Al Capone and the transformation of the IRS

Gangsters, banksters, and politicians. Today on the show, how the hunt for Al Capone helped turn the IRS into one of the U. S. government's most powerful tools — and most effective weapons. This episode originally published in May of 2025. Guests: Joe Thorndike, historian for Tax Analysts and author of Their Fair Share: Taxing the Rich in the Age of FDR. Paul Camacho, retired special agent for the IRS Criminal Investigation Division and member of the board of directors at the Mob Museum in Las Vegas. Jason Scott Smith, historian at The University of New Mexico and author of two books about FDR and the New Deal. Lawrence Reed, president emeritus of The Foundation for Economic Education. To access bonus episodes and listen to Throughline sponsor-free, subscribe to Throughline+ via Apple Podcasts or at plus.npr.org/throughline. See pcm.adswizz.com https://pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences. NPR Privacy Policy https://www.npr.org/about-npr/179878450/privacy-policy

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 0:28Speaker 01

  February 14th, 1929, Valentine's Day. Around 10:00 in the morning, a Cadillac pulls up to a garage on the north side of Chicago. Four guys jump out of the car. Two are dressed in police uniforms. Inside the garage, they find seven men, six of whom are members of a gang led by George Bugs Moran, who runs things on the north side. Cops come around all the time, looking for a bribe, just the cost of doing business. Moran's men do as they're told, hand over their guns, line up against the wall. But then, suddenly, Thompson machine guns appear from under the coats of the cops,

• 1:13Speaker 01

  and they start firing. Seventy rounds later, Moran's men lie slumped on the ground, in a pool of their own blood. The shooters get back in the Cadillac and drive away. It turns out, they weren't cops. And when the actual police arrive on the scene, they find one man barely still alive. When asked who had him shot, he replies,

• 1:39Rund Abdelfatah?

  No one shot me.

• 1:41Speaker 01

  Three hours later, he dies. And the question remains, who was responsible for this?

• 1:55Speaker 03

  Newspapers around the country seize on this story, calling it the Valentine's Day massacre.

• 2:01Speaker 04

  The leader in Chicago St. Valentine's Day massacre, termed by police "the most dangerous man alive", was sought over the nation today.

• 2:09Speaker 03

  No arrests were made, but when George Moran is asked about it, he doesn't hesitate. He says, Only Capone kills like that. Alphonse Al Capone, his main rival in Chicago, also known as Scarface.

• 2:28Speaker 05

  There were other kingpins just as large, but Al Capone, man, he was like the poster child.

• 2:35Speaker 03

  Capone had moved to Chicago at the start of prohibition in 1920.

• 2:40Speaker 06

  Suddenly, they take an industry that is big and lucrative, the alcohol industry in the US, and they make it illegal. And there's immediately a booming market for illegal alcohol.

• 2:52Speaker 01

  This is Joe Thorndike, historian for Tax Analysts, a nonprofit provider of tax information.

• 2:58Speaker 06

  And in places like Chicago, this was very evident.

• 3:02Speaker 03

  Chicago was an ideal place to build a bootlegging empire, a big city centrally located with notoriously corrupt law enforcement.

• 3:11Speaker 06

  But it was also true in almost every big city.

• 3:13Speaker 05

  Prohibition didn't start organized crime in the early 1900s. There was this culture of corruption. So they already had the infrastructure.

• 3:21Speaker 01

  This is Paul Camacho. He's a retired special agent for the IRS Criminal Investigation Division, and he's on the Board of Directors at the Mob Museum in Las Vegas.

• 3:32Speaker 05

  But prohibition came in. It was like the goose that laid the golden egg. These people get really rich.

• 3:38Speaker 06

  They could buy the protection of police officers, of prosecutors, of judges. They could also threaten all of those same people with violence. They had their fingers on the levers of power.

• 3:51Speaker 03

  Al Capone really knew how to pull those levers.

• 3:54Speaker 06

  And was essentially considered untouchable. You couldn't get people to testify. You couldn't keep people alive who were going to testify. There had been organized efforts to take him down for years.

• 4:07Speaker 03

  At one point, there was even a $50,000 bounty on Capone's head, the equivalent of close to $1 million today.

• 4:15Speaker 06

  But no one had ever succeeded.

• 4:19Speaker 01

  Just days after the Valentine's Day massacre, the gruesome details and photos still fresh in people's minds, a new president took office named Herbert Hoover, determined to clean up the streets of gangland Chicago.

• 4:33Speaker 05

  Herbert Hoover made it his top priority to get Capone.

• 4:36Speaker 01

  And he caught wind of someone in the Treasury Department at the IRS who might be the guy to do it, Elmer Irie. So he calls up Elmer's boss, the Treasury Secretary Andrew Mellon, and tells him.

• 4:51Speaker 05

  Direct Elmer to get Capone.

• 4:57Speaker 01

  If you're thinking, OK, wait, let me get this straight. You're saying the IRS, the boring agency everyone loves to hate, that's who was put in charge of hunting down the most dangerous man in America? Yeah, that's what we're saying.

• 5:12Speaker 06

  The IRS is a law enforcement agency.

• 5:15Speaker 03

  Which isn't usually how we think about it, the agency that collects our taxes every year. And where do our tax dollars go?

• 5:23Speaker 06

  So on some level, taxes pay for government.

• 5:26Speaker 03

  Government offices and salaries, but also government services. They pay for that paved road you drive on to go to work, the public school your niece goes to, the social security check your grandparents get, and a big chunk pays for Medicare and the military.

• 5:43Speaker 06

  You know, they pay for everything. Justice Oliver Wendell Holmes said that taxes are the price we pay for civilization.

• 5:52Speaker 01

  But for a lot of American history, up until the early 20th century, we didn't have a permanent income tax. The federal government paid for everything, mainly using money collected from tariffs and excise taxes on various goods.

