April 3, 2014 • 42 mins
They are among the more reviled concepts of modern life, and yet they are as inevitable as death. Join Josh and Chuck as they look into the history and the basis of income taxes in the U.S. in this episode.
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Episode Transcript
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Speaker 1 (00:01):
Welcome to you stuff you should know from house Stuff
Works dot com. Hey, and welcome to the podcast. I'm
Josh Clark and Draws w Chuck Bryant and Jerry Rowland.
They're here with me. So it's stuff you should know.
That's right. Welcome, that's nice. That's a friendly will come in. Oh,
(00:24):
German friendly, bienvenue French friendly? Is that French? I believe?
So Okay, how's it going. It's going fine, still snowing,
that's right with people, like weeks later it's snowing. Uh. Yeah,
because we're releasing this one around text time because it's appropriate.
That's right. People, the dreaded day, it is dreaded. I
(00:49):
feel sorry for people with that birthday because it's just
associated with you know, pain and suffering. Well you should know,
I mean, like think about it. That's one good thing
on that day. Yeah, is their birthday? You know. I
think we should all celebrate like a half birthday or
a mini birthday on April fift just to kind of
(01:09):
alleviate tax day. That's right. So we're talking about taxes,
specifically income tax, which is everyone's favorite tax to pay
is go out and work hard for your money and
then give a significant portion of that to the government.
(01:29):
All Right, that's text day. I'm not gonna tax bash.
I'm gonna try not to tax Bash. It's kind of
tough not to. And I know you gotta pay taxes,
I get it, but man, it's just government takes a bite.
Well it's not that even it takes a bite that
they tinkle so much of it away, you know, And
(01:50):
oh my god, it's so maddening. The older I get,
the more I'm just like, you have to bed. Yeah,
when you're younger, you don't think about that stuff as much.
At least I died and you go all learn like,
wait a minute, pay how much in taxes? Exactly? All right,
let's get into this alright, Chuck. So um, we're talking
income tax specifically, not just taxes. But um, this country
(02:11):
has a long history of hating taxes. And it goes
back to the very um point that it was founded on,
which was in part breaking away from um, Great Britain England. Um,
because of taxation without representation. If you're a colonist, you
were taxed man all over the place. Yeah. And um.
(02:34):
What they found though, was when we got our independence,
the US government formed and started taxing all the same stuff,
and I imagine they didn't love it, but they were like, well,
at least we're represented, which is kind of the issue
we had before. You know, this is taxation with representation. Um.
But these were just they weren't They were excise taxes,
(02:56):
which is a tax on a specific good, right specific
type of good. They were tariffs, which is a tax
on foreign imports. And they were um sales taxes basically. Yeah,
twelve was the first sales tax on gold, silverware, jewelry,
and watches. So that's pretty much a luxury tax really. Yeah.
So right off the bat, the first tax on a
(03:18):
personal tax on a person um is it affects the wealthy. Yeah,
And it's interesting them the history of the taxes here
as you look at it, there was a lot of
installing attacks and then repealing it and saying no, that's
not right, and then they'll put in another tax and
then they would say no, that's not right. Well, what's
funny is that pattern that you're talking about. It followed
(03:42):
because the taxation is usually imposed on the wealthy, and
the wealthy figures out how to get out of it,
and it goes on everybody else's shoulder and then it's repealed. Yeah,
this is nothing the stuff that we see now people
arguing about. It's kind of what's exactly the same back then,
which is really kind of funny when you think about it.
You know, there's nothing new. So in eighteen sixty two
is when we got our first national income tax UM
(04:05):
and part of this was to support the Union Army.
Congress passed laws in eighteen sixty one. In eighteen sixty two,
UM in the Office of Commissioner of Internal Revenue, which
we know is i RS today, was set up by
the Tax Act of eighteen sixty two. Yeah, let's just
for a second, chuck, Like, let's think about this. The
beloved Abe Lincoln is directly responsible for the income tax
(04:30):
and the i R S. Yeah, I mean it happened
on his watch. Sure, I guess you can't set up
an income tax without a body to regulate it and
to enforce it, which is basically what that did in
eighteen sixty two. Right, And we were talking about taxes
being um created due to be imposed on the wealthy
um between eighteen twelve after eighteen seventeen, with that when
(04:52):
that tax, the Luxury good tax was terminated, and eighteen
sixty two, there weren't any taxes like that at all.
There weren't any personal taxes, and the US government funded
itself from tariffs, right, So all these foreign imports coming
in imports, well, the tariffs were on imports apparently mostly um.
(05:15):
Because this allowed companies this this basically led to the U.
S economy booming because they like all of the internal stuff,
all of domestically produced stuff, wasn't subject to any tariffs,
so they didn't have to compete. They had cheaper prices.
And these companies used this this stuff to enrich themselves,
(05:35):
which led to the uber wealthy, which in turn led
to the first income tax and anything sixty two to
text the uber wealthy. That's right. Uh. In an eighteen
sixty three they started collecting this income tax for the
first time, and it was a graduated tax, kind of
like we see today. Um, if you earned between six
hundred and ten thousand dollars a year, you paid three percent.
(05:58):
If you made higher than that, you paid more than
that percentage wise. Um, I mean that was the first
income tax. So it's always three and then five percent
if you made over tempt Yeah, it's always funny to
me when I hear like our founding fathers blah blah blah, like, no,
you're founding fathers. Is this is exactly how they set
(06:18):
it up. So I guess the argument is, well, not
those founding fathers, just certain founding fathers I agree with, Well,
it depends on the founding fathers. Well, it's just I
hate hearing the argument our founding fathers when people don't
even really know exactly what our founding fathers were doing,
like imposing a graduate attacks first right off the bat.
(06:39):
You know, well, the the U I only recently realized
that there was that. What we have today in the
United States, the form of government we have is part
of what's called the Jeffersonian Revolution, where basically the founding
fathers Monroe, Madison, Washington came up with the country. They
came up with the country that's different than the one
(07:02):
we have now. And the reason that it's different now
is because Jefferson came along and said, Noah, we can
do better than this, so let's change this, and that's
what we have now. So which, yeah, which which founding
father are you talking about? So, like we're saying, it
went back and forth, there was a flat tax in
eighteen sixty seven instead of a graduate attacks and then
(07:24):
five years after that they repealed income tax altogether, and
they said, this is not right. It is unconstitutional. Um,
it's got to abide by a constitutional guideline and it
does not. And that was the income tax of eighteen
ninety four. That was where the tariffs were. I'm sorry
I missed spoke earlier. Between eighteen seventy two and eighteen nine.
(07:47):
That's where the U. S. Government was lived on tariffs
and that allowed the economy to boom, railroads to grow,
and that a class of uber wealthy to get even
wealthier they were there before. But um, like this is
when the Carnegies came along, the Rockefellers like started to
develop this and so all these people said, hey, man,
(08:08):
like these people should should be paying some some taxes here,
and that's where they came from. That's where the tax
came from. Yeah. In that tax two percent of personal
income more than four thousand dollars again, tax on the wealthy. Uh.
And the Supreme Court is that's when they struck that
one down as unconstitutional. So in nine Congress got around
(08:30):
all this by making it a part of the constitution.
And said, you know what, we'll create the sixteenth Amendment.
Congress will have the power to lay in collect taxes
on incomes from whatever source derived without a portion I'm sorry, Yeah,
apportionment among the several states without regard any census, right,
which was the hangout before. Yeah, Like, it doesn't matter
(08:50):
how populated your state is. Like, this has nothing to
do with state. It's just a national tax. And originally
the income taxes a tax on the uber wealthy does
make a king more than four thousand dollars a year,
which is super wealthy. Um, and the uber wealthy fought it,
got the Supreme Court to strike it down, and so
under Taff's watch, they said, well, we can get around
(09:13):
this by just amending the constitution. That's what they did.
And apparently from this the sixteenth Amendment. Like before, Chuck,
it was like, um, you were more a participant in
your state, and there was the federal government, but it
was the federal government and they didn't mean a whole
lot to you. When the sixteenth Amendment was passed, that
(09:33):
changed everything because now you were a payer to the
federal government. Um, and the federal government also had the
states kind of by the short hairs because the states
relied now on federal grants that were generated through your
tax dollars. So the federal government really asserted itself as
a central power, consolidated power into the federal government with
(09:57):
the sixteenth Amendment more than anything else but or and
they never looked back. They certainly didn't know. UM. In
nineteen thirteen with the Underwood Tariff Act, UM, they basically
kicked off the modern system that we have in During
World War Two, they started withholding taxes instead of just
telling up your bill and paying at the end of
(10:18):
the year. You have, as we all know and love.
