Pod Insights Civics 101 How did federal income taxes get this way? About this episode We haven't always had a federal income tax, and in the beginning, it only applied to the very richest Americans. So how did we end up with the permanent income tax we have today, with all its complicated rules about everything from pre-tax income to deductions and credits? And what does it actually pay for?
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Hannah McCarthy? Hi. This is Civics 101. I'm Hannah McCarthy.
0:02 Nick Capodice? And I'm Nikcapadice, and I guess we're just jumping in? No warm-up, no archival, just going right into this?
0:09 Hannah McCarthy? Well, I do have a question for you, but it sounds a lot like a question we might ask at the beginning of an ad, which this is not. This is a real show. We are not trying to sell you on anything, but we are going to talk about something that you're probably hearing a lot of ads about right now, and that is taxes.
0:32 Nick Capodice? Oh, dear.
0:33 Hannah McCarthy? We'll get to that after a quick break.
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1:40 Speaker 04 They say everybody's got different problems. Well, maybe so, but I've got a song about one problem that every one of us have, and that's taxes.
1:51 Hannah McCarthy? So I solemnly swear I'm not about to sell you a tax service, but I do want to ask, do any of these questions sound familiar to you? How many kids do you have? Do you work from home? Did you save for retirement? Did you pay tuition? How about student loans? Did you get money from an inheritance? Did you buy an electric vehicle? Did you donate to a charity? Did you buy a house? Sell a house? How big is your office?
2:12 Nick Capodice? Yeah, I'm familiar with all those questions, Hannah, because I answer them when I file my taxes.
2:17 Hannah McCarthy? And Nick, if you don't mind me asking, how did you do your taxes last year?
2:23 Nick Capodice? Well, after I put them off, I used an accountant.
2:26 Hannah McCarthy? Right. Like you, most Americans need help figuring out how much money we owe the government each year. About 90% of people use technology like TurboTax or hire a human tax preparer to do their tax return. Tax season requires an enormous amount of time, money, and resources, not only from the government, but from us, the taxpayers.
2:49 Nick Capodice? It is pretty confounding, Hannah, that we live in a country where you basically need a degree in accounting, or the money to pay for someone with a degree, or computer software, just to comply with the law. It's hard to understand how that's a good thing.
3:03 Hannah McCarthy? You raise a good point, so I want to introduce you to someone named Beverly Moran. She's a professor of law and sociology at Vanderbilt University, where she focuses on federal income taxation. She's testified before Congress and written extensively about the complexity of our income tax system.
3:20 Speaker 05 I mean, when people talk about being able to have a tax return on a postcard, that was basically the amount of information you had to put on a return for most people. But the problem is, as the tax started to filter to the whole country, there was another sort of movement going on, which caused the return to become much more frightening. And what that was, was that we started to put a lot of things into the tax system that
3:56 Speaker 05 really weren't about taxes. In preparation for talking to you, I reached out to several friends of mine who have, like, you know, decades of experience, you know, were tax preparers, right? They know the taxpayer's side, and they know the government's side. They were all saying to me, like, how can you say any of it is good? How could you come up with a story? Like, and I'm saying, well, I want to say this and that. And they were like, well, good for you that you can come up with this story, because it's not good. It's horrible.
4:34 Hannah McCarthy? So today on Civics 101, we're going to talk about why our income tax system is the way it is, full of complexity, difficult to navigate, and extremely personal, where circumstances like who you work for, what kind of resources you have, and how you spend your money are directly connected to how much you owe the government each year and what the government provides for you in return.
5:00 Nick Capodice? Just to clarify, you said federal income taxes, so we're leaving states out of it. We're not talking about state, local, sales tax, anything like that?
5:08 Hannah McCarthy? Right, because that's a whole other subject entirely. Every state and many municipalities have their own tax system, and they vary widely. We're focused today on federal income taxes, specifically those taxes that individuals like you and me pay every year out of the money we earn. And to start, I think we should get a better sense of how much income taxes matter.
5:35 Speaker 06 So the federal income tax is our largest single source of revenue for the federal government. It raises roughly 50% of federal receipts.
5:45 Hannah McCarthy? This is Eric Toder. He's an institute fellow at the Urban Brookings Tax Policy Center. He worked in tax policy for the Treasury Department at the IRS and in the Congressional Budget Office. He also worked as a consultant for the New Zealand Treasury.