• 6:07Speaker 03

  Keep in mind, everything back then was a lot fewer things. There was no social security, no unemployment insurance, and a much smaller military. But as the world changed rapidly, the country grew just as fast. Suddenly, new problems demanded new solutions from the federal government.

• 6:27Speaker 01

  And it was at that moment that Elmer Irie and the IRS were instructed to get Capone.

• 6:36Speaker 01

  I'm Rande Abdelfattah. And I'm Ramtin Arablouei. On this episode of Throughline from NPR, the hunt for Capone helps launch a new era when tax collectors were on the front lines of a war against lawlessness, from back alleys to the halls of power, transforming the IRS from an obscure federal agency to a powerful, sometimes scandal-ridden one that helped make the federal government into what it is today.

• 7:09Speaker 07

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• 8:33Speaker 12

  Part One: The Giant Killers.

• 8:38Speaker 13

  We in the Treasury Department were somehow chosen for the job of incarcerating Alphonse. I couldn't help wondering why a Treasury Department unit should be assigned to nab a murderer, a gambler, and a bootlegger.

• 8:51Speaker 01

  Elmer Irie wasn't who you might expect to lead the hunt for Capone.

• 8:55Speaker 05

  He was kind of like a teddy bear type guy. He had this folksy charm.

• 9:00Speaker 01

  So when Elmer's boss, Treasury Secretary Andrew Mellon, got that call from the president himself directing him to get Capone, Elmer was confused.

• 9:10Speaker 13

  Anyway, Mellon was my boss. Ergo, I said, yes, Mr. Mellon, we'll get right on it.

• 9:17Speaker 01

  Elmer's middle name was Lincoln. And yes, he was named after that Lincoln. His dad was a huge fan. Elmer would be too. Throughout his life, he was known to hand out pictures of Lincoln and drop quotes attributed to him into conversation.

• 9:34Speaker 05

  Nearly all men can stand adversity, but if you want to test a man's character, give him power.

• 9:41Speaker 01

  To Elmer, Lincoln represented what it meant to really serve in government.

• 9:45Speaker 05

  Where country mattered more than anything else.

• 9:49Speaker 01

  Elmer took these principles more to heart than his father, who abandoned the family when Elmer was still a kid, soon after moving them from Kansas City to Washington, DC.

• 10:01Speaker 05

  His mission in life was to support his mom and his younger siblings.

• 10:05Speaker 03

  He got a job as a stenographer at the post office in DC and worked his way up to becoming a postal inspector.

• 10:13Speaker 05

  Now, there's a big footnote here that you have to understand. The one beacon of light in the federal law enforcement back then was the US Postal Inspectors. They could trace a fraud to a penny.

• 10:26Speaker 03

  That's right. The most impressive crime fighting cops worked for the post office. Because at this time, the early 20th century, more and more people were moving to cities. Industries were booming. Life was changing fast. And so if, say, you had a stock trade you wanted to make, it went through the mail. Needed to pay your rent or water bill? Mail. Were waiting on a big shipment of rugs? You get the idea.

• 10:54Speaker 05

  So it was important that the government made sure that that agency was free as much as possible fraud, waste, and abuse.

• 11:01Speaker 03

  That's where Elmer cut his teeth.

• 11:03Speaker 05

  He was a humble guy, worked hard. He became a very good investigator and well-respected.

• 11:12Speaker 03

  And he might have spent his career in the postal service had things not taken an unexpected turn.

• 11:24Speaker 01

  World War I was brewing, and the US had just ratified the 16th Amendment, which restored the income tax.

• 11:31Speaker 06

  It's viewed as a way to make the tax system more fair.

• 11:35Speaker 01

  The income tax had only been used a couple times before, mainly during the Civil War, to fund the Union's war effort. When that war ended, so did the income tax. But some Democratic and Republican congressmen had been pushing ever since to bring it back. They didn't think we should be relying so much on tariffs, which at the time were the main way the government got its money. They thought tariffs put too much of the burden on consumers and farmers, led to unstable trade relationships with other countries, and unfairly favored industrialists and the wealthy.

• 12:12Speaker 01

  And once the US entered the war,

• 12:17Speaker 01

  the income tax proved vital.

• 12:21Speaker 05

  There's this tremendous need to fund the government, to fight World War I.

• 12:26Speaker 06

  The income tax gets much bigger very quickly.

• 12:29Speaker 05

  The top rate went from 6% to like 77%.

• 12:33Speaker 01

  77%.

• 12:35Speaker 05

  When I say top rates, that was for people who were making a lot of money. That's a huge portion.

• 12:41Speaker 01

  Some of the people being taxed the most were ironically making that money from the war itself. The media labeled them...

• 12:48Speaker 05

  War profiteers. Businessmen that were providing the military equipment, the goods, everything needed for the war. And they became some of the most wealthy people in the country.

• 13:02Speaker 01

  People like Pierre S. Dupont, Charles M. Schwab, and J. P. Morgan Jr. And some of these so-called war profiteers...

• 13:10Speaker 05

  They had the temerity to bribe tax collectors and have them turn a blind eye and not pay taxes. And it became an embarrassment for Treasury.

• 13:27Speaker 03

  After the war ended in 1918, the income tax rates were significantly reduced. But those wealthy tax evaders were getting off scot-free. So officials at the Treasury Department were trying to think of a way to improve the image of the IRS. How could it get the kind of reputation the postal service had? And the light bulb goes off.

• 13:49Speaker 05

  They went to the postal service and took one of their senior leaders by the name of Daniel Roper. And they bring him over and he becomes the Commissioner of IRS.

• 13:58Speaker 03

  Without consequences, what's a person's incentive to pay? So then Roper decides he needs to set up a special division to specifically investigate tax evasion and root out corruption in the department.