Now you have part of your paycheck withheld pay as
you earned system. That's right, and that funds the government
continuously because every pay period your employer, which who withholds
the your money on behalf of the government, submits it
to a federal reserve bank, and the government earns interest
(10:40):
on it and has constant income. That's right. It's like
a paycheck for the Government's exactly what it is. Uh
So let's let's walk people through. Uh And and I
think this article does right by it like picking out
just one person. I don't want to call him Joe.
I'm so tired of that, What do you want to call?
While I have Cyrus written down? All right, we'll go
(11:01):
with Cyrus. Right, the Cirrus gets a job, Cyrus gets
away age, he agrees to with his employer and says,
all right, this is fair, We'll take this job. And
the employer says, all right, Syryus, you gotta fill out
this W four and um, that's one of your tax
forms and you gotta do it right when you get hired.
And it's gonna list all your withholding allowances and all
(11:22):
your dependents and child care expenses and basically everything that
you need to know, Mr employer, like how much money
to hold out of my paycheck? So I fill out
the W four. Now you know, now you're withholding. And
now at the end of the year, me, Cyrus, I
want to see if I can kind of project how
(11:42):
I did this year. Am I gonna be paying? Am
I be getting it back? So here's how you do that.
So you take your gross income, the number that we
all wish we actually made. Right, Yeah, that's all the
money you have from salary, from interest, income from pensions. Yea,
all the money you have coming in, that's your gross income, right,
(12:03):
and then you go through adjustments, and adjustments are basically
um uh, little little mulligans that the government gives you, says,
all right, you can you can subtract this from your
gross income, which alimony, let's say, sure, or if you
um uh tax on your self employment, if you moved,
(12:26):
moving expenses for your job, that's one to stuff like that,
and all these things. So adjustments, deductions, which we'll talk about,
all of these things, credits, they're all basically behaviors that
the government wants to encourage, so they give you, they
give you the ability to subtract those amounts from your uh,
your gross income. Yeah, they incentivize these things. Yeah, Like
(12:47):
they want you to work, so you can deduct childcare
expenses under some some regimes. Or they want you to
go to college, so you can deduct college expenses things
like that. So that your adjusted gross income. Right when
you subtract your adjustments from your gross so that's your
A g I. And then you've got a couple of
(13:09):
choices here when you go to fill out your tax forms.
You can either do the standard deduction or itemize everything out.
You're gonna want to choose whichever one is greater. Obviously,
so you can get the biggest chunk for yourself. Um,
all sorts of itemized deductions. Like if we had a
tax accounting in here, they would probably laugh if we
tried to break down itemized deductions. There's a lot of them,
(13:32):
and they get really weird. Like, for example, a good
example that, um, if you're a bodybuilder, a professional body building,
which I am, Uh oil body oil, I write off
all my oils can be written off as a business expense. Yeah,
and you know I want. I used to freelance in
the film industry. They are all sorts of cool things
you can write off, like your movie tickets and your
(13:52):
cable bill and uh stuff like that. Um, you can
write off your interest on your home mortgage, charitable contributions,
some medical and dental expenses, all sorts of things within
the law that you can they call him right offs
your deductions or you can just go with the standard
deduction again. Right, you don't have to itemize everything out No,
(14:13):
but a lot of text people say, uh, tax professionals say,
at least go through and make sure you shouldn't be
itemizing because if it's even a penny more maybe not
a penny, but if it's a little more. It's worth
the trouble most of the time, and it is a
lot of extra paperwork. Um, but you know, you save
yourself some money as you're deducting from it. You're deducting
(14:35):
from your income. And then finally, after you have your
justice gross income and you subtract all the deductions for it,
that the number that you have that's your taxable income.
So the more you can deduct from it, the lower
your tax burden is going to be. Yeah, I can't
remember which. There's a commercial going around now about one
of the accounting firms that says that Americans left a
(14:57):
billion dollars on the table for Buffalo while Wings cafe.
If you're getting your taxes done at Buffalo Well Wings,
then you get a free dozen wings. That'd be awesome.
Did you hear that they may have Dorito's flavored wings
coming out. I can't tell you how excited I am
about this. I don't get the whole derito ization of everything.
(15:20):
You need to get on the bandwagon, dude, because there's
a lot of fun to be had eating Dorito based food.
Remember we were kids and that was derritos. That was
it was like the guy with a mustache would sell
you this one derito And now there's like, wait, what
where are you buying derrito's one at a time? From
a guy? When down the commercial he was he looks
(15:40):
for like jeans Shallotte. Oh, you're talking about the frido bandido.
That's different. I'm talking about the Dorito's guy. Really know
you're thinking of Mr Pringle's. But now they you know,
you go the store is just overwhelming. It's ridiculous. Yeah,
but different shape flavors, and they're they're just like, let's
throw everything at the let's see what sticks. Just give
(16:01):
me a derita or cool Ranch. Cool Rance is great.
I have to abide by the color ranch. They brought
the original version out too, and those are pretty great
to just regular nacho cheese doritos. You know, even before
that there was an original version. It's like taco basically
it's orange bag. It's an orange bag. I think that's
that is when I grew up on. Obviously, no, the
nacho one is the red bag and then blue is cool.
(16:24):
What is this like the nine twenties? What do you
mean when they had the original like the sixties or fifties,
even before your time. So you've got your taxable income,
you go to the I R S tables. If you
make less than a hundred thousand dollars a year, you
go to the rate schedules. If you earn more than
(16:45):
a hundred thousand dollars a year. And like we said,
it's a marginal tax rate system. Um or graduated their
different tax brackets depending on how much you make. Yeah,
there's seven this year and two. So what's still low?
Is it still ten percent? Yep? Ten percent, fifty three percent,
thirty five percent, and then for earners of four hundred
(17:07):
thousand or over, I think single earners of four k
or over, it's thirty nine point six percent of your Hey.
But so it's a marginal tax rate, meaning that um
that you fall into one bracket or another. If you
earn a hundred thousand dollars, um you're not gonna owe
I think twenty eight thousand dollars. I think it falls
(17:29):
into maybe they percentile you wouldn't owe twenty eight thousand
dollars of your adjusted gross income or yeah, what you
would owe is ten percent up to the top of
the ten percent bracket of the high of the fifercent bracket.
And so on until you reach your bracket and you
(17:50):
subtract your adjusted gross income from the top of that
or from the bottom of that bracket, and then you
owe percent of that. That makes more sense. It's a
lot easier if if say, like you know, if you're
making a hundred thousand dollars less, you just go to
the text table and you're like, there it is. But
it's also fairly easily calculated as well. So what do
you want to make? Well, here's the thing. You want
(18:11):
to make as much as you possibly can, I think,
But then you want to have that's what you're Into're
not saying everyone has to pursue the dollar, right, But
if you are pursuing the dollar and you don't want
to pay more tax than you have to, UM, you
you want to make a high salary and then have
(18:32):
a lot of adjustments. UM. The problem is is that
there's this thing that was introduced in the sixties nineteen
sixty nine I think, or maybe the seventies. UM was
the alternative minimum tax. Sorry that came around in the eighties.
The alternative minimum tax was introduced to keep high earners
(18:55):
from just deducting absolutely everything and paying a very a
low tax. Um, and it made sense of the time
because it was imposed on higher earners. The problem is
is the cut off that was originally introduced, something like
sixty thou or something like that at that time was
a lot of money, but it was never index to inflation.
(19:17):
So as the value of the dollar grew weaker over
time through inflation, why didn't they index it to inflation.
That's weird. Well, because now something like of wag earners
fall subject to the minimum tax, so it's basically like
an extra tax now. And what the alternative minimum text
(19:39):
does is say, okay, great, you went through and you
figured out all your deductions. That's beautiful. What we're gonna
do is take your adjusted gross income minus deductions, that
nice little number that you got it too, and we're
gonna add those deductions back and we're gonna come up
with your alternative adjusted alternative income figure. And then we're
going to figure that how much ex tray you oh,
(20:01):
on top of your normal ten forty and that's your
full tax. You're gonna add that to the ten forty
tax amount that you owe, and we're gonna come up
with the actual tax you oh, including alternative minimum And
apparently Basically, everybody's subject to it one way or another.
Even if you don't itemize, even if you choose the
standard deduction, you probably owe something on the alternative minimum tax.
(20:25):
So it sounds like what you're saying is that no
matter what we do, and no matter how clever we
try to get with our accounting, all they have to
do is throw in the word another adjust right, they
add those adjustments right back them. They can just throw
in another word no, no, no, we need to adjust
it again and some at some point you gotta stop adjusting, right, exactly.