5:59 Speaker 06 But there are other big taxes. The second biggest tax is the payroll tax, which people may feel is similar to an income tax because it also comes out of their paycheck. And for most people in this country, the payroll tax is a bigger tax than the income tax. The income tax is a very progressive tax. It rises steeply as a rate of tax with your income, whereas the payroll tax is a flat rate tax.
6:27 Hannah McCarthy? The payroll tax is a flat tax, set at 15.3%. Your employer pays half and you pay half.
6:34 Nick Capodice? Right, but Eric said that income tax is a progressive tax. So can you clarify for me the difference between a flat rate tax and a progressive tax?
6:42 Hannah McCarthy? A flat rate tax is one that applies to everyone in the same amount, regardless of how much money they make, like social security. If you made anywhere from $0 to $160,000, you pay 6.2% of your income to social security and your employer also pays 6.2%. If you're self-employed, you pay the full, 12.4%. What makes our income tax progressive is that the more income you earn, the higher the tax rate is on that income.
7:14 Speaker 06 The third biggest source, which is significantly smaller, is the corporate income tax. But that's an important part of our tax system because without a tax on corporate income, people could avoid the income tax by accumulating income within corporations. So the corporation income tax, even though it raises only about 10% of federal revenues, is an important part of our tax system. There are other taxes, excise taxes, estate taxes, customs duties, they're smaller.
7:45 Nick Capodice? Well, where does that revenue go? What kind of things does it pay for?
7:49 Hannah McCarthy? It pays for the cost of running the government. It pays for all kinds of government programs, with social services being the biggest chunk, followed by defense and things like education, scientific research, infrastructure, and natural resources.
8:03 Nick Capodice? So I want to go back to how we got to this place. Did the framers mention this at all in the Constitution? Like, have we always had an income tax?
8:11 Hannah McCarthy? We have not. The Constitution says that Congress can set taxes to, quote, "pay for the debts and provide for the common defense and general welfare of the United States." But the framers favored indirect taxes, like sales taxes and tariffs, more than direct taxes on income.
8:31 Nick Capodice? So indirect, meaning like a tax on something that you're paying for and theoretically could choose to pay for, rather than tax that automatically comes out of your paycheck?
8:41 Hannah McCarthy? Correct.
8:42 Nick Capodice? All right, so what changed? When did we finally get a permanent income tax?
8:47 Hannah McCarthy? That happened in 1913, when we ratified the 16th Amendment. This amendment says the federal government has the right to impose income taxes. And more importantly, that the federal government does not have to distribute or apportion that revenue to states based on population size.
9:04 Speaker 07 Now, in the beginning, the tax is really narrow. Only applies to a relative handful of Americans. And that's true, you know, up till the World War I, and then it gets broader and bigger. And then, but it's still, it's a pretty minor tax. It's a rich man's burden, basically, right?
9:19 Speaker 05 Originally, and even now, to some extent, it's a fantasy.
9:23 Hannah McCarthy? Again, this is Beverly Moran.
9:24 Speaker 05 And the fantasy that it was selling between 1913 and the 1940s was that this was a way of having some sort of income redistribution.
9:38 Hannah McCarthy? But the income tax wasn't just added to the already existing taxes. The government also lowered tariffs, which are taxes on imported and exported goods. Tariffs had been a main source of revenue after the Civil War and the rise of industrialization. But with that industrialization came business owners and investors who accumulated vast sums of wealth. People who used that wealth to exploit workers, monopolize industries, raise prices, and manipulate the markets for their own gain. So in an effort to lower tariffs and redistribute wealth without making big cuts to the government's budget, Congress shifted more of the tax burden directly onto the wealthiest Americans.
10:23 Speaker 05 The taxes were only like 3% of the population even had to file. Only about 1% of the population had to pay.
10:32 Hannah McCarthy? But even so, the stock market crashed in 1929.
10:35 Nick Capodice? Which led to the Great Depression.
10:37 Hannah McCarthy? It did, indeed.
10:38 Speaker 04 Prosperity is just around the corner, say the hopeful headlines. But around the corners wind the lengthening breadlines, and a whole new class of citizens appears in American society: the new poor.
10:53 Hannah McCarthy? Businesses failed, industries crashed. And when President Franklin Roosevelt was elected in 1933, he wasn't shy about using income tax to pay for economic recovery.