• 14:10Speaker 05

  And he asked one of his assistants, "Well, who do you recommend to run this division?"

• 14:15Speaker 03

  They answered,

• 14:16Speaker 05

  "Well, how about this Elmer guy? He's well-respected. He's a rising star. And he seems to be a guy that everybody likes to work with. And so they offered him the job."

• 14:27Speaker 03

  It's 1919. Elmer Ivey recruits six of his old colleagues, other postal inspectors. And together, they begin building this new unit of the IRS, the Intelligence Unit.

• 14:43Speaker 13

  And then,

• 14:44Speaker 05

  this tremendous loop is thrown on Elmer and Daniel Roper. And that is, in 1920, the Eighteenth Amendment, prohibition.

• 14:54Speaker 13

  We sat face to face in Roper's office in the Treasury Department. I broke the glum silence with, "Mr. Roper, they can't do this to us." Roper nodded and answered, "They certainly can't, but they have. And I'm afraid you're stuck." "Yes, I guess we are stuck, Mr. Roper." "No, Mr. Ivey, we're not stuck. You're stuck." "Me? I'm resigning."

• 15:21Speaker 01

  Overnight, the production, transportation, and sale of alcohol was illegal everywhere. No beer, no wine, no whiskey, nothing. And people didn't like it. It led to a whole underground economy, speakeasies, moonshiners, and of course, organized crime, the mob, who were making a lot of money, none of which was being taxed. This was a huge problem, and none of the government agencies had wanted to be in charge of policing it. So when the Treasury Department was forced to oversee the new prohibition service, Daniel Roper left his post. But Elmer had a family to feed, so he stuck it out.

• 16:01Speaker 05

  All of a sudden, the responsibility for policing corrupt prohibition agents was now under Elmer Ari.

• 16:12Speaker 01

  Prohibition agents were supposed to be reining in this massive black market. But because demand was so high, a lot of them had been hired with no qualifications, and corruption was rampant.

• 16:24Speaker 05

  Prohibition agents showing up to their jobs, wearing diamond rings, fur coats, being chauffeured to their jobs.

• 16:33Speaker 13

  I think a clue as to just how complicated this job became can be found in the following dreary statistic. From 1920 to 1928, we fired 706 prohibition agents for larceny and prosecuted 257 for same.

• 16:50Speaker 05

  Elmer led this sweep of government corruption. He's starting to get attention. People are like looking at him like, whoa, who is this guy?

• 17:03Speaker 03

  By the mid 1920s, some lawyers and government officials began pushing for criminals to be subject to tax evasion charges too. Because so much money was being funneled through their criminal enterprises during prohibition. So in 1927, a case went before the Supreme Court. And in the decision, which Justice Oliver Wendell Holmes wrote, the court ruled that individuals must report and pay taxes on illegal income. After that decision, Elmer was basically told.

• 17:36Speaker 05

  Hey, the Supreme Court has now determined that illegal income is taxable. It's legal. Knock yourself out. Go after these kingpins. Use the tax law.

• 17:48Speaker 03

  Now Elmer had to face down the criminal underworld.

• 18:00Speaker 04

  The leader in Chicago seen Valentine's Day massacre turned by police to be most dangerous man alive.

• 18:06Speaker 05

  So when they started the investigation on Capone, what they were trying to show is, well, how much money did he have that he didn't report?

• 18:16Speaker 01

  So they followed the paper trails and then started interviewing people.

• 18:19Speaker 05

  You would have to go to the bank and that might lead to somebody that held account. You had to go interview that person.

• 18:25Speaker 01

  Pretty quickly, Capone caught on that Elmer and his men were coming around asking questions.

• 18:30Speaker 05

  Witnesses were ending up dead.

• 18:33Speaker 01

  And then Elmer sent his best agent undercover.

• 18:37Speaker 05

  Then they were able to infiltrate the Capone organization.

• 18:40Speaker 01

  It was a dangerous situation for everyone.

• 18:44Speaker 05

  And at one point, Capone puts a hit out on, on a few people because of the investigation.

• 18:51Speaker 01

  But Elmer remained steadfast. He was like, we're going to do this investigation right.

• 18:57Speaker 05

  We got to follow this to the letter of the law.

• 19:00Speaker 01

  And just as Elmer's crew was closing in on Capone.

• 19:05Speaker 14

  Wall Street was easy street for everybody.

• 19:07Speaker 01

  The stock market crashes.

• 19:10Speaker 14

  Panic gave way to despair. Overnight, the richest country in the world had spawned breadlines.

• 19:15Speaker 01

  The entire nation is sent into a tailspin.

• 19:21Speaker 06

  It sort of signals the beginning of the Great Depression.

• 19:26Speaker 03

  By the time Capone went to trial two years later in 1931, the country had sunk deep into the Great Depression. Still, as the trial unfolded, all eyes were on Capone, the man everyone thought was untouchable.

• 19:43Speaker 03

  Day after day, rows of photographers swarmed him outside the courthouse. Eager readers followed along as witnesses took the stand. And through the papers, Capone made his case to the public, at one point saying, "I've been made an issue and I'm not complaining. But why don't they go after all those bankers who took the savings of thousands of poor people and lost them in bank failures?"

• 20:09Speaker 05

  Capone gets convicted of tax evasion.

• 20:12Speaker 03

  Elmer's there as the judge reads the sentence.

• 20:15Speaker 05

  Right after, soon after, there are lines of mobsters at IRS buildings.

• 20:19Speaker 03

  Collections from unpaid taxes spiked.

• 20:23Speaker 05

  And Herbert Hoover is so thrilled. He's giddy.

• 20:30Speaker 03

  In a sea of losses amid the Great Depression, this was one bright spot for him and the country.