So the key here is then if you're still if
(20:46):
you're like, okay, I'm subject to the alternative minimum tax,
I'm um, I want to earn a high salary, but
I don't want to pay too much tax. The thing
that doesn't the adjustment or the deduction, I'm sorry, that
doesn't get added back um to your your gross income
when you're figuring the alternative minimum taxes charity charitable contributions.
(21:08):
So the key then would be to max those out
as much as possible, and then that would, I imagine,
lower your tax a little bit as far as alternative
minimum tax goes. Alright, it's like here's your tax, and
then now do it again and pay more. That's because
they didn't adjust it to inflation. All right, I think
(21:34):
we're here towards the end of this portion. You have
your gross tax liability finally, and we should say also,
I'm sorry, um that as of two thousand twelve it
became finally index to inflation. But I mean for thirty
years it wasn't, and it just kept hitting more and
more and more people. Well it's important though, that's good. Uh.
So we have your gross tax liability. Now Cyrus is
(21:57):
Cyrus is going to subtract any credits that are still there,
and then that final number is Cyrus's net tax. So
that's either what he's gonna pay or what he's gonna
get back. And come April, uh, some time between January one,
when he gets his W two from his employer in April,
(22:17):
he's gonna have to figure all that out, either by
himself or with the help of someone who knows what
they're doing. Um, your W two is gonna break down, uh,
everything you made Basically, it's also in your final paycheck,
but the W two is what you send in, so
you need a separate copy and Supposedly, the UM, your employer,
you're anybody who who is going to send you money
(22:39):
about income you made or documents about income you made,
UM has to give you those documents by January thirty one.
That's right, okay. Uh And then here's the fun part.
They take all your information and they store it on
magnetic tape machines from the nineteen fifties. Yeah, you found this, UM,
(22:59):
this is pretty crazy easy. Well, it stood out to
me when I saw magnetic tape machines. I was like,
how old is this right? And apparently that's still the
case because UM they don't have the funding to upgrade
their systems, so they have the magnetic tape program. And uh,
Obama's is trying to think UM in two thousand twelve
(23:20):
to increase funding to correct that by like a billion
and a half dollars two point one billion. I don't
know if it went through or not. So, like you found, Chuck,
you stumbled upon the very reason why tax refunds take forever,
because there's up to a two week period between when
this the refund or the tax return is filed UM
(23:42):
and and it ends up on the magnetic tape where
it's like it doesn't even exist as far as irs
is can. There's no data whatsoever because they're using magnetic tapes. Um.
All right. So oh and apparently also in this article
that you sent, UM, they were saying that the the
encryption for the I r US is like pretty sad
(24:02):
as well, that's parting. Yeah, and the security breaches is
all but inevitable. Yeah, if it hasn't happened, like if
it doesn't happen in a daily basis already. Wow. All right.
So that a lot of people complain about taxes in
this country and probably worldwide. Um. So over the years
have been a lot of different UH solutions proposed, different
kinds of taxes, alternatives, if you will. One very popular one, um,
(24:27):
because it keeps coming back up at least is the
flat tax. UM. I think also people like to say
it flat tax. Uh. Steve Forbes and Dick Army, Um,
we're big on the flat tax. And that was one
of Steve Forbes's big one of the foundations of his
presidential campaign was a flat tax of se ish um. Basically,
(24:52):
everyone pays the same tax no matter what. Um, You're
complicated tax code is going to be bye bye, and
you're gonna get something about the size of a postcard
to fill out about ten lines your personal income, any
personal allowances, your wage, your salary, and then what is
your seventeen percent and nut that you owe? Makes sense?
(25:15):
What's the problem seventeen percent? That'd be great for everybody. Yeah, Well,
critics will say that it's a favorite the wealthy and
puts higher taxes on the burden on those who don't
make as much money. Yeah, because if you're paying ten percent,
if you're in the ten percent bracket, suddenly you're paying
seven percent more on your income. True. Under Dick armies
um flat tax that he proposes, anyone making less than
(25:39):
thirty six thousand, eight hundred pays no taxes, which is
different than Forbes is right, which if if that's still
part of his plan, I couldn't find if he'd adjusted it,
then that that it actually is a pretty good plan
if it would still satisfactorily fund the government, because that
would mean that everybody, if you were like you, would
(26:02):
pay no tax for thirty eight six right, and so
anybody above that would still be paying less because that
falls in the bracket, which means that you would automatically
everybody would automatically be downgraded tax wise, which is pretty good.
(26:23):
The problem is, you know, would that fund the government?
Is that the issue? Well? Yeah, I mean think about this.
So we're at historically low levels of income taxes right
like UM in the sixties under JFK and lb j's watch,
the tax rates were in the nine percentile, the highest
(26:47):
TAXI was up to and it was like, people think
taxes are bad now that it's not. There's been plenty
of other times during the during boot mean times like
the post war period saw high taxes where taxes have
been up to sev for people UM, and these are
(27:07):
the high this is the highest bracket, but there have
been many times where it's very high, very low. And
apparently the situation is we UM will have like a
bubble an economic boom cycle and as a result will
lower taxes, and then things get tight and then extremely
high taxes follow. So apparently, considering the amount of federal
(27:30):
spending going on right now, our taxes are alarmingly low.
So the idea of a seventeen percent tax across the board,
we basically bankrupt the the the US, well, maybe they
should be a little smarter with how they spend their money. Well,
it's a lot of people say that. Maybe we talked
about that in the Dead Ceiling episode. Um. But there
(27:50):
are some some countries that have instituted flat taxes, especially
a handful of Baltic states. I mean, they've been doing
it since the nineties, some of them have. It's kind
hard to compare though, you know, yeah, because I mean,
you know, apples to oranges, apple to a slightly different
type of apple, Smith to the red delicious. Um. But
there's also a lot of people who say, well, yeah,
(28:12):
Estonia is still around, its economy is growing, but there's
also this thing called the value added tax that is
really helping their revenue as well, is in addition to
the flat tax. Interesting. So another alternative, the national sales taxes,
been floated for a while now, and it seems to
be gaining traction or maybe I'm just reading into it. Um. Basically,
(28:36):
this is the argument that taxing income decreases productivity, which
sort of makes sense when you think about it. Like, basically,
what they want to do is eliminate corporate income tax,
eliminate capital gains tax, eliminate a state in gift taxes,
and institute anywhere between fifteen and National Sales Tax also
(28:57):
eliminate Social Security tax the employer part employee part, and
abolished the I R S as they want to repeal
the sixteenth Amendment. Yeah, pretty much, um and under I
don't know if it was Alan Keys, if it was
his plan specifically or just generally. With the National Sales Tax,
they would exempt all consumption up to the poverty line.
(29:19):
So at the end of the year, if your total
expenditures were less than the poverty line, then you would
get all that money refunded to you that you paid
a national sales tax. That's a big deal because the
National sales tax any is a consumption tax, and a
consumption taxes um by nature regressive, meaning that the burden
(29:41):
is is heavier on the poor. And the reason the
burden is heavier on the poor with the consumption taxes
because the poor spend more of their money on necessities
that would be taxed. These are retail items, right, so
therefore more of the poor's income is tax and somebody
who's wealthy like if the poor, Like if if you
(30:01):
have a lower income person spending eighty percent of their
money on necessities, food, whatever, um, that means eight percent
they pay an eight taxes or they pay taxes on
eighty percent of their income, Whereas if you're wealthy and
you're spending twenty of your income on these necessities, you're
only spending you're only being taxed on of your income, right,
(30:25):
So that makes it a regressive tax, which is the
big the big criticism of the sales tax, the National
Sales tex that and it probably wouldn't provide enough funding
to fund the government once again to fund a big
bloated government at least, and they say that, Uh, some
people that advocate for it said, well, if we tweetd
it to where it was only retail and it was
also stocks and bonds included, then that might change the
(30:48):
arguments um um. But there is definitely an argument to
be made that the current system punishes people who save
money like that that don't spend, because you get tax
don your money, and then let's say you want to
take that money and put it in your bank, you
get tax on that again on the interest you learn,
all right, so it's that like you're getting taxed twice.
(31:09):
So there's the government has set up a lot of
incentive to go out and earn as much and save
as much as you can. Yeah, you know. Well, plus
banks aren't exactly encouraging savings right now with the terrible
interest rates they are offering. Yeah, yeah, that's true. Um,
what about corporate taxes? You know much about those? I
know that the income tax national income tax would get
(31:32):
rid of corporate income tax as well as the individual right.
So with corporate income taxes as it stands now, the
US has a U flag guess a flat rate of thirty.
