The Tax Collector

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. To access bonus episodes and listen to Throughline sponsor-free, subscribe to Throughline+ via Apple Podcasts or at plus.npr.org/throughline http://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

• 0:00Speaker 00

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• 0:32Speaker 01

  February 14, 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,

• 1:17Speaker 01

  and they start firing.

• 1:21Speaker 01

  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,

• 1:43Speaker 02

  "No one shot me."

• 1:45Speaker 01

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

• 1:59Speaker 03

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

• 2:05Speaker 04

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

• 2:13Speaker 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.

• 2:32Speaker 05

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

• 2:39Speaker 03

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

• 2:44Speaker 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.

• 2:56Speaker 01

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

• 3:02Speaker 06

  And in places like Chicago, this was very evident.

• 3:06Speaker 03

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

• 3:15Speaker 06

  But it was also true in almost every big city.

• 3:17Speaker 05

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

• 3:25Speaker 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.

• 3:36Speaker 05

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

• 3:42Speaker 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.

• 3:55Speaker 03

  Al Capone really knew how to pull those levers.

• 3:58Speaker 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.

• 4:11Speaker 03

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

• 4:19Speaker 06

  But no one had ever succeeded.

• 4:23Speaker 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.

• 4:37Speaker 05

  Herbert Hoover made it his top priority to get Capone.

• 4:40Speaker 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.

• 4:55Speaker 05

  To direct Elmer to get Capone.

• 5:01Speaker 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.

• 5:16Speaker 06

  The IRS is a law enforcement agency.

• 5:19Speaker 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?

• 5:27Speaker 06

  So on some level, taxes pay for government.

• 5:30Speaker 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.

• 5:47Speaker 06

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

• 5:56Speaker 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.

• 6:11Speaker 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.

• 6:31Speaker 01

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

• 6:40Speaker 01

  I'm Rund Abdelfatah. 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.

• 7:13Speaker 07

  Hi, this is Winea calling from beautiful Bend, Oregon. And you're listening to Throughline from NPR. Thanks.

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• 9:00Speaker 02

  Part one, The Giant Killers.

• 9:05Speaker 09

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

• 9:18Speaker 01

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

• 9:23Speaker 05

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

• 9:27Speaker 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.

• 9:37Speaker 09

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

• 9:45Speaker 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.

• 10:01Speaker 05

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

• 10:09Speaker 01

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

• 10:13Speaker 05

  Where country mattered more than anything else.

• 10:16Speaker 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.

• 10:28Speaker 05

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

• 10:32Speaker 03

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

• 10:40Speaker 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.

• 10:53Speaker 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.

• 11:21Speaker 05

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

• 11:28Speaker 03

  That's where Elmer cut his teeth.

• 11:31Speaker 05

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

• 11:39Speaker 03

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

• 11:51Speaker 01

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

• 11:59Speaker 06

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

• 12:02Speaker 01

  The income tax had only been used a couple of 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.

• 12:40Speaker 01

  And once the US entered the war,

• 12:44Speaker 01

  the income tax proved vital.

• 12:48Speaker 05

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

• 12:53Speaker 06

  The income tax gets much bigger very quickly.

• 12:56Speaker 05

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

• 13:00Speaker 01

  77%.

• 13:02Speaker 05

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

• 13:08Speaker 01

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

• 13:15Speaker 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.

• 13:29Speaker 01

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

• 13:38Speaker 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.

• 13:54Speaker 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.

• 14:16Speaker 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.

• 14:25Speaker 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.

• 14:38Speaker 05

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

• 14:42Speaker 03

  They answered,

• 14:43Speaker 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.

• 14:54Speaker 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.

• 15:10Speaker 05

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

• 15:22Speaker 09

  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."

• 15:49Speaker 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.

• 16:29Speaker 05

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

• 16:39Speaker 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.

• 16:51Speaker 05

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

• 17:00Speaker 09

  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.

• 17:18Speaker 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?