• 20:37Speaker 05

  And it makes people feel good about the tax system, too. It's like, yeah, at least they're paying their taxes.

• 20:43Speaker 01

  Hoover was hungry for more. He instructs Elmer and his team to go on a massive crime sweep across the country.

• 20:51Speaker 05

  This small band of elite financial investigators just took down one kingpin after another. And they got so good at it that the media called them the giant killers.

• 21:04Speaker 01

  In between chasing down kingpins, Elmer and his men also managed to help the famous pilot, Charles Lindbergh, solve the kidnapping and killing of his one-year-old son by tracing the ransom money. Everyone in America had been following the kidnapping, and now, a lot more people knew Elmer Iri, and they loved him.

• 21:26Speaker 05

  The public viewed Elmer as Uncle Elmer. He was this unassuming, church-going, all-American family man that had this immense courage and competence to take down these organized crime figures. And he did it in such a fair way, you know? He became the brand.

• 21:46Speaker 01

  The brand of the IRS.

• 21:51Speaker 03

  And with life getting harder every day, the public was starting to wonder if maybe Capone had been right about something. Why don't they go after all those bankers?

• 22:02Speaker 01

  Weren't they just gangsters by a different, supposedly more legit, name?

• 22:08Speaker 01

  Some papers even started calling them "banksters."

• 22:13Speaker 06

  And so in the early 1930s, a lot of politicians are looking hard at that to try to figure out what role did finance and did the Wall Street bankers play in causing this depression?

• 22:27Speaker 03

  Coming up, the banksters are put in a hot seat.

• 22:39Speaker 15

  Hi, this is Lynda Turner from Huntington, West Virginia, and you're listening to Throughline on NPR.

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• 23:59Speaker 17

  Part two, ninety-nine and two-thirds.

• 24:04Speaker 18

  Who is your first witness?

• 24:07Speaker 17

  Mr. J. P. Morgan.

• 24:09Speaker 18

  Mr. Morgan, will you be sworn?

• 24:11Speaker 19

  Certainly.

• 24:13Speaker 18

  Hold up your right hand. You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, so help you God.

• 24:22Speaker 19

  I do.

• 24:27Speaker 01

  It's Tuesday, May 23rd, 1933, about four years after the stock market crash. Unemployment is at 25%. Breadlines stretch around city blocks. And J. P. Morgan Jr. appears before a Senate Banking Committee, who has called this hearing to investigate...

• 24:46Speaker 06

  What did Wall Street do? And how bad was it? You know, can we blame them for this depression?

• 24:53Speaker 01

  And J. P. Morgan Jr.

• 24:54Speaker 06

  He is the archetypal Wall Street banker.

• 24:58Speaker 01

  Not only had he dominated Wall Street for decades by that point...

• 25:02Speaker 06

  He played a pivotal role in international finance through this whole period and was accused by many of being a war profiteer in World War I. He made an enormous amount of money doing that. You could just as easily make the case that he, you know, saved the Allies from defeat.

• 25:19Speaker 17

  Do you know what the aggregate amount was of those deposit accounts at the end of the last fiscal year?

• 25:25Speaker 19

  Three hundred forty million dollars.

• 25:29Speaker 01

  This investigation was picking up steam as a new president entered the White House, the man who had beat out Herbert Hoover in the 1932 election, Franklin Delano Roosevelt.

• 25:42Speaker 20

  But his earlier career and his earlier life, you might not necessarily have predicted that this would happen.

• 25:49Speaker 03

  FDR had grown up not all that differently from JP Morgan Jr., with a lot of money rubbing shoulders with the elite. They even went to Harvard around the same time. And after college, JP Morgan Jr. goes into finance like his dad and Franklin Roosevelt.

• 26:06Speaker 20

  Goes into politics thinking this is the family business. My cousin Teddy Roosevelt, he was a Republican. I'll distinguish myself by being a Democrat.

• 26:15Speaker 03

  He becomes Assistant Secretary of the Navy for a little while, and then tries to run for Vice President in 1920, loses, and within a year.

• 26:24Speaker 20

  He tragically is struck with polio and is no longer able to walk.

• 26:29Speaker 03

  By the way, this is Jason Scott Smith. He's a historian at the University of New Mexico, who's written two books about FDR and the New Deal.

• 26:38Speaker 20

  This kind of illness striking someone who was so wealthy and seemingly led such a charmed life must have humanized him to many Americans.

• 26:47Speaker 03

  Roosevelt became Governor of New York in 1929, just before the stock market crash.

• 26:53Speaker 01

  And during the first few years of the Great Depression, he watched as the Republican administration of President Hoover made a bad situation worse.

• 27:02Speaker 03

  Raising taxes on businesses, which meant they had less money to invest.

• 27:06Speaker 01

  And individuals, which led to more unemployment and fewer customers at stores.

• 27:11Speaker 03

  Raising tariffs to protect American jobs, which backfired and triggered a global trade war.

• 27:17Speaker 01

  And refusing to give direct aid to people, leading to a crisis of hunger and homelessness.

• 27:23Speaker 21

  Good evening, my fellow Americans and friends of the radio audience. I hope during this campaign to use the radio frequently.

• 27:31Speaker 03

  So Roosevelt decided to throw his hat into the ring for the presidency.

• 27:36Speaker 21

  In this time of unprecedented economic and social distress, the Democratic Party declares its conviction that the chief causes of this conflict-

• 27:44Speaker 19

  Roosevelt said the problem was too much government, and he was going to cut it back.

• 27:48Speaker 21

  First and immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than 25%.

• 28:05Speaker 19

  And his running mate accused Hoover of leading the country down the path to socialism.

• 28:11Speaker 03

  This is Lawrence Reed, president emeritus of the Foundation for Economic Education.