But um, very famously, a lot of companies have great
accounting departments that are really good at getting around paying taxes.
(31:52):
Companies do that. Yeah. So ge in two thousand ten
made fourteen billion dollars. Okay, that's more than me, almost
five and a half bill And that's more than you
and me combined. Almost five and a half billion were
made in the US, and um, they paid zero dollars
in taxes in the US and in fact applied for
a three point two billion dollar tax credit. Okay, okay, um.
(32:15):
Apple paid zero taxes to any government between two thousand
nine and two thousand and twelve despite making thirty billion dollars.
But their iPhones are so cute, right, And then um,
in two thou also Warren Buffett very famously pointed out
that he paid UM six point nine million dollars in
personal income taxes, but where his assets not incorporated in
(32:36):
Berkshire Hathaway, he would have paid um one point six
billion dollars and extra billion dollars in income taxes. So
he points us out to say, like, the corporate tax
system is broken. You don't like anybody can get around it.
So we need to fix this as well, not do
away with it. You need to close the loopholes that
are allowing this. But then that brings up the big argument, Well,
(32:59):
it's going to keep America from being competitive because we're
gonna pay higher taxes. It's going to drive jobs overseas,
and companies are gonna shut down here in the US.
Apparently that's not ever been proven that that's all this
kind of hot air. Yeah, um, they they Some people
contend that high tax rates on the rich, um, don't
(33:20):
hurt the economy and don't disincentivize people to work hard. Um,
like you said, in the fifties and sixties, it was,
and the economy and the stock market were booming back then.
And I'm not arguing for any of it. I think
it's all just broken and and I don't know if
there is a solution because corporations and wealthy are the
(33:44):
very people that have the ability to find the loopholes. Yeah,
that's where people go to H and R Block and
just still out their taxes in bam. Yeah, it's sad
like that's that's we don't have an accounting department. You
and I know, like you know, we hopefully get as
many deductions as we want and then we get slapped
with the alternative minimum tax and they get added right
(34:05):
back in. I don't do you have a Swiss bank account.
I'm not talking about that, you have a bank in
the Cayman Islands. Let's change the subject. But yeah, that's
I mean, just the unfairness of it is is um
reason enough to change the tax structure of the tax code.
Well that's why a flat tax initially makes a little sense,
(34:25):
because it's just everyone pays the same. But people will
still find their way around that. Well, healthy people will
still find their way around it. It seems like somehow
the way that you find your your way around it
is it's just again, it's through loopholes. It's through and
whether it's a personal deduction or if you hold your
money overseas, you don't owe tax on it. If you
(34:47):
do away with loopholes and instituted a flat tax of
sev then for corporations as well, then that would I mean,
if it could, if it could fund the government, if
it didn't have to cut social service is and all
this other stuff, then I'm all for it. All right,
we have you found an interesting story from about fourteen
years ago where some businesses decided to stop paying taxes. Yeah,
(35:10):
and we'll talk about it right now, right, no, right
off this message break, Okay, all right, So you found
this story which I thought was pretty interesting, where some
small businesses in the early two thousand's thought they had
found a loophole um that basically said that they are
not subject to pay taxes as a small business owner.
(35:33):
Right that not only personal income, right, but the business both. Okay.
So basically there's this thing called the eight sixty one
arguments that legally you don't really have to pay income tax. Yes, okay,
that's not true though, Uh well it was up for interpretation.
I think had these people um sued the government and
(35:53):
continued to pay taxes, this movement would have had a
lot more teeth but instead a lot of people, just
a lot of tax resistors, just out of protests stop
paying taxes. There's a trend in the late nineties and
up to two thousand, two thousand three or four where
people were very loudly in public, holding press conferences saying
(36:14):
I'm a business owner and I'm not paying income taxes
any longer, and I'm not going to withhold my employees
taxes on behalf of the federal government. I don't have to.
That's a service that businesses provide the federal government. It's
not a mandate, and I think it's illegal that they're
paying taxes. So we're not doing it, and we're not
filing taxes either as a business. They head backup from
(36:35):
a former I R. S employee, right that said, you're right,
they can't come after you. Yeah. So apparently in the
code there's um there's a a part called eight sixty
one where it says that taxes are generated by non
American business activities. So the eight sixty one position is
(36:56):
that if you work for an American company and you're
an American, like any income you make it's domestic, which
is anything that you or I do, or anything most
people do um is not subject to taxation, and these
people tried it. They tested it, but they didn't really
test it in the courts, and most of them got
dragged to jail and are have just gotten out of
(37:18):
prison or are still serving prison terms, but a lot
of them aren't being forced to pay back taxes, which
is weird. Well, apparently the I r S is woefully
underfunded in terms of how much they can pursue these people.
That's why you could be a tax cheat and get
(37:38):
away with it, right if you're if your number isn't called,
but you know, you take that risk. That's why they
were Um. They apparently these people misinterpreted the i r
S is inability to prosecute them with the IRIS is
umbility legal ability to go after them, and they took
(38:01):
it as I r S capitulating to their argument and
instead really it was like, um, we were kind of
busy right now, but we'll come get you in two
thousand five. What was your name again? And they did,
thank you sir. Yeah, So a lot of people went
to jail. Um and six one is kind of dead
and Wesley Snipe's famously invoked argument, interesting, wonder if Willie
(38:22):
did uh not that I saw. You know, there's a
big push now that the um, you know, the NFL
National Football League is tax exempt, and there's a lot
of stink being you know, because I don't think a
lot of people knew this until sort of recently, and
of course now the internet. He gets on social media
and people are like what they're They're not a nonprofit?
(38:44):
So um yeah, socialition helps things quite a bit, doesn't it. Yeah,
their petitions going around, Uh, remove the NFL from that text?
Why would they be tax exempt? Uh, it's complicated, it's
so stupid. It's like you, Joe Public, you're paying the
alternatimentum text, But this enormous economic engine over here is
(39:06):
is exempt? Why not? Yeah? And not the individual teams
and owners like Arthur Blankett, the Falcons and the Falcons
organization has to pay taxes, but the NFL as a
as the larger body does not. But um yeah, it's
kind of messed up. They should probably pay taxes. So
we could sit here all day alternately giving facts and
railing on um, yeah, the income tax. But I think
(39:30):
we we got it. Yeah, and I'm sure we'll hear
from all sides on this one. Bring it on I
look forward to it. If you want to learn more
about the income tax, you can type income tax into
the search part how stuff works dot com. And uh,
since I said search part how stuff first dot com,
it means the time for listener mail. I'm gonna call this.
We may have saved the life. Hey guys, my name
(39:52):
is Zach Freeland. I'm a graphic design student at Grand
Valley State University, Go lakers Um. This is about its concussion.
He I went to sit down his bed one night
in his dorm and smacked the back of my head.
My roommates bunk heard a bit, but I went to
class and forgot all about it. About five hours later,
in a drawing class, I began to get all the
symptoms I usually got with a migraine. The next day
(40:14):
I had a bit of a headache, and then the
next day as well. So that Wednesday I started to
suspect I had a concussion and planning to go to
the hospital the next day. But that night I put
on the podcast and listen to the one on concussions,
and he said it was alarming enough to where I
went to the e R immediately and didn't wait till
the next day. And at the e R the doctor
(40:36):
told me I had an aneurysm or brain cancer, and
I was it was odd to predecide relief to find
out it was only an aneurysm. Um, I talked to
the doctors. Well, it's better than brain cancer. I guess. Uh.
I talked to the doctors. They said I should be
fine to finish my time at school, which made it
possible for me to get further treatment at home. Went
(40:58):
into surgery. They off my aneurism with platinum coils. I
guess that's what they do. And the doctor said if
I had not have come in, I might not have
lived a whole lot longer. Uh. The aneurism had already
grown from the first hospital visit to this second. So guys,
I want to say thank you for letting you know that.
Uh you make this podcast. And because of the concussion
(41:20):
one hadn't scared the crap into me, I might not
be here today. That is pretty awesome. And hey, if
this ends up in the air, give a shout out
to the Detroit City Football Club minor league soccer team
most passionate fans in the nation. No joke, So uh
go Detroit City Football Club. Yeah, let's good shout up.
That's Zach Freeland. Thanks Zach. If you're recouping well, sir,
(41:42):
this is a while ago. Yeah, sorry it took so
long to get on the air. Take care of Zach.
