American Taxation

0:00Well, morning, I didn't realize we had this interesting new bit of technology. See, when I grew up we had blackboards and chalk, remember that? This is really nice, I didn't realize they had advanced so far. In the first days we talked about the Chinese system, what was called the field well system, and this was the one that Mencius, who was a disciple and follower of Confucius, developed. and it was the way they cut up the Chinese Empire for taxes. There were these eight people, farmers, on the perimeter, and this piece here belonged to the emperor. And then they all band together and worked on his piece in proportion equally in the field.

0:50And so this was the main structure of the tax system in early China. And I thought it's easy if I drew it on the wall and you could see how it looks, Because it was a centerpiece, it was interesting that the people around it could all watch each other and make sure they did their share of it. The other thing up here is a Laffer curve, which is in one of my books, I guess it's in the main book. Art Laffer was a professor at USC, and one day he was explaining the way that tax revenues decrease when the rates get too high, and so he drew this on a napkin. And in my book I've improved it, or I've added a little more to it and given you some substance for it.

1:45This is the tax rate at the time the income tax was adopted in America was 7% max, and then by the end of World War I it was 70% max, and it produced the same amount of income. So I had added the Laffer's curve to show how accurate it was that went from 7 to 77 and the revenues were the same. And so his thinking is that when you get out here to this end, that's the maximum rate you can tax if you're going to get the maximum revenue. The moments you increase at here, which is probably around 25%, then the revenues start to decline. You get less and less.

2:31And if you get up to 100% tax, you don't get anything. So that's called the Laffer Curve, as modified by Adams. This was a popular analysis in the 1920s, and Andrew Mellon, who was the Secretary of the Treasury, he felt that this number here, E, was 25 percent. And he felt once the tax rate exceeded 25 percent, the collection of revenue started down, you collected less. Yes. And it's interesting, from what I've just been told by one of our interesting members here, that last night, Gary was going to soak the rich above 200,000.

3:17Anything above 200,000? Yeah, well, what's going to happen is that they're going to disappear. And that's been the old story throughout history, that the moment you zero in on somebody, they disappear. And I like the words that was in the Times in London around 1894 when they started progressive rates. And they said, he wrote and he said, when you start making these progressive rates and zeroing in on the rich, they used the words, they will, if by magic, disappear. And really, there's a lot of truth in that. You simply drive and motivate them to find ways to avoid the tax.

4:06They're just not going to pay it, and they may not work, they may leave the country, they may get some clever tax schemes that they can think of. And so the idea that revenue and income is static out here, and that you have this dumb idea that if you're collecting If you're increasing exit on the dollars from the tax base, if you increase the base 10%, then you increase the revenues 10%, but it doesn't work that way, because then the motive to do and evade and avoid is kicked in, so that's what Laffer-Kirb is all about, and you might want to draw a little sketch of it, because I think it's a very brilliant way of showing you what happens when you raise taxes, Is there for the guy who says you want less of something, tax it? You reminded me of that. You said they'll go away, but if you tax them, they'll go away, and somebody had a quote years ago, if you want less of something, put a tax on it, you'll have less of it.

5:56I've got to tell you, did you know that in the colonies, in American colonies, about 1760 they had a bachelor tax? If you were a male and over 25 you weren't married you got taxed. That actually goes all the way back to Caesar Augustus. No kidding. I thought it was the first time I'd ever used it.

6:45The German leader did, when he went after the Jews, Frederic the Great, you know, he didn't want people to marry. And so I think he probably put a tax on marriage, may well have if we go into that. But tax has been used not only to make revenue, but also to motivate society. And one of the interesting stories, yes? Oh, I remember, they had a marijuana tax years ago, about 1960s I guess, or 50s or 60s, they wanted to get rid of marijuana, it was a federal tax on marijuana. And some hippie in San Francisco went in the office of the Internal Revenue Service and wanted to pay his marijuana tax. And they didn't want to deal with him.

7:33Well, let's see, what else did I want to talk about that maybe I missed? I think that we have this period when the income tax is starting to be invented, when the world was pretty filled with hatred for the excise tax, and that the excise tax really brought about the decline and the fall of the Dutch, so the super Dutch gave way to the super British.