• 28:16Speaker 19

  But once he took office, the kinds of advisors he listened to were the ones telling him that, no, we've got to go whole hog for as much government spending and relief programs as we can. That's the only way to get out of the depression. So that's the way he went.

• 28:32Speaker 22

  In the working out of a great national program that seeks the primary good of the greater number, it is true that the toes of some people are being stepped on and are going to be stepped on.

• 28:49Speaker 01

  This New Deal would offer direct relief to the poor, infrastructure programs to put people back to work, and a whole new way of doing business where the government, not the private sector, would lead the way.

• 29:03Speaker 20

  The inefficiency was the point.

• 29:07Speaker 20

  He wanted to provide jobs. He wanted to provide government paychecks to prevent, you know, an uprising. It's a way of using the power of the state to support the private economy in a more effective and regulated fashion. In a sense, I would say the New Deal is trying to save capitalism from the capitalists and for the capitalists.

• 29:29Speaker 01

  Who represents the capitalist?

• 29:32Speaker 20

  J. P. Morgan Jr., we can see him as a kind of symbol of this older money opposition to Franklin Roosevelt, the Democratic Party, the New Deal, and the kind of tension that reflected the broader class divides that existed during the Great Depression.

• 29:49Speaker 01

  Which brings us back to J. P. Morgan Jr. sitting in the Senate Banking Committee hearing.

• 29:56Speaker 14

  In that bookkeeping process, do you count deposits as liabilities?

• 30:00Speaker 03

  Do I? I do not think that question is very necessary, Senator.

• 30:05Speaker 06

  The critics of this are saying, you know, this is just blatant politics. This is, you're just searching for scapegoats.

• 30:13Speaker 01

  And then it was discovered in the hearing.

• 30:16Speaker 06

  JP Morgan and his partners hadn't paid any taxes for a couple of years in the early 1930s.

• 30:22Speaker 01

  People were outraged.

• 30:23Speaker 06

  They were like, oh, my goodness, I cannot believe that one of these richest people in America is not paying any taxes. And JP Morgan says, hey, no one regrets that more than I do. I wasn't paying taxes because I was losing money. How could I pay taxes on money I wasn't making?

• 30:38Speaker 01

  In other words, because he hadn't made a profit those years after the stock market crash, technically, he didn't have any taxable income and hadn't evaded taxes.

• 30:49Speaker 06

  Who do you blame in that moment? Do you blame the taxpayer JP Morgan, who's taking advantage of the law as best he can to minimize his taxes? Or do you blame the law and say, hey, Congress shouldn't written the law like this in the first place? You know, you can go either way on that.

• 31:03Speaker 03

  The committee interviewed a series of other bankers, and by the end, it was clear.

• 31:09Speaker 20

  Unchecked stock market speculation was one of the factors that had sent the economy and the American banking system into collapse.

• 31:18Speaker 03

  So Congress quickly moved to pass a series of laws to regulate the stock market and put more checks in place on bankers to prevent them from gambling with people's money.

• 31:28Speaker 01

  But the tax question remained.

• 31:31Speaker 06

  What is the moral status of tax avoidance? It may be legal, but is it moral?

• 31:38Speaker 01

  FDR took this up as his personal fight.

• 31:41Speaker 06

  To him, the aggressive tax avoidance, even when legal, is just as worthy of scorn and political attack.

• 31:48Speaker 05

  Because you think about it, that's the New Deal. The government is relying on the tax system.

• 31:54Speaker 03

  Thing is, most of the government's revenue to fund New Deal projects, like new schools. New sewers. New sidewalks, new airports. New courthouses. Came from deficit spending and from excise taxes, taxes on goods like tobacco, cars, radios, and alcohol, as prohibition ended in 1933. Not the income tax, which only about 5% of the population at this point, the wealthiest of the wealthy, were paying.

• 32:23Speaker 01

  But for Roosevelt, the income tax was symbolic, a way to rebuild trust with the public and restore that feeling people had when Elmer IRS took down Capone, that everyone was expected to pay their fair share.

• 32:38Speaker 06

  And he wants to name names.

• 32:41Speaker 01

  One of the names Roosevelt tells the IRS to investigate is Elmer Irie's former boss, Andrew Mellon.

• 32:48Speaker 19

  Andrew Mellon was a very prominent and very wealthy man. Everybody knew who he was.

• 32:54Speaker 06

  There is an old joke about Andrew Mellon, that three presidents served under Andrew Mellon.

• 33:00Speaker 19

  He'd been Treasury Secretary for more than 11 years.

• 33:02Speaker 01

  Basically, from the time prohibition began.

• 33:04Speaker 06

  And what did he believe in? He believed in cutting taxes, more than anything else.

• 33:08Speaker 13

  The Roosevelt administration made me go after Andy Mellon. I liked Mr. Mellon, and they knew it.

• 33:15Speaker 01

  Elmer initially objects to the investigation. He's like, there's nothing there. And then he gets a phone call from the new Treasury Secretary, Henry Morgenthau, a close friend of Roosevelt, who says, "Irie, you can't be 99 and 2/3% on that job. Investigate Mellon. I order it."

• 33:36Speaker 06

  Everyone was convinced, I think, of Mellon's innocence, except perhaps for Franklin Roosevelt and Henry Morgenthau. It was politics driving this.

• 33:45Speaker 05

  Elmer showed him, okay, if you ask me to do this, I'll put my best agent on it, and eventually showed the judge that the guy was innocent beyond a reasonable doubt. If the case is not there, he's going to make it known that the case is not there.

• 33:57Rund Abdelfatah?

  But it is telling that if he was a different person who got that request and understood the subtext, like, we don't like this guy, find something on him, you know, what havoc that could have wreaked on the government.