• 17:30Speaker 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.

• 18:04Speaker 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.

• 18:15Speaker 03

  Now, Elmer had to face down the criminal underworld.

• 18:27Speaker 04

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

• 18:34Speaker 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?

• 18:43Speaker 01

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

• 18:47Speaker 05

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

• 18:52Speaker 01

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

• 18:58Speaker 05

  Witnesses were ending up dead.

• 19:01Speaker 01

  And then Elmer sent his best agent undercover.

• 19:04Speaker 05

  Then they were able to infiltrate the Capone organization.

• 19:08Speaker 01

  It was a dangerous situation for everyone.

• 19:12Speaker 05

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

• 19:19Speaker 01

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

• 19:24Speaker 05

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

• 19:27Speaker 01

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

• 19:32Speaker 10

  Wall Street was easy street for everybody.

• 19:35Speaker 01

  The stock market crashes.

• 19:37Speaker 10

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

• 19:43Speaker 01

  The entire nation is sent into a tailspin.

• 19:48Speaker 06

  It sort of signals the beginning of the Great Depression.

• 19:54Speaker 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. 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?"

• 20:36Speaker 05

  Capone gets convicted of tax evasion.

• 20:39Speaker 03

  Elmer's there as the judge reads the sentence.

• 20:42Speaker 05

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

• 20:47Speaker 03

  Collections from unpaid taxes spiked.

• 20:51Speaker 05

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

• 20:57Speaker 03

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

• 21:05Speaker 05

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

• 21:10Speaker 01

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

• 21:19Speaker 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.

• 21:32Speaker 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 Iry, and they loved him.

• 21:53Speaker 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.

• 22:13Speaker 01

  The brand of the IRS.

• 22:18Speaker 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?

• 22:29Speaker 01

  Weren't they just gangsters by a different, supposedly more legit, name? Some papers even started calling them "banksters."

• 22:40Speaker 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?

• 22:54Speaker 03

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

• 23:06Speaker 11

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

• 23:15Speaker 00

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• 24:38Speaker 02

  Part two, ninety-nine and two-thirds.

• 24:44Speaker 12

  Who is your first witness?

• 24:46Speaker 13

  Mr. J. P. Morgan.

• 24:48Speaker 12

  Mr. Morgan, will you be sworn?

• 24:51Speaker 14

  Certainly.

• 24:52Speaker 12

  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.

• 25:01Speaker 14

  I do.

• 25:06Speaker 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...

• 25:25Speaker 06

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

• 25:32Speaker 01

  And J. P. Morgan Jr.

• 25:34Speaker 06

  He is the archetypal Wall Street banker.

• 25:37Speaker 01

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

• 25:41Speaker 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.

• 25:59Speaker 13

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

• 26:05Speaker 14

  Three hundred forty million dollars.

• 26:08Speaker 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.

• 26:22Speaker 15

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

• 26:28Speaker 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.

• 26:46Speaker 15

  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.

• 26:54Speaker 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.

• 27:03Speaker 15

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

• 27:09Speaker 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.

• 27:17Speaker 15

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

• 27:27Speaker 03

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

• 27:32Speaker 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.

• 27:41Speaker 03

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

• 27:45Speaker 01

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

• 27:50Speaker 03

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

• 27:56Speaker 01

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

• 28:02Speaker 16

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

• 28:11Speaker 03

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

• 28:15Speaker 16

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

• 28:23Speaker 17

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

• 28:27Speaker 16

  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%.

• 28:45Speaker 17

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

• 28:51Speaker 03

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

• 28:56Speaker 17

  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.

• 29:12Speaker 18

  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.

• 29:29Speaker 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.

• 29:42Speaker 15

  The inefficiency was the point.

• 29:47Speaker 15

  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.

• 30:09Speaker 01

  Who represents the capitalist?

• 30:12Speaker 15

  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.