Thank you for listening to us and letting us save
your life. If we saved your life, you know me
and Chuck always want to hear about those. You can
tweet to us at s y s K podcast. You
can join us on Facebook dot com slash Stuff you
Should Know, and you can send us an email to
Stuff Podcasts at Discovery dot com and has always joined
(42:05):
us at our home on the web, Stuff you Should
Know dot com. For more on this and thousands of
other topics, Is it how Stuff Works dot com
Welcome to you stuff you should know from house Stuff
Works dot com. Hey, and welcome to the podcast. I'm
Josh Clark and Draws w Chuck Bryant and Jerry Rowland.
They're here with me. So it's stuff you should know.
That's right. Welcome, that's nice. That's a friendly will come in. Oh,
(00:24):
German friendly, bienvenue French friendly? Is that French? I believe?
So Okay, how's it going. It's going fine, still snowing,
that's right with people, like weeks later it's snowing. Uh. Yeah,
because we're releasing this one around text time because it's appropriate.
That's right. People, the dreaded day, it is dreaded. I
(00:49):
feel sorry for people with that birthday because it's just
associated with you know, pain and suffering. Well you should know,
I mean, like think about it. That's one good thing
on that day. Yeah, is their birthday? You know. I
think we should all celebrate like a half birthday or
a mini birthday on April fift just to kind of
(01:09):
alleviate tax day. That's right. So we're talking about taxes,
specifically income tax, which is everyone's favorite tax to pay
is go out and work hard for your money and
then give a significant portion of that to the government.
(01:29):
All Right, that's text day. I'm not gonna tax bash.
I'm gonna try not to tax Bash. It's kind of
tough not to. And I know you gotta pay taxes,
I get it, but man, it's just government takes a bite.
Well it's not that even it takes a bite that
they tinkle so much of it away, you know, And
(01:50):
oh my god, it's so maddening. The older I get,
the more I'm just like, you have to bed. Yeah,
when you're younger, you don't think about that stuff as much.
At least I died and you go all learn like,
wait a minute, pay how much in taxes? Exactly? All right,
let's get into this alright, Chuck. So um, we're talking
income tax specifically, not just taxes. But um, this country
(02:11):
has a long history of hating taxes. And it goes
back to the very um point that it was founded on,
which was in part breaking away from um, Great Britain England. Um,
because of taxation without representation. If you're a colonist, you
were taxed man all over the place. Yeah. And um.
(02:34):
What they found though, was when we got our independence,
the US government formed and started taxing all the same stuff,
and I imagine they didn't love it, but they were like, well,
at least we're represented, which is kind of the issue
we had before. You know, this is taxation with representation. Um.
But these were just they weren't They were excise taxes,
(02:56):
which is a tax on a specific good, right specific
type of good. They were tariffs, which is a tax
on foreign imports. And they were um sales taxes basically. Yeah,
twelve was the first sales tax on gold, silverware, jewelry,
and watches. So that's pretty much a luxury tax really. Yeah.
So right off the bat, the first tax on a
(03:18):
personal tax on a person um is it affects the wealthy. Yeah,
And it's interesting them the history of the taxes here
as you look at it, there was a lot of
installing attacks and then repealing it and saying no, that's
not right, and then they'll put in another tax and
then they would say no, that's not right. Well, what's
funny is that pattern that you're talking about. It followed
(03:42):
because the taxation is usually imposed on the wealthy, and
the wealthy figures out how to get out of it,
and it goes on everybody else's shoulder and then it's repealed. Yeah,
this is nothing the stuff that we see now people
arguing about. It's kind of what's exactly the same back then,
which is really kind of funny when you think about it.
You know, there's nothing new. So in eighteen sixty two
is when we got our first national income tax UM
(04:05):
and part of this was to support the Union Army.
Congress passed laws in eighteen sixty one. In eighteen sixty two,
UM in the Office of Commissioner of Internal Revenue, which
we know is i RS today, was set up by
the Tax Act of eighteen sixty two. Yeah, let's just
for a second, chuck, Like, let's think about this. The
beloved Abe Lincoln is directly responsible for the income tax
(04:30):
and the i R S. Yeah, I mean it happened
on his watch. Sure, I guess you can't set up
an income tax without a body to regulate it and
to enforce it, which is basically what that did in
eighteen sixty two. Right, And we were talking about taxes
being um created due to be imposed on the wealthy
um between eighteen twelve after eighteen seventeen, with that when
(04:52):
that tax, the Luxury good tax was terminated, and eighteen
sixty two, there weren't any taxes like that at all.
There weren't any personal taxes, and the US government funded
itself from tariffs, right, So all these foreign imports coming
in imports, well, the tariffs were on imports apparently mostly um.
(05:15):
Because this allowed companies this this basically led to the U.
S economy booming because they like all of the internal stuff,
all of domestically produced stuff, wasn't subject to any tariffs,
so they didn't have to compete. They had cheaper prices.
And these companies used this this stuff to enrich themselves,
(05:35):
which led to the uber wealthy, which in turn led
to the first income tax and anything sixty two to
text the uber wealthy. That's right. Uh. In an eighteen
sixty three they started collecting this income tax for the
first time, and it was a graduated tax, kind of
like we see today. Um, if you earned between six
hundred and ten thousand dollars a year, you paid three percent.
(05:58):
If you made higher than that, you paid more than
that percentage wise. Um, I mean that was the first
income tax. So it's always three and then five percent
if you made over tempt Yeah, it's always funny to
me when I hear like our founding fathers blah blah blah, like, no,
you're founding fathers. Is this is exactly how they set
(06:18):
it up. So I guess the argument is, well, not
those founding fathers, just certain founding fathers I agree with, Well,
it depends on the founding fathers. Well, it's just I
hate hearing the argument our founding fathers when people don't
even really know exactly what our founding fathers were doing,
like imposing a graduate attacks first right off the bat.
(06:39):
You know, well, the the U I only recently realized
that there was that. What we have today in the
United States, the form of government we have is part
of what's called the Jeffersonian Revolution, where basically the founding
fathers Monroe, Madison, Washington came up with the country. They
came up with the country that's different than the one
(07:02):
we have now. And the reason that it's different now
is because Jefferson came along and said, Noah, we can
do better than this, so let's change this, and that's
what we have now. So which, yeah, which which founding
father are you talking about? So, like we're saying, it
went back and forth, there was a flat tax in
eighteen sixty seven instead of a graduate attacks and then
(07:24):
five years after that they repealed income tax altogether, and
they said, this is not right. It is unconstitutional. Um,
it's got to abide by a constitutional guideline and it
does not. And that was the income tax of eighteen
ninety four. That was where the tariffs were. I'm sorry
I missed spoke earlier. Between eighteen seventy two and eighteen nine.
(07:47):
That's where the U. S. Government was lived on tariffs
and that allowed the economy to boom, railroads to grow,
and that a class of uber wealthy to get even
wealthier they were there before. But um, like this is
when the Carnegies came along, the Rockefellers like started to
develop this and so all these people said, hey, man,
(08:08):
like these people should should be paying some some taxes here,
and that's where they came from. That's where the tax
came from. Yeah. In that tax two percent of personal
income more than four thousand dollars again, tax on the wealthy. Uh.
And the Supreme Court is that's when they struck that
one down as unconstitutional. So in nine Congress got around
(08:30):
all this by making it a part of the constitution.
And said, you know what, we'll create the sixteenth Amendment.
Congress will have the power to lay in collect taxes
on incomes from whatever source derived without a portion I'm sorry, Yeah,
apportionment among the several states without regard any census, right,
which was the hangout before. Yeah, Like, it doesn't matter
(08:50):
how populated your state is. Like, this has nothing to
do with state. It's just a national tax. And originally
the income taxes a tax on the uber wealthy does
make a king more than four thousand dollars a year,
which is super wealthy. Um, and the uber wealthy fought it,
got the Supreme Court to strike it down, and so
under Taff's watch, they said, well, we can get around
(09:13):
this by just amending the constitution. That's what they did.
And apparently from this the sixteenth Amendment. Like before, Chuck,
it was like, um, you were more a participant in
your state, and there was the federal government, but it
was the federal government and they didn't mean a whole
lot to you. When the sixteenth Amendment was passed, that
(09:33):
changed everything because now you were a payer to the
federal government. Um, and the federal government also had the
states kind of by the short hairs because the states
relied now on federal grants that were generated through your
tax dollars. So the federal government really asserted itself as
a central power, consolidated power into the federal government with
(09:57):
the sixteenth Amendment more than anything else but or and
they never looked back. They certainly didn't know. UM. In
nineteen thirteen with the Underwood Tariff Act, UM, they basically
kicked off the modern system that we have in During
World War Two, they started withholding taxes instead of just
telling up your bill and paying at the end of
(10:18):
the year. You have, as we all know and love.