11:05 Speaker 04 My friends, I still believe in ideals. I am not for a return to that definition of liberty under which for many years a free people were being gradually regimented into the service of the privileged.
11:23 Hannah McCarthy? For example, Roosevelt introduced the Revenue Act of 1935, which was targeted specifically at the wealthiest Americans with tax rates that were as high as 75%.
11:37 Nick Capodice? Wow.
11:38 Hannah McCarthy? This helped fund the relatively new Social Security Administration, one of the New Deal welfare programs Roosevelt created after the Great Depression.
11:45 Nick Capodice? Yeah, I am just trying to imagine something like a 75% income tax happening today, and I just cannot.
11:51 Hannah McCarthy? By the way, at one point, the highest tax bracket only had one person: John D. Rockefeller. But at the same time that the federal government was heavily taxing the wealthy, it was also creating exceptions. Asterisks. Things that allowed people to get out of paying taxes on their entire income. Here's Joe Thorndike.
12:15 Speaker 07 There was one moment where FDR says to his Treasury Secretary, "I'd like a list of the top 50 taxpayers in, you know, 1942, I can't remember which year it was, but roughly around then. No names, of course." And then they give him a memo, which includes all the names. Roosevelt was famous for a lot of sort of anti-loop hole, anti-tax avoidance crackdowns. And in 1937, I mean, he had the Treasury write in this memo, again, there were two versions, one that had the names and one that didn't. But they made sure that those names made their way into the public sphere and that these guys were called out for using, you know, special little loopholes to try to avoid their taxes.
13:02 Hannah McCarthy? We'll hear more about that after a quick break.
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17:08 Speaker 06 Well, we've always had certain exceptions in the income tax system.
17:12 Hannah McCarthy? This is Eric Toder again.
17:14 Speaker 06 Modern federal income tax started in 1913. We had a capital gains preference introduced in 1921. We had mortgage interest deduction from the beginning.
17:27 Speaker 06 That wasn't very important because not very many people paid income tax and not very many people owned homes when the federal income tax started. But it became important later.
17:37 Hannah McCarthy? It became more important when our income taxes went from something that only affected a small group of people to something that applied to nearly everyone.
17:46 Nick Capodice? I'm going to go with the episode trend so far, Hannah, and guess that a war had something to do with this.
17:52 Hannah McCarthy? It did, indeed. Once again, war.
17:54 Speaker 04 No matter how long it may take us to overcome this premeditated invasion, the American people in their righteous might will win through to absolute victory.
18:14 Hannah McCarthy? Specifically, World War II and the need to pay for it led to a major shift in our tax policy.
18:21 Speaker 06 Big government really dates from the Second World War. And that was when we introduced a mass income tax that applied to the majority of Americans.
18:32 Speaker 05 And again, the income tax becomes a way of communicating certain ideas, like this is like a victory garden, or this is like not wearing nylons, you know, we're all in it for the war effort.
18:46 Speaker 04 I paid my income tax today. I'm only one of millions more whose income never was taxed before. Our tax, I'm very glad to pay.
18:59 Nick Capodice? Victory gardens, like that's where the government encouraged people to grow their own food to help reduce the demand needed to feed soldiers?
19:06 Hannah McCarthy? Yeah, taxes were pitched in the same way. The propaganda around income taxes, like the song by Irving Berlin that you're hearing right now, were all about showing your support for the war effort by paying taxes.
19:19 Nick Capodice? I gotta say, it's a pretty jaunty little tune.
19:21 Speaker 07 When the number of taxpayers increases like sevenfold in a few years, millions of new people start paying the tax. The saying is that it went from being a class tax to a mass tax. And that's when the Bureau of Internal Revenue became a fact of life for regular Americans, for middle-class Americans in particular.
19:44 Hannah McCarthy? Like the previous income tax, the expanded mass income tax was a progressive graduated tax. The higher your income, the higher your income tax rate.
19:55 Nick Capodice? All right, so how did the Bureau handle this huge new tax base?
19:59 Hannah McCarthy? Well, it got help from the Social Security Administration, which introduced social security numbers. So the Bureau of Internal Revenue could keep track of people's identities and income. And Congress also made it possible for the Bureau of Internal Revenue to collect those taxes from someone's check before payday.