• 30:29Speaker 01

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

• 30:35Speaker 19

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

• 30:40Speaker 14

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

• 30:44Speaker 06

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

• 30:53Speaker 01

  And then it was discovered in the hearing.

• 30:55Speaker 06

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

• 31:01Speaker 01

  People were outraged.

• 31:03Speaker 06

  They were like, oh, my goodness, I cannot believe that one of these richest people in America is not paying any taxes. And J P 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?

• 31:18Speaker 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.

• 31:28Speaker 06

  Who do you blame in that moment? Do you blame the taxpayer, J P 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 have written the law like this in the first place? You know, you can go either way on that.

• 31:43Speaker 03

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

• 31:48Speaker 15

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

• 31:57Speaker 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.

• 32:08Speaker 01

  But the tax question remained.

• 32:10Speaker 06

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

• 32:18Speaker 01

  F D R took this up as his personal fight.

• 32:21Speaker 06

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

• 32:27Speaker 05

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

• 32:33Speaker 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.

• 33:02Speaker 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 Iry took down Capone, that everyone was expected to pay their fair share.

• 33:17Speaker 06

  And he wants to name names.

• 33:21Speaker 01

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

• 33:28Speaker 17

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

• 33:34Speaker 06

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

• 33:39Speaker 17

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

• 33:41Speaker 01

  Basically, from the time prohibition began.

• 33:44Speaker 06

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

• 33:48Speaker 09

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

• 33:55Speaker 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."

• 34:17Speaker 06

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

• 34:25Speaker 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.

• 34:37Speaker 01

  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.

• 34:51Speaker 05

  Oh, yeah. I mean, look, he even talks about it, that an investigation could destroy a person. And he preached it. 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.

• 35:16Speaker 06

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

• 35:21Speaker 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.

• 35:44Speaker 06

  It was John D. Rockefeller Jr.

• 35:46Speaker 03

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

• 35:52Speaker 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.

• 36:00Speaker 15

  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.

• 36:13Speaker 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.

• 36:48Speaker 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.

• 37:00Speaker 17

  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."

• 37:23Speaker 20

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

• 37:35Speaker 01

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

• 37:44Speaker 20

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

• 38:01Speaker 21

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

• 38:08Speaker 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.

• 38:43Speaker 17

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

• 38:49Speaker 01

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

• 38:52Speaker 15

  This is a radical transformation of the federal government.

• 38:55Speaker 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.

• 39:30Speaker 03

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

• 39:38Speaker 22

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

• 39:45Speaker 00

  Stay tuned for the following announcements and messages from our sponsors.

• 39:49Speaker 08

  This message comes from Granger. This is the story of the one. As a maintenance supervisor at a manufacturing facility, he knows keeping the line up and running is a top priority. That's why he chooses Granger. Because when a drive belt gets damaged, Granger makes it easy to find the exact specs for the replacement product he needs. And next-day delivery helps ensure he'll have everything in place and running like clockwork. Call 1-800-GRANGER, click Granger.com, or just stop by. Granger, for the ones who get it done. This message comes from Quo. You're on a job, in a meeting, slammed, and a customer calls. If nobody picks up, they go to your competitor. That's why over 90,000 companies choose Quo,

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• 41:08Speaker 02

  Part Three: New Deal Dictator.

• 41:15Speaker 23

  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.

• 41:44Speaker 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.

• 41:55Speaker 05

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

• 42:01Speaker 03

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

• 42:08Speaker 05

  And so he's writing this letter.

• 42:11Speaker 03

  Dear Mr. Irie.

• 42:12Speaker 05

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

• 42:17Speaker 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.

• 42:34Speaker 05

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

• 42:40Speaker 03

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

• 42:47Speaker 05

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

• 42:50Speaker 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.

• 43:11Speaker 02

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

• 43:20Speaker 06

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

• 43:28Speaker 01

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

• 43:34Speaker 06

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

• 43:40Speaker 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.

• 43:50Speaker 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%.