Now you have part of your paycheck withheld pay as
you earned system. That's right, and that funds the government
continuously because every pay period your employer, which who withholds
the your money on behalf of the government, submits it
to a federal reserve bank, and the government earns interest
(10:40):
on it and has constant income. That's right. It's like
a paycheck for the Government's exactly what it is. Uh
So let's let's walk people through. Uh And and I
think this article does right by it like picking out
just one person. I don't want to call him Joe.
I'm so tired of that, What do you want to call?
While I have Cyrus written down? All right, we'll go
(11:01):
with Cyrus. Right, the Cirrus gets a job, Cyrus gets
away age, he agrees to with his employer and says,
all right, this is fair, We'll take this job. And
the employer says, all right, Syryus, you gotta fill out
this W four and um, that's one of your tax
forms and you gotta do it right when you get hired.
And it's gonna list all your withholding allowances and all
(11:22):
your dependents and child care expenses and basically everything that
you need to know, Mr employer, like how much money
to hold out of my paycheck? So I fill out
the W four. Now you know, now you're withholding. And
now at the end of the year, me, Cyrus, I
want to see if I can kind of project how
(11:42):
I did this year. Am I gonna be paying? Am
I be getting it back? So here's how you do that.
So you take your gross income, the number that we
all wish we actually made. Right, Yeah, that's all the
money you have from salary, from interest, income from pensions. Yea,
all the money you have coming in, that's your gross income, right,
(12:03):
and then you go through adjustments, and adjustments are basically
um uh, little little mulligans that the government gives you, says,
all right, you can you can subtract this from your
gross income, which alimony, let's say, sure, or if you
um uh tax on your self employment, if you moved,
(12:26):
moving expenses for your job, that's one to stuff like that,
and all these things. So adjustments, deductions, which we'll talk about,
all of these things, credits, they're all basically behaviors that
the government wants to encourage, so they give you, they
give you the ability to subtract those amounts from your uh,
your gross income. Yeah, they incentivize these things. Yeah, Like
(12:47):
they want you to work, so you can deduct childcare
expenses under some some regimes. Or they want you to
go to college, so you can deduct college expenses things
like that. So that your adjusted gross income. Right when
you subtract your adjustments from your gross so that's your
A g I. And then you've got a couple of
(13:09):
choices here when you go to fill out your tax forms.
You can either do the standard deduction or itemize everything out.
You're gonna want to choose whichever one is greater. Obviously,
so you can get the biggest chunk for yourself. Um,
all sorts of itemized deductions. Like if we had a
tax accounting in here, they would probably laugh if we
tried to break down itemized deductions. There's a lot of them,
(13:32):
and they get really weird. Like, for example, a good
example that, um, if you're a bodybuilder, a professional body building,
which I am, Uh oil body oil, I write off
all my oils can be written off as a business expense. Yeah,
and you know I want. I used to freelance in
the film industry. They are all sorts of cool things
you can write off, like your movie tickets and your
(13:52):
cable bill and uh stuff like that. Um, you can
write off your interest on your home mortgage, charitable contributions,
some medical and dental expenses, all sorts of things within
the law that you can they call him right offs
your deductions or you can just go with the standard
deduction again. Right, you don't have to itemize everything out No,
(14:13):
but a lot of text people say, uh, tax professionals say,
at least go through and make sure you shouldn't be
itemizing because if it's even a penny more maybe not
a penny, but if it's a little more. It's worth
the trouble most of the time, and it is a
lot of extra paperwork. Um, but you know, you save
yourself some money as you're deducting from it. You're deducting
(14:35):
from your income. And then finally, after you have your
justice gross income and you subtract all the deductions for it,
that the number that you have that's your taxable income.
So the more you can deduct from it, the lower
your tax burden is going to be. Yeah, I can't
remember which. There's a commercial going around now about one
of the accounting firms that says that Americans left a
(14:57):
billion dollars on the table for Buffalo while Wings cafe.
If you're getting your taxes done at Buffalo Well Wings,
then you get a free dozen wings. That'd be awesome.
Did you hear that they may have Dorito's flavored wings
coming out. I can't tell you how excited I am
about this. I don't get the whole derito ization of everything.
(15:20):
You need to get on the bandwagon, dude, because there's
a lot of fun to be had eating Dorito based food.
Remember we were kids and that was derritos. That was
it was like the guy with a mustache would sell
you this one derito And now there's like, wait, what
where are you buying derrito's one at a time? From
a guy? When down the commercial he was he looks
(15:40):
for like jeans Shallotte. Oh, you're talking about the frido bandido.
That's different. I'm talking about the Dorito's guy. Really know
you're thinking of Mr Pringle's. But now they you know,
you go the store is just overwhelming. It's ridiculous. Yeah,
but different shape flavors, and they're they're just like, let's
throw everything at the let's see what sticks. Just give
(16:01):
me a derita or cool Ranch. Cool Rance is great.
I have to abide by the color ranch. They brought
the original version out too, and those are pretty great
to just regular nacho cheese doritos. You know, even before
that there was an original version. It's like taco basically
it's orange bag. It's an orange bag. I think that's
that is when I grew up on. Obviously, no, the
nacho one is the red bag and then blue is cool.
(16:24):
What is this like the nine twenties? What do you
mean when they had the original like the sixties or fifties,
even before your time. So you've got your taxable income,
you go to the I R S tables. If you
make less than a hundred thousand dollars a year, you
go to the rate schedules. If you earn more than
(16:45):
a hundred thousand dollars a year. And like we said,
it's a marginal tax rate system. Um or graduated their
different tax brackets depending on how much you make. Yeah,
there's seven this year and two. So what's still low?
Is it still ten percent? Yep? Ten percent, fifty three percent,
thirty five percent, and then for earners of four hundred
(17:07):
thousand or over, I think single earners of four k
or over, it's thirty nine point six percent of your Hey.
But so it's a marginal tax rate, meaning that um
that you fall into one bracket or another. If you
earn a hundred thousand dollars, um you're not gonna owe
I think twenty eight thousand dollars. I think it falls
(17:29):
into maybe they percentile you wouldn't owe twenty eight thousand
dollars of your adjusted gross income or yeah, what you
would owe is ten percent up to the top of
the ten percent bracket of the high of the fifercent bracket.
And so on until you reach your bracket and you
(17:50):
subtract your adjusted gross income from the top of that
or from the bottom of that bracket, and then you
owe percent of that. That makes more sense. It's a
lot easier if if say, like you know, if you're
making a hundred thousand dollars less, you just go to
the text table and you're like, there it is. But
it's also fairly easily calculated as well. So what do
you want to make? Well, here's the thing. You want
(18:11):
to make as much as you possibly can, I think,
But then you want to have that's what you're Into're
not saying everyone has to pursue the dollar, right, But
if you are pursuing the dollar and you don't want
to pay more tax than you have to, UM, you
you want to make a high salary and then have
(18:32):
a lot of adjustments. UM. The problem is is that
there's this thing that was introduced in the sixties nineteen
sixty nine I think, or maybe the seventies. UM was
the alternative minimum tax. Sorry that came around in the eighties.
The alternative minimum tax was introduced to keep high earners
(18:55):
from just deducting absolutely everything and paying a very a
low tax. Um, and it made sense of the time
because it was imposed on higher earners. The problem is
is the cut off that was originally introduced, something like
sixty thou or something like that at that time was
a lot of money, but it was never index to inflation.
(19:17):
So as the value of the dollar grew weaker over
time through inflation, why didn't they index it to inflation.
That's weird. Well, because now something like of wag earners
fall subject to the minimum tax, so it's basically like
an extra tax now. And what the alternative minimum text
(19:39):
does is say, okay, great, you went through and you
figured out all your deductions. That's beautiful. What we're gonna
do is take your adjusted gross income minus deductions, that
nice little number that you got it too, and we're
gonna add those deductions back and we're gonna come up
with your alternative adjusted alternative income figure. And then we're
going to figure that how much ex tray you oh,
(20:01):
on top of your normal ten forty and that's your
full tax. You're gonna add that to the ten forty
tax amount that you owe, and we're gonna come up
with the actual tax you oh, including alternative minimum And
apparently Basically, everybody's subject to it one way or another.
Even if you don't itemize, even if you choose the
standard deduction, you probably owe something on the alternative minimum tax.
(20:25):
So it sounds like what you're saying is that no
matter what we do, and no matter how clever we
try to get with our accounting, all they have to
do is throw in the word another adjust right, they
add those adjustments right back them. They can just throw
in another word no, no, no, we need to adjust
it again and some at some point you gotta stop adjusting, right, exactly.