8:23And one of the British agents in the Haygrove home, I didn't mention this particular one, He said, if we had taxes like that in England, we'd have rebellion upon rebellion. I says, it's amazing that these people will tolerate this. And of course, the British just hated the excise tax. And maybe that's what motivated during the time of Napoleon. Got to remember that the reason for taxing the colonies and set up the American Revolution was the fact that England was at war with France. And they had to look around for more sources of revenue, The British government promised the British people that when the war is over, we will repeal the tax.

9:26Now that, as we know, goes all the way back to the beginning of time, you know, it goes back to ancient Sumer and the first recorded bits of history was that when the war ended, the tax people did not give up their wartime powers. Canada came about during World War I as a war tax that would end when the war was over, never ended. I don't know why we tolerate that. Maybe we should go back to the French Revolution when they got the guillotine and they cut off all the heads of the tax people. We did that. They probably would honor their promise. Well, what happened in Britain is that in 1816, the British government, they didn't repeal it, what they wanted was to renew it.

10:19And, of course, at that particular time, I think there were 800,000 pounds in debt because of the wars of Napoleon, so it made pretty good sense to repeal the tax. Well, there came a real storm of protest. You guys had promised this. And they said that this extension of this tax would be the herald of an all-embracing tyranny. And so they had a vote in the House of Commons to, whether or not to extend the tax. And there's an interesting caricature in my book showing, I think there was 39 or 38 members of the House In addition to the majority that voted, surely wouldn't extend the tax, and that's when the historians say that the noise from the House of Commons, the tumultuous noise was the loudest noise ever heard in the Commons in 500 years, yelling and screaming that they had killed the damn tax, and the caricatures are interesting, they show this big monster, the income tax, and they show the members of the House of Commons with these big clubs and saying,

11:33down, down to hell, you monster. And that's just the way they felt about it. So the income tax dies and of course they then had another vote. We don't want this tax again, we're going to burn everything up. I mentioned this, they're going to burn all the records. So the chancellor of these checkers was ordered to burn the records and so they kept bringing out the records and he kept burning them and burning them. Stoked the fires while they were pouring on the records and, of course, years later we discovered he had a secret duplicate set of all the records in the basement. I thought it would be nice to know why he did that. Here's the British government, in theory, the root of power, the House of Commons, ordering this to be done and he goes to all the motions and he saves a copy of everything.

12:25Well, the income tax was a war tax, and it was hated, I suppose, worse than the excise tax. In 1833 came the Great Reform Parliament, and that's the parliament that abolished slavery. And they brought up the question of re-instituting the income tax. Well, the Chancellor of the Exchequer, I mean Lord Althrop, he said if inquisitorial powers are ever spoken of, when were they worse than with the income tax during Napoleon's day? And he said, we don't want to renew that tax. So they didn't. Well, almost less than 10 years later, then Robert Peel comes along and he said, well, he wants to balance the budget.

13:14So we're not going to have this 10% tax like you had in Napoleon's day. We're going to have a little bitty 3% tax, and we're only going to have it for three years, and we calculated that that will put our finances back in shape and the government will be solvent. So they went ahead and they did it, and three years later they found out that they had made twice as much revenue as they had expected. So, well, let's go for another three years, you know, come on. So they did, and they did, and they did, and they did, and they never, ever abolished it. As much as it was hated, and one of the British leaders who hated it was Gladstone, and he became Prime Minister off and on.

14:03He was the guy that used to roam around the red light district. You know the story about him? Yeah, anyway, he used to like to go down to help the prostitutes. He felt sorry for him. Now, this is a true story. And it was kind of embarrassing to his party because here he was going through the, you know, I guess there weren't red light. You know where the red light came from? It came from the railroad men that had their red lanterns. And so they'd go on and into where the prostitutes were and set the red light down. Gladstone became Prime Minister off and on.

14:51He hated the income tax, but he said the real problem is the public expenditure. And he said, it's the abandonment of thrift and frugality in government. And that's why we have to have the damn tax. He said there were three things wrong with it. One was the inquisition into our lives. The other was the unfairness of it. And what was his third reason? Well, let's see, frauds. Yeah, the frauds. nd the people weren't making out their taxes return to what they should. But it rocked along pretty much in that 3%.