• 34:12Speaker 05

  Oh, yeah. I mean, look, he even talks about it, that an investigation could destroy a person. And he preached to agents, "Follow strictly the rules of the Constitution and the laws that govern criminal investigations." That was what it meant to be a civil servant.

• 34:37Speaker 06

  In 1935, Roosevelt's starting to gear up for his first reelection campaign.

• 34:42Speaker 03

  That year, Roosevelt pushes through the Social Security Act and the so-called wealth tax, which raised the federal income tax on the highest income earners. Those in the very highest tax bracket had to pay 79%, and there was no war to fund this time. Now, full disclosure, that 79% only applied to one person.

• 35:05Speaker 06

  It was John D. Rockefeller Jr.

• 35:07Speaker 03

  Even J.P. Morgan Jr., who had a lot of money, didn't have that kind of money.

• 35:13Speaker 06

  So is that a meaningful tax? Well, it's not meaningful the amount of revenue it's going to raise, but it might be meaningful in terms of the message that it sends.

• 35:21Speaker 20

  These kind of rhetorical attacks on the wealthy were terrific politics. He was, over time, seen by the wealthy as a kind of traitor to his class.

• 35:34Speaker 03

  Even though this tax crusade against the wealthy was resonating with people, FDR was feeling uncertain about his reelection, and he began asking Elmer to investigate more and more people who could be fairly described as his political opponents. Among them were a Democratic senator from Louisiana named Huey Long, who was a threat to him in the primaries, a Republican congressman from Roosevelt's home district, Hamilton Fish, and Mo Annenberg, owner of a media company that was vocally critical of FDR and the New Deal.

• 36:08Speaker 01

  Paul Camacho says it's unclear how much these investigations were politically motivated because some of them were suspected of actual criminal wrongdoing. But Lawrence Reed cites this as counter evidence.

• 36:21Speaker 19

  Elliot Roosevelt, the son of the president, wrote a very revealing book about the family's years in the White House, and he points out in that book, quote, "My father may have been the originator of the concept of employing the IRS as a weapon of political retribution."

• 36:44Speaker 23

  We know now that government by organized money is just as dangerous as government by organized mob.

• 36:56Speaker 01

  Roosevelt won reelection in 1936, and he would go on to win reelection an unprecedented two more times.

• 37:05Speaker 23

  They are unanimous in their hate for me, and I welcome their hatred.

• 37:22Speaker 24

  Nowadays, we are assailed by a chorus of hurried threats.

• 37:28Speaker 03

  By the late 1930s, talk of war began to fill the airwaves, and fascism was taking hold of Europe. Some Americans angry at Roosevelt began to call him "the New Deal dictator." He proposed a 99% top income tax rate. That was extreme and didn't actually get approved by Congress. But for the business class, this tax crusade and the New Deal were a direct threat to their bottom line. And more than that, a threat to American innovation and entrepreneurship.

• 38:03Speaker 19

  They're saying we're not going to take all the risk and have almost all the reward taken by the government.

• 38:09Speaker 01

  And whether you saw it as a good or a bad thing.

• 38:12Speaker 20

  This is a radical transformation of the federal government.

• 38:16Speaker 01

  Exactly how much New Deal programs actually fix the economy is hard to measure. Unemployment rates were still high and businesses still struggling by the time World War II began. But it did restore hope among many people, that they were not alone in the struggle, that the government was growing to meet their needs, that taxes were the engine for that growth, and that trusty Uncle Elmer was making sure everyone paid their fair share: gangsters, banksters, and politicians alike.

• 38:50Speaker 03

  Coming up, that trust is put to the ultimate test.

• 38:58Speaker 25

  Hello, my name is Tamara. I'm in New Orleans and you're listening to Throughline on NPR.

• 39:05Speaker 00

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• 39:09Speaker 26

  Oh, Kevin, it feels good to be back.

• 39:11Speaker 16

  It sure does, Casey. And what a time. The world is talking about AI and what's going on in Silicon Valley. And we are here with a new show to tell you all about it.

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• 39:28Speaker 16

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• 40:00Speaker 26

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• 40:53Speaker 12

  Part three, New Deal Dictator.

• 41:00Speaker 14

  Japan, like its infamous Axis partners, struck first and declared war afterwards. Costly to our navy was the loss of war vessels, airplanes, and equipment. But more costly to Japan was the effectiveness of its foul attack in immediately unifying America in its determination to fight and win the war thrust upon it and to win the peace that will follow.

• 41:29Speaker 03

  On March 9, 1942, just a few months after the US entered World War II, Elmer Irie received a letter from Franklin Roosevelt himself.

• 41:40Speaker 05

  We were not really winning the war. And FDR was not just sending letters randomly out to people.

• 41:46Speaker 03

  This is Paul Camacho. He's a retired special agent for the IRS Criminal Investigation Division.

• 41:53Speaker 05

  And so he's writing this letter.

• 41:56Speaker 03

  Dear Mr. Irie.

• 41:58Speaker 05

  And telling Elmer, you know, I'm looking back at your career when you first started.

• 42:02Speaker 03

  I feel I should take a moment to tell you of my pride in the work of the Intelligence Unit. As the years have gone by, the Intelligence Unit has become a shining mark, not only of incorruptibility, but what is just as important, of A1 efficiency.

• 42:19Speaker 05

  And I just want to thank you because going into this tax season...

• 42:25Speaker 03

  On this coming March 15th, we will be unpopular with more millions of taxpayers than ever before.

• 42:32Speaker 05

  I mean, they're in a perfect position for an agency to hate.

• 42:35Speaker 01

  Back then, March 15th was Tax Day, and Roosevelt, needing money fast to fund World War II, had pushed through the Victory Tax of 1942, hoping the goodwill and trust Elmer Irie had built up with the public would help this new tax land with them.

