cuts, 51%. And the share paid by the bottom bracket, fell from 21% to a mere 5%. Now how's that for fairness? You know the Great Depression and Herbert Hoover, a status, and statics scoring president who was Franklin Roosevelt ritz small. Although he forced a minor tax cut through after The Depression, he offset that with government expenditures, driving up deficient even past, had Congress pass a check tax, tax on every check you wrote. But while Hoover exacerbated the economic conditions, most economists blamed horrid federal reserve policies for contracting the money supply, which it had already done after the 1920's in real terms. Democrats in Congress gleefully repealed the Harding Coolidge Mellon cuts, pushing the top rate to 63% and passing a national sales tax. Democrats also increased the estate tax, pushing the effective rate on top payers to the highest levels in 10 years and The Depression continued. The new president in 1932, Franklin D. Roosevelt, made no secret of his intent to soak the rich and further ensure The Depression lingered. His administration added still more taxes to an economy already unable to achieve lift off. There was a tax on dividends, a tax on food processing, increases in capital gains and other taxes. Roosevelt embodied the essence of the phrase, tax and spend. In World War II, FDR pushed through a dangerous withholding program that concealed the burden of taxes from ordinary people. In a comedy show in the 1980s, Designing Women, anybody remember that show? Designing Women? Designing Women was about some uh, women who ran a design and architectural firm. And one of the women, a wealthy woman named Suzanne Sugarbaker, at one point, found herself forced to take a regular job. When she got her first paycheck, she explained, whose this FICA guy and why is taking all my money. Precisely. Go back to my suggestion that people pay their taxes by check or cash. During World War II, high taxes were tolerable because of patriotism and also because consumers could not purchase much creating a massive pool of pin-up demand for consumer items after the war. With nothing to buy and with wages steady thanks to government controls, the American put up with it a tax regime. Of course the flip side was enormous debt which piled on top of FDR's new deal debts. By 1943, the annual deficient was 57 billion dollars. And increasingly taxes made up a larger share of federal expenditures. More tax money meant more federal spending rising from 10% in 1940 to 15% a decade later. As the nation emerged from World War II, a new liberal Democrat tax regime had mass based progressive personal income tax, a flat tax on corporate income and a regressive payroll tax for Social Security. As American businesses regained its footing and confidence in the 1950's, however, a new push to reduce burdensome tax rates appeared. John F. Kennedy answered the call. Kennedy subscribed to Mellon's supply side concepts so named because the tax cuts on the wealthy would stimulate the supply side such as investment and building factories. Supply side was based on Says Law that says that supply creates its own demand, meaning not that by making a product will it lead to that particular product being purchased but that the expenditures created in making that product would be enough to purchase it if desired. The money would be spent somewhere. Although JFK would not live to see it, the Revenue Act of 1964 led to a across the board cuts of 20 to 30%. Even with the Vietnam War escalating, the economy turned around and again proved the concept of supply side cuts. For the bible says, in the mouth of two or three witnesses and now we had two, Mellon and JFK. Ronald Reagan would provide the third. In th 1970's, Keynesian was largely debunked through the disproving of the Phillips curve which said high inflation and high employment, could not coexist. By the mid 70's, all Americans knew it absolutely wasn't true. Government expenditures only added to inflation, did not seem to affect unemployment at all. By the end of the 70's, Jimmy Carter, as head Gerald Ford before him, failed helplessly with Keynesian's approach just to stop inflation and simultaneously restart the economy. Reagan need come to the supply side in the 1970's from reading a number of sources, but his biggest influence on his thinking on taxation, was from personal experience from incredibly high rates he once paid as an actor. He knew intuitively that high taxation discouraged work initiative and rewarded purchases of non-taxable assets. Arthur Laffer from the University of Chicago had already outlined his Laffer curve extensively on a napkin although he couldn't recall that, as a means to dismiss the basic argument as not serious. Liberals kind of forget that the Beatles wrote Yesterday on a napkin or that in Dayton, at a place called the Engineer's Club, you have a framed tablecloth outside, where some of the most brilliant engineers on the planet would draw their designs for incredible inventions. The Laffer curve was a simple basic illustration of the true principle that there are two levels at which government will receive no tax revenue, zero and 100%. No one will willingly be a slave although I think Donna Brazil said she did something like that, I'm not sure. Laffer said that at some point and he didn't specify where the the government would get more revenues by lowering taxes. This is common sense. He used