15:38And it eked up the five. In the meantime, of course, America had a civil war and we had an income tax, but it was a war tax and of course it was sort of accepted that during war time, it's okay to have a tax. The interesting thing I discovered, there's a magazine or a journal called The Nation, It's one of the few journals that has really survived from a long time ago. The first edition was in 1865 and of course right now it's my understanding that the nation is pretty much of a leftist socialist type of magazine. Well, the nation in its first year of publication came out with some very interesting comments, which first they praised the American people for keeping the income tax, and they says the British, even though the government was really in hock with the war against Napoleon, the British abolished it right at a time when they really needed it, you know, to balance The Americans are really wonderful people because they're willing to pay this tax, knowing how burdensome it is, knowing how unfair it is, knowing that the middle class is the main target of it, and knowing that it is administered by men who are the most odious in mankind.

17:12Tax Collector. He used the word the most odious of mankind. And this is the nation and it's the September issue of 1865. And yes, it's funny, you do research sometimes, and of course if you have these sources available. And when I ran into that, I just left the most odious of mankind. In fact, when Lew asked me what we were going to talk about, you know, my talk this week, I said, why not call it the most odious of mankind? He wouldn't do that, but in a sense you could use that, because here's a very prominent early American journal that is expressing the way people feel about taxes, the most odious of mankind.

17:58Because the next thing that goes out of this period, so they do abolish income tax, was Brooks Adams. Now, Brooks Adams was the son of Charles Francis Adams, who was the son of John Quincy Adams, who was the son of John Adams. So this is this famous Boston Adams family, and he was famous. If you look in most any encyclopedia, you'll see Brooks Adams. And he wrote in the Atlantic Magazine in 1878, he said, All taxation is an evil, and taxation that is upon everything, so to speak, in sight is one of the worst calamities that can befall mankind. Boy, that's really strong stuff. You think the Atlantic magazine would publish that today?

18:46You got to be kidding me. You know, but it did express the way the American people felt about the income tax. But there also came, at this time, socialism, a socialistic movement. And I like to compare socialism and communism. A lot of people say communism is just a rough form of socialism, and I think there's truth in that. Socialism came by seduction. You know, how you can be seduced by a female or something. It came by seduction. Communism came by rape. What Nation Ever Voted in Communism? And I think that's a good analogy. The Seduction, there was a book by Edward Bellamy called Looking Backwards, which came out in this period of time, and it was a very delightful novel, probably one of the best novels of the day, and in it this guy, Bellamy, he has the lead character, goes to sleep, And then he wakes up in the future and in this wonderful socialist world.

19:55And there were Bellamy Clubs all throughout the United States, a very popular, and this is part of the Grange Movement, a part of the social movement in the United States. And they were the ones that wanted an income tax. Well, it was fought pretty hard and it didn't do very well. But it finally got on the books in 1894, and it was only a 2% tax, and it exempted 4,000 people. Anybody made more than $4,000 paid the tax, anybody less than $4,000 didn't pay the tax. But when you consider the value of money, that meant that 98% of the people did not pay the tax. was attacked upon the rich and it was attacked in the courts and the famous case was called farmers versus somebody, I don't remember the name of it, Pollock versus Farmers Trust Company and

20:58it went through hearings and in fact it filled a whole volume of Supreme Court reports and it finally came up for a decision and the majority of the court held it was unconstitutional because it was a direct tax and a direct tax has to be apportioned among the states by population, therefore this was not apportioned, therefore it's a bad tax. That gave rise to the 16th Amendment, because if an income tax has to be apportioned and they didn't want it, they wanted a direct tax to be just like any other tax. And the 16th Amendment went through the states and was eventually adopted about 20 years later. But there are three opinions in that case that struck me as being pretty good.

21:45Not the majority. One of the voters for the majority, but he wrote a concurring opinion, was Justice Field, and Stephen Field was his name, and he said the tax is bad because it lacks uniformity, and the Constitution requires uniformity, and you can't exempt 98% of the people from a tax, and it passed the Constitutional Mustard. He said, it's no virtue to exempt people from paying for the cost of government. Even if the widows might, they still should pay something. They should pay their share. And it's a wonderful idea. I read his opinion and I always thought it made so much sense.