• 42:56Speaker 12

  Victory Tax Plan adopted. All individuals earning more than $12 a week affected the Baltimore Sun.

• 43:05Speaker 06

  Suddenly, millions and millions of Americans who've never had to pay income taxes are suddenly paying them for the first time.

• 43:13Speaker 01

  This is Joe Thorndike, historian for Tax Analysts, a nonprofit provider of tax information.

• 43:19Speaker 06

  And that's how the federal government manages to take what they call a class tax and turn it into a mass tax.

• 43:25Speaker 01

  A mass tax. Because now, it wasn't just the rich being taxed, it was also everyday, middle-class Americans that had to contribute.

• 43:35Speaker 03

  In 1939, only about 5% of American workers were paying income tax. By the time Victory Tax came along, it had risen to 75%.

• 43:47Speaker 01

  Are Americans angry about this?

• 43:50Speaker 06

  You know, war has a way of holding that kind of taxpayer anger at abeyance for a while. Patriotism really matters. Like, hey, our boys are dying in the field, in the trenches, in Europe, in the Pacific. The least we can do is contribute our dollars to support them.

• 44:07Speaker 03

  And the government builds a whole PR campaign around this new tax, partly to make sure people comply, and partly because...

• 44:15Speaker 06

  People who had never done it, they didn't know how to do that.

• 44:19Speaker 27

  I paid my income tax today.

• 44:24Speaker 27

  I'm only one of millions more whose income never was taxed before. Our tax, I'm very glad to pay.

• 44:33Speaker 20

  The federal government commissioned people like Irving Berlin to write songs.

• 44:37Speaker 03

  This is Jason Scott Smith. He's a historian at the University of New Mexico, who's written two books about FTR and the New Deal.

• 44:45Speaker 20

  That were all about how, hey, I've paid my income tax today, isn't this great?

• 44:49Speaker 27

  See those bombers in the sky? Rockefeller helped to build them, so did I. I paid my income tax today.

• 45:00Speaker 05

  And there was this famous campaign that they rolled out using Donald Duck.

• 45:04Speaker 24

  Are you a patriotic American? Yes, sir. Eager to do your part? Yes, sir. Then there's something important you can do. Oh, boy, oh, boy, oh, boy, I'll do it. Your income tax. Income tax? Yes, your income tax. My, my, my, my income tax.

• 45:24Speaker 01

  Now, it's one thing to ask people to pay their taxes and have a cartoon explain how to file them, and a whole other thing to actually send your tax money to the government.

• 45:34Speaker 06

  There was a huge fear that these new taxpayers would, one, not realize that they were supposed to pay in the first place and just wouldn't file returns, or, two, wouldn't have enough money saved to pay the taxes when the time came.

• 45:45Speaker 19

  There were many people in Washington who knew that it might become increasingly difficult to collect the money.

• 45:51Speaker 01

  The IRS wasn't staffed up enough to keep track of that many new taxpayers.

• 45:56Speaker 06

  And so policymakers recognized early on that they're going to have to find some better way for these people to pay. And so in 1943.

• 46:03Speaker 19

  They thought, hey, let's put withholding in place because then we'll get it before the taxpayer ever earns it.

• 46:10Speaker 01

  Tax withholding. You know what I'm talking about. That one line on your paycheck that says "federal income tax" and how much was automatically taken out of it.

• 46:20Speaker 06

  And the idea is that a little bit will be taken out of your paycheck every two weeks, or every month, or every week, whenever you get paid. And then that will effectively pay your tax bill in pieces over the course of the year. This is the way we pay our taxes now.

• 46:33Speaker 01

  This was a win-win for the federal government because it did two things. One, this simplified and streamlined tax payment system meant the government would actually get the money it needed. And two, the IRS didn't have to be the one collecting everyone's money. Instead, your boss was going to do it.

• 46:53Speaker 06

  The federal government's sort of deputizing employers and saying, you're going to be our tax collectors. So take that money out of the paycheck for your employee and then send it to us directly.

• 47:04Speaker 03

  It was a drastic step in terms of government invasiveness.

• 47:09Speaker 19

  If there hadn't been a war on, I'm guessing you would have seen far more opposition to withholding. But the fact that there was, and everybody was pulling for victory, that made withholding much more palatable. And a lot of people thought it would only be temporary anyway, that it would go away after the war.

• 47:26Speaker 03

  But there were some people who were speaking out against these new tax laws, even as the war raged on.

• 47:32Speaker 01

  People like Vivian Kellums.

• 47:36Speaker 19

  Vivian Kellums is one of my favorite people.

• 47:39Speaker 01

  In the late 1920s, Vivian and her brother started a company together, based around an invention.

• 47:46Speaker 19

  Called a cable grip. Which was used by bridge builders and ultimately even the military would use it to lift heavy artillery shells.

• 47:56Speaker 01

  And so she made a lot of money, money that was taxable.

• 48:00Speaker 19

  She was rebelling by the 1940s against these sky-high income tax rates. From her perspective, she thought, I haven't done anything wrong. I've added value to society, I haven't taken anything from anybody. I've employed people at good wages and I helped the war effort by making these things that the army needed for its artillery shells. She felt aggrieved and for good reason.

• 48:24Speaker 01

  Vivian's frustrations started coming out in newspaper articles. The Chicago Tribune reported on a speech she gave, saying that withholding was, quote, "a deliberate plan to keep the system of free enterprise from surviving after the war. This underground movement will not only control, but own, all business." And she refused to be a part of that plan.

• 48:48Speaker 19

  I mean, this was quite remarkable for a woman to say, no, I'm not going to do it. And she told her employees, you're responsible for making your tax payments and even though the government tells me I have to take it from you, I'm not going to do it.

• 49:00Speaker 01

  Vivian traveled around the country, giving speeches.