So the key here is then if you're still if
(20:46):
you're like, okay, I'm subject to the alternative minimum tax,
I'm um, I want to earn a high salary, but
I don't want to pay too much tax. The thing
that doesn't the adjustment or the deduction, I'm sorry, that
doesn't get added back um to your your gross income
when you're figuring the alternative minimum taxes charity charitable contributions.
(21:08):
So the key then would be to max those out
as much as possible, and then that would, I imagine,
lower your tax a little bit as far as alternative
minimum tax goes. Alright, it's like here's your tax, and
then now do it again and pay more. That's because
they didn't adjust it to inflation. All right, I think
(21:34):
we're here towards the end of this portion. You have
your gross tax liability finally, and we should say also,
I'm sorry, um that as of two thousand twelve it
became finally index to inflation. But I mean for thirty
years it wasn't, and it just kept hitting more and
more and more people. Well it's important though, that's good. Uh.
So we have your gross tax liability. Now Cyrus is
(21:57):
Cyrus is going to subtract any credits that are still there,
and then that final number is Cyrus's net tax. So
that's either what he's gonna pay or what he's gonna
get back. And come April, uh, some time between January one,
when he gets his W two from his employer in April,
(22:17):
he's gonna have to figure all that out, either by
himself or with the help of someone who knows what
they're doing. Um, your W two is gonna break down, uh,
everything you made Basically, it's also in your final paycheck,
but the W two is what you send in, so
you need a separate copy and Supposedly, the UM, your employer,
you're anybody who who is going to send you money
(22:39):
about income you made or documents about income you made,
UM has to give you those documents by January thirty one.
That's right, okay. Uh And then here's the fun part.
They take all your information and they store it on
magnetic tape machines from the nineteen fifties. Yeah, you found this, UM,
(22:59):
this is pretty crazy easy. Well, it stood out to
me when I saw magnetic tape machines. I was like,
how old is this right? And apparently that's still the
case because UM they don't have the funding to upgrade
their systems, so they have the magnetic tape program. And uh,
Obama's is trying to think UM in two thousand twelve
(23:20):
to increase funding to correct that by like a billion
and a half dollars two point one billion. I don't
know if it went through or not. So, like you found, Chuck,
you stumbled upon the very reason why tax refunds take forever,
because there's up to a two week period between when
this the refund or the tax return is filed UM
(23:42):
and and it ends up on the magnetic tape where
it's like it doesn't even exist as far as irs
is can. There's no data whatsoever because they're using magnetic tapes. Um.
All right. So oh and apparently also in this article
that you sent, UM, they were saying that the the
encryption for the I r US is like pretty sad
(24:02):
as well, that's parting. Yeah, and the security breaches is
all but inevitable. Yeah, if it hasn't happened, like if
it doesn't happen in a daily basis already. Wow. All right.
So that a lot of people complain about taxes in
this country and probably worldwide. Um. So over the years
have been a lot of different UH solutions proposed, different
kinds of taxes, alternatives, if you will. One very popular one, um,
(24:27):
because it keeps coming back up at least is the
flat tax. UM. I think also people like to say
it flat tax. Uh. Steve Forbes and Dick Army, Um,
we're big on the flat tax. And that was one
of Steve Forbes's big one of the foundations of his
presidential campaign was a flat tax of se ish um. Basically,
(24:52):
everyone pays the same tax no matter what. Um, You're
complicated tax code is going to be bye bye, and
you're gonna get something about the size of a postcard
to fill out about ten lines your personal income, any
personal allowances, your wage, your salary, and then what is
your seventeen percent and nut that you owe? Makes sense?
(25:15):
What's the problem seventeen percent? That'd be great for everybody. Yeah, Well,
critics will say that it's a favorite the wealthy and
puts higher taxes on the burden on those who don't
make as much money. Yeah, because if you're paying ten percent,
if you're in the ten percent bracket, suddenly you're paying
seven percent more on your income. True. Under Dick armies
um flat tax that he proposes, anyone making less than
(25:39):
thirty six thousand, eight hundred pays no taxes, which is
different than Forbes is right, which if if that's still
part of his plan, I couldn't find if he'd adjusted it,
then that that it actually is a pretty good plan
if it would still satisfactorily fund the government, because that
would mean that everybody, if you were like you, would
(26:02):
pay no tax for thirty eight six right, and so
anybody above that would still be paying less because that
falls in the bracket, which means that you would automatically
everybody would automatically be downgraded tax wise, which is pretty good.
(26:23):
The problem is, you know, would that fund the government?
Is that the issue? Well? Yeah, I mean think about this.
So we're at historically low levels of income taxes right
like UM in the sixties under JFK and lb j's watch,
the tax rates were in the nine percentile, the highest
(26:47):
TAXI was up to and it was like, people think
taxes are bad now that it's not. There's been plenty
of other times during the during boot mean times like
the post war period saw high taxes where taxes have
been up to sev for people UM, and these are
(27:07):
the high this is the highest bracket, but there have
been many times where it's very high, very low. And
apparently the situation is we UM will have like a
bubble an economic boom cycle and as a result will
lower taxes, and then things get tight and then extremely
high taxes follow. So apparently, considering the amount of federal
(27:30):
spending going on right now, our taxes are alarmingly low.
So the idea of a seventeen percent tax across the board,
we basically bankrupt the the the US, well, maybe they
should be a little smarter with how they spend their money. Well,
it's a lot of people say that. Maybe we talked
about that in the Dead Ceiling episode. Um. But there
(27:50):
are some some countries that have instituted flat taxes, especially
a handful of Baltic states. I mean, they've been doing
it since the nineties, some of them have. It's kind
hard to compare though, you know, yeah, because I mean,
you know, apples to oranges, apple to a slightly different
type of apple, Smith to the red delicious. Um. But
there's also a lot of people who say, well, yeah,
(28:12):
Estonia is still around, its economy is growing, but there's
also this thing called the value added tax that is
really helping their revenue as well, is in addition to
the flat tax. Interesting. So another alternative, the national sales taxes,
been floated for a while now, and it seems to
be gaining traction or maybe I'm just reading into it. Um. Basically,
(28:36):
this is the argument that taxing income decreases productivity, which
sort of makes sense when you think about it. Like, basically,
what they want to do is eliminate corporate income tax,
eliminate capital gains tax, eliminate a state in gift taxes,
and institute anywhere between fifteen and National Sales Tax also
(28:57):
eliminate Social Security tax the employer part employee part, and
abolished the I R S as they want to repeal
the sixteenth Amendment. Yeah, pretty much, um and under I
don't know if it was Alan Keys, if it was
his plan specifically or just generally. With the National Sales Tax,
they would exempt all consumption up to the poverty line.
(29:19):
So at the end of the year, if your total
expenditures were less than the poverty line, then you would
get all that money refunded to you that you paid
a national sales tax. That's a big deal because the
National sales tax any is a consumption tax, and a
consumption taxes um by nature regressive, meaning that the burden
(29:41):
is is heavier on the poor. And the reason the
burden is heavier on the poor with the consumption taxes
because the poor spend more of their money on necessities
that would be taxed. These are retail items, right, so
therefore more of the poor's income is tax and somebody
who's wealthy like if the poor, Like if if you
(30:01):
have a lower income person spending eighty percent of their
money on necessities, food, whatever, um, that means eight percent
they pay an eight taxes or they pay taxes on
eighty percent of their income, Whereas if you're wealthy and
you're spending twenty of your income on these necessities, you're
only spending you're only being taxed on of your income, right,
(30:25):
So that makes it a regressive tax, which is the
big the big criticism of the sales tax, the National
Sales tex that and it probably wouldn't provide enough funding
to fund the government once again to fund a big
bloated government at least, and they say that, Uh, some
people that advocate for it said, well, if we tweetd
it to where it was only retail and it was
also stocks and bonds included, then that might change the
(30:48):
arguments um um. But there is definitely an argument to
be made that the current system punishes people who save
money like that that don't spend, because you get tax
don your money, and then let's say you want to
take that money and put it in your bank, you
get tax on that again on the interest you learn,
all right, so it's that like you're getting taxed twice.
(31:09):
So there's the government has set up a lot of
incentive to go out and earn as much and save
as much as you can. Yeah, you know. Well, plus
banks aren't exactly encouraging savings right now with the terrible
interest rates they are offering. Yeah, yeah, that's true. Um,
what about corporate taxes? You know much about those? I
know that the income tax national income tax would get
(31:32):
rid of corporate income tax as well as the individual right.
So with corporate income taxes as it stands now, the
US has a U flag guess a flat rate of thirty.
But um, very famously, a lot of companies have great
accounting departments that are really good at getting around paying taxes.