• 44:02Speaker 01

  Are Americans angry about this?

• 44:05Speaker 06

  You know, war has a way of holding that kind of taxpayer anger and 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.

• 44:22Speaker 03

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

• 44:30Speaker 06

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

• 44:34Speaker 24

  I paid my income tax today.

• 44:39Speaker 24

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

• 44:47Speaker 15

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

• 44:52Speaker 03

  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.

• 45:00Speaker 15

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

• 45:04Speaker 24

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

• 45:14Speaker 05

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

• 45:19Speaker 21

  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. Oh, boy, oh, boy, oh, boy, income tax.

• 45:39Speaker 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.

• 45:49Speaker 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.

• 46:00Speaker 17

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

• 46:06Speaker 01

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

• 46:11Speaker 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.

• 46:18Speaker 17

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

• 46:25Speaker 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.

• 46:35Speaker 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.

• 46:48Speaker 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.

• 47:08Speaker 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.

• 47:19Speaker 03

  It was a drastic step in terms of government invasiveness.

• 47:24Speaker 17

  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.

• 47:41Speaker 03

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

• 47:47Speaker 01

  People like Vivian Kellums.

• 47:51Speaker 17

  Vivian Kellums is one of my favorite people.

• 47:54Speaker 01

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

• 48:01Speaker 17

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

• 48:11Speaker 01

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

• 48:15Speaker 17

  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.

• 48:39Speaker 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.

• 49:03Speaker 17

  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."

• 49:15Speaker 01

  Vivian traveled around the country, giving speeches.

• 49:18Speaker 17

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

• 49:26Speaker 15

  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' campaign in 1946. Wouldn't you like to be able to go to the grocery store and buy something that you can afford? It was the eggs of their day.

• 49:50Speaker 25

  From this day, we move forward. We move toward a new era of security at home. With the other United Nations, we move toward a new and better world.

• 50:05Speaker 03

  After the war ends, Elmer Iry 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 Iry and his Treasury agents.

• 50:23Speaker 01

  And this is where the story ends for Iry. 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.

• 50:43Speaker 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.

• 51:06Speaker 15

  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.

• 51:27Speaker 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.

• 51:42Speaker 26

  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.

• 51:51Speaker 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.

• 52:00Speaker 26

  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.

• 52:10Speaker 01

  And these voices coalesced into a new movement.

• 52:14Speaker 15

  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.

• 52:35Speaker 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.

• 52:46Speaker 15

  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?

• 52:57Speaker 03

  And without an Elmer Irie 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.

• 53:08Speaker 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...

• 53:20Speaker 15

  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.

• 53:36Speaker 03

  Today, the IRS is facing dramatic cuts. Since January, it has lost almost one-third of its tax auditors. Treasury Department officials estimate that will lead to a 10% drop in tax revenue, about $500 billion. And some IRS employees have also chosen to resign after the agency agreed to share migrants' tax information with ICE officials.

• 54:04Speaker 01

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

• 54:12Speaker 17

  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 the 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.

• 55:06Speaker 01

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

• 55:10Speaker 03

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

• 55:15Speaker 01

  This episode was produced by me.

• 55:17Speaker 03

  And me, and?

• 55:19Speaker 25

  Lawrence Wu.

• 55:20Speaker 27

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

• 55:24Speaker 09

  Devon Katayama.

• 55:25Speaker 27

  Sarah Wyman. Irene Noguchi.

• 55:28Speaker 03

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

• 55:38Speaker 01

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

• 55:43Speaker 03

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

• 55:50Speaker 01

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

• 55:55Speaker 25

  Naveed Marvi. Cho Fujiwara.

• 55:57Speaker 00

  Anya Mizani.

• 56:00Speaker 03

  And finally, if you have an idea or like something you heard on the 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.

• 56:15Speaker 01

  Thanks for listening.

• 56:20Speaker 00

  Stay tuned for the following announcements and messages from our sponsors.