• 49:04Speaker 19

  And often had sizable crowds in which she argued against compulsory withholding and against big government in general.

• 49:12Speaker 20

  There are plenty of Americans that are upset, as they were near the close of World War II, about federal controls on prices, about shortages of meat at the supermarket. You know, the Republicans campaigned in 1946, wouldn't you like to be able to go to the grocery store and buy something that you can afford?

• 49:35Speaker 28

  From this day, we move forward. We move toward a new era of security at home.

• 49:45Speaker 03

  After the war ends, Elmer IRS retires from public service. Life magazine calls him one of the world's greatest detectives. And there was even a Hollywood movie called The T-Men, which stood for the Treasury Men, that was partly inspired by Elmer IRS and his Treasury agents.

• 50:02Speaker 01

  And this is where the story ends for IRS. Nearly three years after the war's end, he passes away. But what he left behind, this tax system that he helped enforce and grow, didn't go back to the way it was before the war. Instead, all that tax money got fed into something else.

• 50:22Speaker 06

  We developed a national security state that was big and expensive and required a giant standing army and navy and air force. In addition, you know, this is the beginning of the atomic arms race and we're developing a huge atomic arsenal. All of that is expensive and they have to find some way to keep paying for that. So the government does not shrink. It's permanently expanded by World War II.

• 50:47Speaker 20

  You know, there's a before and after moment in American society, and this is one of them. Before the 1930s, Americans encountered the federal government at the post office. After World War II, Americans encountered the federal government in all aspects of their lives, from social security to federal highways.

• 51:07Speaker 01

  And the debates surrounding these new taxes and this new expanded role of the federal government got louder. People like Vivian Kellums made it their life's mission to fight back against the government that they thought had gotten way too big.

• 51:22Speaker 29

  I decided that we had to take some action. And what I did was a perfectly American thing. I broke the law to provide a test case.

• 51:31Speaker 01

  Vivian was invited onto talk shows. She was one of the first women interviewed on Meet the Press, and she even took the IRS to court.

• 51:39Speaker 29

  And I wrote to the Secretary of the Treasury and I told him that I had not sent any money and that I was not going to until he paid me what he owed me.

• 51:51Speaker 01

  And these voices coalesced into a new movement.

• 51:55Speaker 20

  The new right that we think about today in the 1980s and 1990s and beyond, that the origins of the new right really do lie in the 1930s and the kind of business reaction to the power of the New Deal, the remaking of labor relations and the growth of organized labor.

• 52:15Speaker 03

  Jason Scott Smith says so much of how people think about the government, of the taxes they pay, and of their role in all of that boils down to trust.

• 52:26Speaker 20

  To what extent do people trust the government to do the right thing with their tax money? To what extent do people feel like they are getting good value for their money?

• 52:37Speaker 03

  And without an Elmer Iry in the picture, someone to be the trustworthy face of the government, building that goodwill has proven difficult for the agency entrusted with our taxes.

• 52:48Speaker 01

  In the century since, the IRS has been embroiled in scandals, political retribution, and not everyone is always paying their fair share. So it's not unreasonable to ask...

• 53:00Speaker 20

  What am I paying? Who's getting away with not paying? And in our present moment, we have a president who's proud of the fact that he's avoided taxes for many years, that he knows so much about the tax code that he can do that.

• 53:14Speaker 01

  But this imperfect system is what helps keep the lights on, the roads operating, the water running.

• 53:21Speaker 19

  Taxes are the price we pay for civilization. There's an element of truth to that. After all, taxes do pay for the core functions of a government: to provide protection at home, a court system, a national defense, and those kinds of things that keep order and allow for us in a free society to be prosperous. The problem has been throughout the ages that a government doesn't know when to quit. You give it an inch and it'll take a mile. And it often has done that over and over again.

• 54:16Speaker 01

  That's it for this week's show. I'm Rund Abdelfatah.

• 54:20Speaker 03

  I'm Ramtin Arablouli, and you've been listening to Throughline from NPR.

• 54:25Speaker 01

  This episode was produced by me.

• 54:27Speaker 03

  And me, and?

• 54:28Speaker 17

  Lawrence Wu.

• 54:29Speaker 30

  Julie Kay. Anya Steinberg. Casey Minor. Christina Kim.

• 54:34Speaker 13

  Devon Katayama.

• 54:35Speaker 00

  Sarah Wyman.

• 54:36Speaker 30

  Irene Noguchi.

• 54:38Speaker 03

  Voiceover work in this episode was done by Jason Divina Gracia, Fulton Ho, Christian Benford, Shaher Khan, and Ivan Wu.

• 54:47Speaker 01

  Thank you to Johannes Sturgie, Edith Chapin, Nadia Lancy, and Colin Campbell.

• 54:53Speaker 03

  Fact checking for this episode was done by Kevin Vogel. The episode was mixed by Jimmy Keely.

• 54:59Speaker 01

  Music for this episode was composed by Ramtin and his band, Drop Electric, which includes?

• 55:05Speaker 17

  Naveed Marvi. Sho Fujiwara.

• 55:07Speaker 00

  Anya Mizani.

• 55:09Speaker 03

  And finally, if you have an idea or like something you heard on this show, please write us at [email protected]. And make sure to follow us on Apple, Spotify, or the NPR app. That way, you'll never miss an episode.

• 55:25Speaker 01

  Thanks for listening.

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• 55:48Speaker 31

  American journalist Austin Tice vanished in Syria over a decade ago. For years, we've been searching for him. And now, we finally have some answers.

• 55:59Rund Abdelfatah?

  This is the prison that Austin was in.

• 56:01Speaker 24

  Oh, my god. We found Austin's file.

• 56:04Speaker 31

  Listen to Where Is Austin Tice? From NPR's Embedded and BBC Radio 4, on the NPR app, or wherever you get your podcasts.