(31:52):
Companies do that. Yeah. So ge in two thousand ten
made fourteen billion dollars. Okay, that's more than me, almost
five and a half bill And that's more than you
and me combined. Almost five and a half billion were
made in the US, and um, they paid zero dollars
in taxes in the US and in fact applied for
a three point two billion dollar tax credit. Okay, okay, um.
(32:15):
Apple paid zero taxes to any government between two thousand
nine and two thousand and twelve despite making thirty billion dollars.
But their iPhones are so cute, right, And then um,
in two thou also Warren Buffett very famously pointed out
that he paid UM six point nine million dollars in
personal income taxes, but where his assets not incorporated in
(32:36):
Berkshire Hathaway, he would have paid um one point six
billion dollars and extra billion dollars in income taxes. So
he points us out to say, like, the corporate tax
system is broken. You don't like anybody can get around it.
So we need to fix this as well, not do
away with it. You need to close the loopholes that
are allowing this. But then that brings up the big argument, Well,
(32:59):
it's going to keep America from being competitive because we're
gonna pay higher taxes. It's going to drive jobs overseas,
and companies are gonna shut down here in the US.
Apparently that's not ever been proven that that's all this
kind of hot air. Yeah, um, they they Some people
contend that high tax rates on the rich, um, don't
(33:20):
hurt the economy and don't disincentivize people to work hard. Um,
like you said, in the fifties and sixties, it was,
and the economy and the stock market were booming back then.
And I'm not arguing for any of it. I think
it's all just broken and and I don't know if
there is a solution because corporations and wealthy are the
(33:44):
very people that have the ability to find the loopholes. Yeah,
that's where people go to H and R Block and
just still out their taxes in bam. Yeah, it's sad
like that's that's we don't have an accounting department. You
and I know, like you know, we hopefully get as
many deductions as we want and then we get slapped
with the alternative minimum tax and they get added right
(34:05):
back in. I don't do you have a Swiss bank account.
I'm not talking about that, you have a bank in
the Cayman Islands. Let's change the subject. But yeah, that's
I mean, just the unfairness of it is is um
reason enough to change the tax structure of the tax code.
Well that's why a flat tax initially makes a little sense,
(34:25):
because it's just everyone pays the same. But people will
still find their way around that. Well, healthy people will
still find their way around it. It seems like somehow
the way that you find your your way around it
is it's just again, it's through loopholes. It's through and
whether it's a personal deduction or if you hold your
money overseas, you don't owe tax on it. If you
(34:47):
do away with loopholes and instituted a flat tax of
sev then for corporations as well, then that would I mean,
if it could, if it could fund the government, if
it didn't have to cut social service is and all
this other stuff, then I'm all for it. All right,
we have you found an interesting story from about fourteen
years ago where some businesses decided to stop paying taxes. Yeah,
(35:10):
and we'll talk about it right now, right, no, right
off this message break, Okay, all right, So you found
this story which I thought was pretty interesting, where some
small businesses in the early two thousand's thought they had
found a loophole um that basically said that they are
not subject to pay taxes as a small business owner.
(35:33):
Right that not only personal income, right, but the business both. Okay.
So basically there's this thing called the eight sixty one
arguments that legally you don't really have to pay income tax. Yes, okay,
that's not true though, Uh well it was up for interpretation.
I think had these people um sued the government and
(35:53):
continued to pay taxes, this movement would have had a
lot more teeth but instead a lot of people, just
a lot of tax resistors, just out of protests stop
paying taxes. There's a trend in the late nineties and
up to two thousand, two thousand three or four where
people were very loudly in public, holding press conferences saying
(36:14):
I'm a business owner and I'm not paying income taxes
any longer, and I'm not going to withhold my employees
taxes on behalf of the federal government. I don't have to.
That's a service that businesses provide the federal government. It's
not a mandate, and I think it's illegal that they're
paying taxes. So we're not doing it, and we're not
filing taxes either as a business. They head backup from
(36:35):
a former I R. S employee, right that said, you're right,
they can't come after you. Yeah. So apparently in the
code there's um there's a a part called eight sixty
one where it says that taxes are generated by non
American business activities. So the eight sixty one position is
(36:56):
that if you work for an American company and you're
an American, like any income you make it's domestic, which
is anything that you or I do, or anything most
people do um is not subject to taxation, and these
people tried it. They tested it, but they didn't really
test it in the courts, and most of them got
dragged to jail and are have just gotten out of
(37:18):
prison or are still serving prison terms, but a lot
of them aren't being forced to pay back taxes, which
is weird. Well, apparently the I r S is woefully
underfunded in terms of how much they can pursue these people.
That's why you could be a tax cheat and get
(37:38):
away with it, right if you're if your number isn't called,
but you know, you take that risk. That's why they
were Um. They apparently these people misinterpreted the i r
S is inability to prosecute them with the IRIS is
umbility legal ability to go after them, and they took
(38:01):
it as I r S capitulating to their argument and
instead really it was like, um, we were kind of
busy right now, but we'll come get you in two
thousand five. What was your name again? And they did,
thank you sir. Yeah, So a lot of people went
to jail. Um and six one is kind of dead
and Wesley Snipe's famously invoked argument, interesting, wonder if Willie
(38:22):
did uh not that I saw. You know, there's a
big push now that the um, you know, the NFL
National Football League is tax exempt, and there's a lot
of stink being you know, because I don't think a
lot of people knew this until sort of recently, and
of course now the internet. He gets on social media
and people are like what they're They're not a nonprofit?
(38:44):
So um yeah, socialition helps things quite a bit, doesn't it. Yeah,
their petitions going around, Uh, remove the NFL from that text?
Why would they be tax exempt? Uh, it's complicated, it's
so stupid. It's like you, Joe Public, you're paying the
alternatimentum text, But this enormous economic engine over here is
(39:06):
is exempt? Why not? Yeah? And not the individual teams
and owners like Arthur Blankett, the Falcons and the Falcons
organization has to pay taxes, but the NFL as a
as the larger body does not. But um yeah, it's
kind of messed up. They should probably pay taxes. So
we could sit here all day alternately giving facts and
railing on um, yeah, the income tax. But I think
(39:30):
we we got it. Yeah, and I'm sure we'll hear
from all sides on this one. Bring it on I
look forward to it. If you want to learn more
about the income tax, you can type income tax into
the search part how stuff works dot com. And uh,
since I said search part how stuff first dot com,
it means the time for listener mail. I'm gonna call this.
We may have saved the life. Hey guys, my name
(39:52):
is Zach Freeland. I'm a graphic design student at Grand
Valley State University, Go lakers Um. This is about its concussion.
He I went to sit down his bed one night
in his dorm and smacked the back of my head.
My roommates bunk heard a bit, but I went to
class and forgot all about it. About five hours later,
in a drawing class, I began to get all the
symptoms I usually got with a migraine. The next day
(40:14):
I had a bit of a headache, and then the
next day as well. So that Wednesday I started to
suspect I had a concussion and planning to go to
the hospital the next day. But that night I put
on the podcast and listen to the one on concussions,
and he said it was alarming enough to where I
went to the e R immediately and didn't wait till
the next day. And at the e R the doctor
(40:36):
told me I had an aneurysm or brain cancer, and
I was it was odd to predecide relief to find
out it was only an aneurysm. Um, I talked to
the doctors. Well, it's better than brain cancer. I guess. Uh.
I talked to the doctors. They said I should be
fine to finish my time at school, which made it
possible for me to get further treatment at home. Went
(40:58):
into surgery. They off my aneurism with platinum coils. I
guess that's what they do. And the doctor said if
I had not have come in, I might not have
lived a whole lot longer. Uh. The aneurism had already
grown from the first hospital visit to this second. So guys,
I want to say thank you for letting you know that.
Uh you make this podcast. And because of the concussion
(41:20):
one hadn't scared the crap into me, I might not
be here today. That is pretty awesome. And hey, if
this ends up in the air, give a shout out
to the Detroit City Football Club minor league soccer team
most passionate fans in the nation. No joke, So uh
go Detroit City Football Club. Yeah, let's good shout up.
That's Zach Freeland. Thanks Zach. If you're recouping well, sir,
(41:42):
this is a while ago. Yeah, sorry it took so
long to get on the air. Take care of Zach.
Thank you for listening to us and letting us save
your life. If we saved your life, you know me
and Chuck always want to hear about those. You can
tweet to us at s y s K podcast. You
can join us on Facebook dot com slash Stuff you
Should Know, and you can send us an email to
Stuff Podcasts at Discovery dot com and has always joined
(42:05):
us at our home on the web, Stuff you Should
Know dot com. For more on this and thousands of
other topics, Is it how Stuff Works dot com
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