the burden of taxes to explain once, Reagan used the burden to taxes once to explain to his son Michael how he couldn't raise Michael's allowance. Butchers my work from Heritage Foundation, Reagan planned a large 30% across the board immediate tax cut upon entering office, originally devised by Representative Jack Kemp of New York. Senator William Ross stretched it over three years. No one ever said that tax cuts would pay for themselves but by that time, the sad notion was already ensconced that tax cuts had to pay for themselves somehow. The post-war Republicans in reaction to FDR, had wedded themselves to the concept that every dollar of reduced taxes had to be paid for with some other revenue source. Of course, deficits never have to be paid for. But nevertheless. Prior to Reagan assuming the presidency though, the anti-tax sentiment in America had achieved a dramatic victory in California with Proposition 13. This is a true tax payer revolt about bracket creep which inflated property values, ever escalating tax levels on homeowners. Prop 13 limited tax rates on property to 1% of market value and required a two thirds majority in each House of the legislature to increase taxes. Piggybacking on this tax payer revolution, Reagan stormed into office in his economic recovery program had the Kemp Roth cuts in the forefront. Reagan also sought new depreciation scales who had benefited businesses. Of course, static scoring budget balancers like Allen Greenspan fretted about deficits and urged Reagan to stretch out the cuts. Reagan refused. As one tax historian said, the president wanted to cut everyone's tax regardless of whether or not they had any particular economic theory to back him up. This was vintage Reagan, who knew instinctively why it worked. He expressed this in a joke about three men, a surgeon, an engineer and an economist, who died and went to heaven. St. Peter said they only had room for one of them based on who was the oldest profession. Surgeon said, well God removed the rib from Adam to make Eve so I should get in. The engineer said, whoa, whoa, hold on. God made order out of chaos, what do you think engineers do? I should get in. The economist said, well who do you think caused the chaos? Eventually the final agreement was for a 5-10-10 reduction on individual rates on capital gains of 20% but as the notion that would lead to great, but as to the notion, it would lead to greater revenues. Even Reaganafiers, such as Dinesh D'Souza seemed to think revenue fell while in fact during Reagan's eight years, government revenues rose eventually by 40% and by 1988, the economy was generating more tax revenue at a maximum rate of 28% than many on the left forecast to generate at 70%. And deficits still rose. Because gee, Congress kept spending. Congress spent 100% more. Was an object lesson that taxes and deficits are not related. And even the deficit rule ended. It fell from 6.3% of GNP in '83. The pit of the recession to 3% by '87 to '89 or right where it was before the tax cuts. America's economy soared. GNP rose 30%, median income which had fallen in the 70's rose 15%. Some five million new businesses were added and 20 million net new jobs were created. Interest rates were cut in half. Inflation nearly disappeared. In some quarters, about 5% more of those in the middle class earning between 15 and 50,000 moved into the next highest quintile than before causing critic Kevin Phillips to scornfully note, quote, the term millionaire has become meaningless. Now, let me go off script. I tell my students all the time, that our textbooks are horribly biased. Any students out there have used a book, called the American Pageant in your History books? Got one over here. How about the National Experience, big blue book? Okay, this is from the American Pageant. I don't have the title up here. But the title of the chapter is Reagan, the chapter on Reaganomics or whatever. And this is deficits over time. If I could put a title up here, it would be deficits over time, okay. So check this out, you obviously see that from 1985 to '85 or from '80 to '85 and then on to '88, deficits just kind of go off the charts here, it's just nuts. What's that crazy ole Reagan doing, gee whiz. Except there's something wrong with the chart. This is taken straight out of the book, by the way. Note up top, it says billions of dollars, uh oh. There's a word missing. Real. This is not billions of real dollars. This is billions of inflated dollars. Any economist worth his salt knows that you always adjust money over time for real dollars. So I got their data and I did that. Then I said you know, how much you owe is a factor of how much you make. I mean if some of these students in here saw my Visa bill, they'd pass out. On the other hand, if Bill Gates saw my Visa bill, he's say I'd throw that in a pile until it amounts to some real money. And I'll pay it maybe in three or four months. So, I adjusted this in real dollars as a share of GNP, here's the chart. Now these guys are historians. They're not economists. It was just a mistake. Maybe they just screwed up, right? No. Same book, same topic, i.e. Reagan's an idiot, okay. This is the national debt over time. But they went a step further. Any of you, I know it's not required watching any more. Any of you remember Sesame Street? They use to have this thing. ? Three of these things is kind of the same thing ? ? One of these things is not