20:18 Speaker 05 I think every kid has this experience, right? You get a job, you're told you're going to get paid $100. You get the check, the check is $80. Like, where did the other $20 go? But it's withholding. So, you know, when you think about it, when all this is going on, there are no computers. There's, you know, there's no internet, right? There are barely like telephones. So withholding serves a lot of purposes. One of which, from the government point of view, is fewer people to deal with. If I can deal with Smith's Grocery that represents 20 people, that's much easier for me than dealing with all the 20 people who work in Smith's Grocery.
21:01 Speaker 05 And so the whole thing was pretty easy to do.
21:06 Nick Capodice? All right, so this sounds pretty basic. Most people paid an income tax, but a lot of times it just came right out of their paycheck. So how do we go from that to what we have now, where a tax return has all of these components in it?
21:20 Speaker 07 The total amount of income is not taxed, however. As each person is allowed certain deductions. You can deduct portions of medical and dental expenses.
21:29 Speaker 06 One reason it's complicated, and isn't as complicated in some other countries, is we've tried to use the tax system for many different things other than raising revenue.
21:39 Speaker 07 Charitable contributions, interest payments.
21:41 Speaker 06 Certain taxes and so on. The federal government has decided it wants to encourage certain activities. Wants to help people save for retirement. It wants to encourage them to give money to charities. Some of these programs could have been done by appropriations, but instead they're done through forgiving tax.
22:02 Nick Capodice? What does he mean by that? Can you give me like an example?
22:04 Hannah McCarthy? Let's start with World War II. In 1942, Congress gave President Roosevelt the power to freeze wages. And he introduced a maximum wage of $25,000.
22:16 Speaker 04 Taxation is the only practical way of preventing the incomes and profits of individuals and corporations from getting too high.
22:24 Hannah McCarthy? Essentially, any income you made over $25,000 was taxed at nearly 100%.
22:33 Speaker 04 The nation must have more money to run the war. People must stop spending for luxuries. Our country needs a far greater share of our income.
22:47 Hannah McCarthy? But, and here's where things get interesting, that wage cap applied to pay salary, commissions, bonuses. But it did not apply to other kinds of compensation, like insurance and pension benefits.
23:04 Speaker 06 When wages were capped, employers, in order to compensate their employees, started introducing health benefits, retirement benefits. The federal government wanted to encourage these things. So the amount of the income you get in the form of employer contributions to health insurance is exempt from federal income tax.
23:26 Hannah McCarthy? Especially because the employer also did not have to pay taxes on any income they spent on those kinds of programs.
23:35 Speaker 06 Which encourages employers to provide health insurance to their employees.
23:41 Nick Capodice? Is this unique to the United States? I mean, employer-provided health care is one of those things that's now kind of the norm and the backbone of our health care system. And saving for retirement through work is, for most people, the only way they're able to retire. But I know that's not the case elsewhere. So what's different about our tax policy than other countries?
24:03 Speaker 06 Okay, so there are some very big differences. One is, we don't have a national sales tax at the federal level. And we generally, even including states, we rely a lot less on consumption taxes than other countries. That means our tax system probably overall is a little bit more progressive than the tax systems in Europe.
24:27 Hannah McCarthy? One way to think of this as more progressive is if there is a high sales tax on something, no matter how much money you earn, you pay that sales tax. Whereas theoretically, the burden of the income tax is higher if you make more money.
24:43 Speaker 06 But oddly enough, our fiscal system is less progressive. The reason I say this is, they have these value-added taxes, but they have much more generous social benefits, health benefits, and so forth. So, in a sense, we rely more on taxes for redistribution, they rely more on spending programs.
25:04 Hannah McCarthy? So even though other countries may charge greater taxes on consumption, they also often spend more on programs that save people money, or reduce their expenses. For example, the cost of healthcare.
25:17 Speaker 06 All the systems use some tax expenditures. I think, you know, our exemption of employer premiums is probably unique to our system, because in other, other systems, they have more public funding of healthcare. So you don't need to have this encouragement of the employer system.
25:38 Hannah McCarthy? So it's hard to compare income taxes across countries, but people in Denmark pay almost half of their income in taxes. And Denmark also has some of the highest consumption taxes, taxes that you pay when you buy something, or go out to eat, which the United States has kept relatively low. High consumption taxes are also the norm in countries like Germany, Finland, Sweden, Norway.