quite the same ? And they'd have a parakeet and a parakeet and a parquet and a boa constrictor! Susie, what's different? Well, that's a boa constrictor, okay. So let's play the Sesame Street game here. Note the bars. We have Depression, that's an event. World War II breaks out, that's an event. Japan surrenders, event. Korean War. event. Vietnam War, event. Reagan! A person. See how clever they are in this? This was done deliberately. This was done and it's utterly, utterly flawed. Here's the real chart. I overlayed them, it's not a perfect, oops. I didn't overlay those two guys. Sorry, I must have dropped the overlay chart. But you get the point. You get the point. As for that equality thing, after the Reagan tax cuts, just as happened under Harding, Mellon, Coolidge, just as it happened under JFK, the rich ended up paying more of the total share of taxes. The poor and middle class, less. In fact, according to a study by James Gourtney and Richard Shoop, the rich ended up paying a whopping four and a half times more than before the cuts. This may sound counterintuitive but it's kind of is like driving on ice, you know. When you go into a skid, which way do you turn? Into the skid. Huh? Hey guy, I don't care. You wanna live, turn into the skid. Reagan eventually gave into the deficit hysterics with a tax revision in '86 which in his mind was mostly about closing loop holes. Nevertheless, as always, reform meant raising tax rates for most Americans and the rate jumps back to 32% for individuals and 33% for corporations and the deficits never changed. Now we're back to these guys. I did not have sex with that woman, Mrs. Lewinsky. I did not have sex with her. Pst, he was talking to Monica. I did not have sex with that woman, Mrs. Lewinsky. No, no, it's me and you, it's always been... Anyway. You'll get it. Reagan successor, George H. W. Bush, committed political suicide by renigging on making his read my lips, no new taxes pledge, made at the Republicans Convention. Bush tried to justify it as a necessary fix for resisting Saddam Hussein and Kuwait but the essence of the promise was destroyed. Taxes would go up. Once again a Republican had been brow-beaten over a deficit that Democrats never cared about when they were in office. Once again, it did little to change the deficit. But it did contribute to Americans saying Bush is unreliable and some people thought the tax hikes contributed to the recession of 1990. Bush's opponent in the election, Bill Clinton, got the message and ran on tax cuts for the middle class combined with class increases on the wealthy. He proceeded to spearhead five separate tax increases, the largest series of peace time tax increase in American history outside the new deal. And as might well been predicted, his middle class cuts went by the waste side. Reaction of Clinton's overreach in 1994 led to the first Republicans majority in the House of Representatives in 40 years and produced the contract with America which called for a balanced federal budget led by Georgia Congressman Speaker Newt Grinch, the House proposed a USA tax, a value added tax that would keep income taxes at current levels but would allow unlimited deductions for savings and a credit for Social Security taxes. However, it also proposed an 11% vat. Congressman Dick Army instead suggested a flat tax as close to a return to the original 1913 form as you could have asked for. Grinch and Senator Bob Dole appointed a commission chaired by Jack Kemp to review the entire US tax program and possibly repeal the income tax. Democrats resisted the flax tax elements and by then it was 1996, a presidential election year and Clinton balked at jumping on board tax reform concentrating on short term issues and running against both Democrats and Republicans called triangulation. But Gingrich had succeeded in getting more protections for tax payers in the Internal Revenue Service Restructuring and Reform Act in '98. It also streamlined the IRS making it a more effective collection machine than ever while business rates remained at about '86 levels through much of the 1990's, individual rates crept back up. Although the national debt had still climbed under Clinton, he claimed credit for a slight budget surplus in 2000. Tax payers weren't convinced that Democrats policies toward them and elected George W. Bush narrowly. Bush ran on a substantial cut of 1.3 trillion including reductions in almost all brackets, some by 30% and included the doubling of the Child Tax Credit to a thousand per child. But unlike Reagan, the economy was not a major issue for Bush. America was not in recession and had in fact, done well in the Clinton years. Especially as Silicon Valley took off, whatever plans Bush had were largely derailed by the events of 9-11, the subsequent war on terror, and the invasion of Iraq. Politically, Bush simply refused to fight back against the negative press, a tactic his strategic advisor, Karl Rove, called quote, the biggest mistake of our presidency. The result was that by 2006, Bush was substantially weakened and he took the Republicans party down with him. Democrats won the Senate and in 2008, with the election of Barack Obama, held a veto-proof majority in both Houses. Obama ran on extending the Bush tax cuts only for those who made under $250,000 a year. After he won, Congress passed the American Reinvestment Recovery Act about a third of which were tax cuts. He immediately offset that with NASA government expenditures that had no impact on the economy. The biggest tax was yet to come, Obama Care, the Affordable Care Act. With a myriad of taxes on everything from medical devices to services, almost all at the whim of the Secretary of Health and Human Services. Deficits soared and Republicans found their issue for 2010, repeal Obama Care and cut taxes. Indeed Republicans are mobilized by a newly emergence grassroots group, the Tea Party, and Tea Party stands for what? Taxed enough already. Which soon dominated the core of the Republican state parties. However, it became clear that while tea parties could elect people, they were a little less successful in forcing them to keep their word. At local levels, tea parties often not always, proved inept at governing, despite three consecutive Tea Party elections, the anti-tax message was paid lip service but little else. Donald Trump won in 2016 in part on the basis of tax reform and still the Republican establishment, an utterly unanimous democrat opposition, have stalled any tax cuts. But we are now into current events not history and the tides swirling around the Republican's unwillingness or futility to achieve anything with electoral majorities goes far beyond taxes. Let me give you in closing, just a few personal proprietary pieces of research, to wrap this up as to where we're heading. In 2016, I wrote a book called How Trump Won with Joel Pollak of Brietbart. I wrote my sections in this book before 2016, long before election day. I predicted a Trump victory and I quote of between 300 and 320 electoral votes in spring of 2016. How'd I do? This was not speculation. It was based on extensive voter registration analysis in key states. For example, I found that in Ohio, in Cuyahoga County, there had been massive shifts by the summer of 2016. How massive? Ohio election centered on three or four cities, Cleveland for Democrats, Cincinnati for Republicans, swing areas of Columbus and Dayton. For a Democrat to win Ohio, they had to come out of Cuyahoga County at least 150,000 to the good. I found that in early summer of 2016, Democrats had lost 92,000 off their roles in Cuyahoga County. Trump's got Ohio. It's simply impossible for Democrats to win this state. Other statistics over the summer confirmed my expectations. In Iowa, in Florida, in North Carolina. Everywhere Democrat registrations and or early absentee voting were drastically off 2012 numbers. We could in some instances even predict with great certainty how independent voters would vote based on very deep house-by-house patterns. My conclusion was that Trump would easily win Ohio. He actually won by 5 points more than I thought. That he would pretty easily win North Carolina, Iowa, Florida and based on the makeup of the voting population of Ohio, that he would carry Michigan and Pennsylvania. The only state I did not call was Wisconsin. I put all this in drafts and I sent to publishers in October and I was laughed out of the office. Of course, the day after the election, I started getting calls. But the story isn't over. And yes it relates to taxes and everything else. I continued my research into voting patterns and registration since November. The numbers are shocking. They are completely unreported in the national news. Largely ignored even by Republican hierarchies because of the stories they tell. Since November the net change in registrations in 14 battleground states where we can track Democrat, Republican registrations, are awesome and they are all in one direction, toward Republicans. Sometimes, total registrations in states are down because Secretary of States purged the roles of dead people out migration otherwise known as Democrats. But up, down or sideways, the numbers are stunning. In 12 of the 14 states, Republicans have gained and gained a lot. Again, since November in Arizona, supposedly trending blue, Republicans have had a net gain of 12,000 over Democrats. In Florida, 62,000. It's a trend about 6,000 per month which means at current rates, always you know, at current rates, you're going to be looking at Florida being a red state in 2020. This is critical because so far neither national, oh yeah, I almost forget. Pennsylvania, 109,000 net shift to Republicans since November. North Carolina, 80,000, on and on and on. The only states that are trending Democrat, Colorado, a little bit. Delaware, by 300 people, okay. The bad one's, California's a million new Democrat registrations since the election. But again, they're 55 electoral votes aren't gonna change 'cause they get more, right. This is critical because so far neither national party has figured this out. Both are in denial because this entire surge, I would argue, is Trump populace Tea Party surge. In my dozens of speeches all around the country, I find no enthusiasm for the Republican Party, per say. It's all about Trump and the change he represents including a more reasonable tax system. I think any chance of a true flat tax unfortunately is non-existent. I'm not a particularly a supporter of the so-called FairTax which I think has even less chance to see the light of day. So that brings us back here. The IRS will be with us all till death. But the system can and if my statistics are right, will be made better. And sooner rather than later, Joe Black, may end up looking like Brad Pitt after all.

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