26:02 Speaker 05 So how can it be that you have people who aren't making very much money, are paying a very high tax rate, and are paying taxes that, um, in the United States, we say, are taxes that hurt the poor? Well, the reason is that they are actually providing tremendous benefits to their people outside of the tax system.
26:28 Speaker 05 Anybody who's a resident of Germany can go to college for free. In Scandinavia, you can get your healthcare for free. You're able to have maternity leave. You, I mean, all sorts of things that in the United States, it's all like it's on you, right? Your retirement is on you. Are you saving for it or are you not saving for it? You know, your maternity leave is between you and your employer. It's all fragmented. And in those countries, they can do their taxes in less than two hours. Some of them don't do it at all, right? They just get like a letter from the government. This is what you owed.
27:13 Speaker 05 This is what you paid. Here's a check for the difference. Thank you very much. The reason why it's so complicated in the United States is because certain people are advantaged by the fact that it's complicated.
27:31 Nick Capodice? Have any of you out there ever Googled your own name? Like actually done it? You'll find your address, your phone number, maybe even that police report from the time you went to see Rain Man in the movie theater, but you were underage? Maybe that one's just me. But here's the thing. There are companies called data brokers whose entire business model is collecting your personal information and selling it to advertisers, to strangers, sometimes to people running scams. And once your data's out there, it just keeps circulating. That is where Incogni comes in. Incogni contacts data brokers on your behalf and sends them removal requests over and over. So your info doesn't just pop right back up. You set it up once and they keep working in the background.
28:16 Nick Capodice? You can even track the progress on a dashboard. And for our listeners, we have an exclusive 60% off an annual Incogni plan. Just go to incogni.com/civics or use the code civics at checkout. There's a link in the episode description. Remember, they can't harm you if they can't find you.
28:37 Nick Capodice? Holiday season is coming and I don't think I have to tell you this might be a tough one because things are expensive in the fall of 2026. Everyone I know is looking for ways to make a little extra money prowling around the side hustle subreddits. But I will say, if you're looking to sell something to launch a store fast before the holiday rush, Shopify is the one stop shop platform for making a professional looking store without touching a line of code. You can sell anything and you can sell it anywhere that people shop online. You can have it done in minutes and you can launch before Black Friday, that time of year when more people are already shopping and ready to buy. So if you're ready to launch
29:22 Nick Capodice? your business before Black Friday, go to Shopify.com/civics to start your free trial. That's Shopify.com/civics. Just go to Shopify.com/civics today to hear your first.
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30:11 Nick Capodice? So we've been talking about why our income taxes here in the US are so complicated. And so far, we have heard about how the government started using the tax code to shift behavior without passing laws, like incentivizing employers to provide health insurance and retirement plans. So what are some of the other carrots that the federal government has added to the tax code, Hannah?
30:33 Hannah McCarthy? There are two main kinds of incentives: deductions and credits.
30:38 Hannah McCarthy? We're going to talk about deductions first. Here's Eric Toder.
30:42 Speaker 06 Deductions reduce the amount of income on which you pay tax. So if I have 50,000 of income and then I get 10,000 of deductions, that reduces the amount of income I have to report to 40,000. So there are certain items that, for example, uh, home mortgage interest, or state and local income taxes, or charitable contributions, which are the biggest, which you can claim as a deduction or subtract that from the income, which is subject to tax.
31:14 Nick Capodice? So every year, you have to figure out which deductions you might qualify for, and then find out how much of a deduction it would be, and send all of that information to the IRS.
31:26 Hannah McCarthy? If you go the itemized deduction route, yes. But there is another option.
31:32 Speaker 06 However, you can also claim a standard deduction. So depending on your marital status, you can deduct a certain amount in lieu of taking itemized deductions. So what you want to do is figure out whether your itemized deductions total up to more than the standard deduction. And if they do, you itemize. And if you don't, you take the standard deduction.
31:54 Hannah McCarthy? Sometimes that itemized deduction is going to be more than a standard deduction, especially if you, say, own multiple properties or give to multiple charities. Or if you have set up a charitable foundation in your name.
32:09 Speaker 06 Most people take the standard deduction. Most high-income people use itemized deductions.
32:16 Hannah McCarthy? Unlike deductions, which lower your taxable income, credits lower your tax bill. That's the amount you have to pay after deductions are factored in.
32:25 Speaker 06 If I were paying $500 of tax and I got a tax credit of $150, that would reduce my taxes 350. So it just comes right off of the tax.
32:36 Hannah McCarthy? And many times, that credit ends up showing up as a refund after you file your taxes. Basically, the government says, "You overpaid this year. Here's some money back."
32:46 Nick Capodice? Is it possible to earn more in tax credits than you paid in taxes?
32:50 Hannah McCarthy? OK, this is where tax credits get a little sticky. The answer is, sometimes. Some credits are refundable, meaning that if the value of the tax credit is more than you owe in taxes, you have a negative tax bill.
33:03 Nick Capodice? In other words, you get money instead of paying money.
33:05 Hannah McCarthy? That's it. So if your tax bill was $500 and you had $600 in refundable tax credits, you would not owe any taxes, and you would get $100. One of the main tax credits that is refundable is the Earned Income Tax Credit, which is specifically for people with lower incomes. But you have to have actually earned an income to qualify.
33:27 Nick Capodice? But not all credits are refundable?
33:29 Hannah McCarthy? Right, many of them are not.
33:31 Nick Capodice? I think I've got it.
33:34 Nick Capodice? So how did these tax credits even end up in our tax policy? They seem complicated. Like, with that Earned Income Tax Credit, why not just lower the tax rate for people who make under a certain amount?
33:47 Hannah McCarthy? The answer is simple: politics.
33:50 Speaker 06 So we all have different views of what public benefits the government should supply. We all have different views of how big the government should be. Your purchase of public goods through taxes is mandatory. So this is the one place where the government is taking something from you, as well as supplying you with something. So naturally, the question is, who should it take from? How should that burden be shared upon those? Those are basically political questions.
34:21 Hannah McCarthy? And with that Earned Income Tax Credit and other tax credits designed to help people with lower incomes in particular, the politics have shifted a lot in the last couple of decades.
34:32 Nick Capodice? How so?
34:33 Hannah McCarthy? Well, remember how we talked about the New Deal, ushering in all of these government programs to help support people while the country recovered from the Great Depression?
34:42 Nick Capodice? Yeah.
34:43 Speaker 04 The remaining costs of government may be considered under general welfare. Social Security programs provide retirement income for the elderly, financial support for widows, children, and others who've lost their means of support. As well as aid to the disabled and unemployed.
34:59 Hannah McCarthy? In the last 30 years or so, a lot of these programs have transitioned from government expenditures to tax incentives instead. The 1980s were the era of Reaganomics. When the Reagan administration proposed streamlining the tax system by removing a lot of incentives while also cutting taxes across the board.
35:21 Speaker 04 When I sign this bill into law, America will have the lowest marginal tax rates and the most modern tax code among major industrialized nations.
35:31 Hannah McCarthy? But especially for businesses and the wealthiest Americans.
35:35 Speaker 04 One that encourages risk-taking, innovation, and that old American spirit of enterprise.
35:41 Nick Capodice? All right, so this is the so-called trickle-down economics.
35:44 Hannah McCarthy? Yep, this was also called supply-side economics, and the theory was that if you cut taxes for businesses and for people with wealth to invest, they would invest that money back into the US economy rather than pocketing it. And after a lot of this reform and these massive tax cuts as we're coming out of the 80s, the political debate about how big the government should be and what it should pay for was centered on the value and logistics of welfare programs.
36:13 Speaker 06 More must be done to reduce poverty and dependency, and believe me, nothing is more important than welfare reform. One is the whole issue of welfare reform and more broadly, how we help people to
36:24 Hannah McCarthy? lift themselves out of poverty and dependence.
36:25 Speaker 04 It's time to make welfare what it should be, a second chance, not a way of life.
36:31 Hannah McCarthy? President Bill Clinton ran on a policy of welfare reform when he was elected in 1992.
36:36 Speaker 06 The incentives for retirement saving were greatly expanded. The earned income credit was introduced and then greatly expanded. The child credit was introduced. That was at the same time where aid for families with dependent children was repealed and welfare reform in 1996. So our system really moved more toward using the tax system for spending-like programs.
37:01 Hannah McCarthy? And Eric worked in the Clinton administration on some of the new policies that focused on taxes.
37:07 Speaker 06 When I was in the Clinton administration and we decided for political reasons we had to have a middle-class tax cut. Well, I think the main view was essentially government spending has a bad name and politicians wanted to keep what the public perceived to be the size of the government low and to provide more tax cuts, middle-class tax cuts, other kinds of tax cuts. And so the way you could do this while still providing government social benefits was to provide credits and so forth through the tax system.
37:51 Speaker 06 So if we lowered rates a little bit, it just cost too much money. You couldn't lower rates across the board. So that said, we had to give some kind of credits or some benefits. So people had talked about a child credit and the number that Republicans had raised was $500. So we said, well, we have to have $500. It can't be less than $500.
38:13 Hannah McCarthy? He's talking about the Balanced Budget Act of 1993. The way that worked is that families could get a $500 tax credit for every child they had under the age of 17. So when you filled out your taxes, if you had a kid under age 17, you'd have 500 bucks taken off your tax bill.
38:30 Speaker 06 Well, how do we save money if it's $500? Well, we have to phase it out if people's income is above a certain amount. And maybe we want to limit it instead of with personal exemptions, which was 18, maybe we ought to limit it to people under 17. And you get the picture. You go through one contortion after another to hit these various targets for how you're changing the system. And those things just stay in there.
39:05 Nick Capodice? I'm beginning to see how we ended up with such a complicated system, Hannah.
39:10 Hannah McCarthy? And this changed the experience of people who used these programs. In part because for both deductions and tax credits, there's a responsibility on you, the taxpayer, to make sure you fill out the right paperwork and get those incentives.
39:24 Speaker 05 When the Clinton administration decided that it was going to kill welfare as we know it, right, that was one of the phrases, get rid of welfare as we know it. I have a plan to end welfare as we know it, to break the cycle of welfare dependency. So you don't really have welfare offices anymore. People don't really use the word "welfare." That all seems to have disappeared. But the money is still flowing to people. But now it's flowing to people through the tax system. If you hide it in the tax system, what you're doing is you're replacing social workers with H&R Block.
40:05 Hannah McCarthy? Like Eric said before, many of the things treated as apportionment, that is, the government sets up programs and funds them directly, were now offered as relief from your tax bill instead. And all of these things just keep being added to the tax code to make it work.
40:23 Speaker 06 The system is much more complicated than it needs to be and could use an overhaul.
40:30 Speaker 06 I mean, there are, you know, when you look at something like retirement plans, there are multiple different ways you can contribute. And for the average person to figure out how to navigate through these systems, even the programs for low-income people, like the education credits, many people just don't use them because they can't figure out how to navigate them. In order to fine-tune things, we've made things way more complicated than it needs to be.
40:56 Speaker 05 For a lot of people, it's terrifying. You know, they don't have the time. They don't have access to the things that they would need. Even if they have access to the things that they would need, the things that they would need are crazy complicated. The IRS produces all these instruction booklets, right? They're like War and Peace. They use all sorts of language that makes sense to tax insiders, but doesn't necessarily make sense to anyone else. And so either you're going to like engage in that system and get the money that
41:40 Speaker 05 the government wants you to have, right? Or you're going to like not engage in that system and maybe end up in prison?
41:57 Nick Capodice? Well, that's enough death and taxes today. This episode was written and produced by Christina Phillips with me, Nikita Diche and Hannah McCarthy. Our staff includes Jackie Fulton and Rebecca Lavoie is our executive producer. Music in this episode by the guy who wrote God Bless America, Irving Berlin, Jesse Gallagher, Raymond Graus, Gridded, Blue Dot Sessions, Ketza, Lee Rosevier, Loboloko, Niktem, Pictures of a Floating World, Proletur, Scott MacLeod, Cooper Canal, Bala, and the tax-free musical stylings of Chris Zabriski. Civics 101 is produced by that station who I hope is kicking in their 6.2% and HPR, New Hampshire Public Radio. I'm just kidding, of course they are.
42:45 Speaker 06 What does it really take to start a startup? I'm David Rosenko, entrepreneur, investor, and the host of Leap Forward. In each episode, I go behind the scenes with successful founders and someone who knew them before they were famous: their college roommate, their first employee, or their mom. To hear the sometimes uncomfortable but very real inside stories of how companies actually get built. Companies like Reddit, Airbnb, or Twitch. Listen to the new season of Leap Forward for never-before-heard stories behind the world's most iconic companies.
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