22:33The problem was that, of course, they've already killed it, and nobody wanted to get involved in a uniformity thing, but anyway they did. So that was Field's argument. Another position that was very interesting was by Justice John Harlan. You might remember Harlan. He had a grandson, I guess, who was a Supreme Court justice and retired some time ago. But the original John Harlan, in the 19th century, was the one that wrote the dissent in segregation cases of Plessy v. Ferguson. And in it he wrote, the Constitution is colorblind. And that was one of his very famous statements. And it wasn't until the Brown case that that was revived. I mean, you know, brought back to life.

23:18But he said, he thought it was not a direct problem. It didn't have to be a portion. But he said what really bothered him was the exemptions. He said the exemptions are most liable to objection. and when you get exemptions that are disguised as legislative, use the word sportly Asian, but legislative theft, he said, then the tax will fail. So he, in effect, he didn't like the 98% exemption, but he was afraid that if the rates got higher, and it's like one of the judges, one of the lawyers argued, he said, if the The rates are 2% today. Why couldn't they be 20% tomorrow? Oh, no. Nobody would ever think of that. They'd never raise a rate of 20%. You've got to be kidding. What's the matter with you? This was the argument. It's only two.

24:12And they said, look at the British system. The British system at that time was five, and they'd been around for a long time. So you're just talking about single digits here. So this 20% argument is nonsense. Another one argued, he said, and this was pretty good, he says once you say that the many can tax the few, it will be impossible to take a backward step. He was a then-demand in the uniformity problem, and that of course was quite true. And that's still true today, like we've talked about the last few days? The many can tax the few. Listen to John Kerry. He talked about the $200,000 level, but those people are paying a much larger percentage than the other people are.

25:06When you have one of the percentages above the X percent of the population is paying a huge percent of the tax, the other half, the lower half, there's no stake? And what goes on? That's what the Constitution was designed to say, that there would be equality for everybody, uniform and equal would be the taxes, and that was really what they were determined to have, and we had it for a long time.

26:06The taxes spread out and down to incomes of $10,000 so that maybe 80 or 90% of the population will pay some tax that voter participation might go up?

26:36A virtue to exempt people from paying their share of supporting the common government of all. That was his expression, the common government. Everybody should pay their share. And of course, in the Bible, the widow paid her might. She still paid her might. You know, you read the New Testament. Again, if you look at John Edwards, this is a nation of two people, one rich and one poor. You've got a class warfare already started. And you see, that's what Madison was concerned with, that the majority would overburden the minority. And what about the little joke I gave you the other day about the boil on the nose? Where did you want the boil to be? And he said, somebody else's back.

27:26Q. So can you explain this? It was either in lewrockwell.com or in the 2002 election, Democrats got 90% of the donations that were over a million dollars. Those are your donations. They're investments. They're rich. They're your investments. You owe something. Well, Carrie has promised to go after the guys who can afford to make those donations. How do they sell that? He has promised something else. There's a lot of rich people who, for some reason, are liberals. They have so much money that they don't worry.

28:14The Hollywood crowd are particularly, you know, they're all pretty liberals, pretty strong Democrats with very few words. They want to bar entry to others. Yeah, I don't know. I don't know how they do it, but that's the way they do it. I think most of the people that are conservative are middle-of-the-road, middle-class people. I remember when they tried to, you know, in Switzerland they have to vote for the people, you know, You know, the Swiss government or Congress does not have the power to change the tax rates. And I talked to one of my Swiss friends at the time, this would be about in the late 70s, there was a Swiss vote to increase the taxes, and it was turned down.

29:01And I asked my friend, I said, well, what does that mean? You guys turned down this vote to raise the tax rates. He says, all that means we're going to have to live on what we give them, very simple and very blunt about it. But they made a study as to why didn't the poorer people support this high tax that would benefit them and they wouldn't have to pay it. And the answer from the survey was, well, someday we may be rich. and if we're rich we don't want to have dug our own hole so to speak and that brings up in my book an old Russian proverb and my wife being a Russian I'm always getting these proverbs and it says do not dig a hole for your neighbor to fall in because you will fall in, lest you fall in and that's kind of what we I recall one of the radio talk show programs, which brought up that a coach of an NFL football team, when he told that at least one of the players was going to be the coach of an NFL football team,

30:31These players making $20, $30, $40, $50 million that they would have to pay a 40 or 50% of their earnings in taxes of these players who were oriented a certain way, were shocked. You know, you can hit them in the head. Hit them in the head. I'm working so hard for it. The government's taking so much. It might change. But it's the same thing as the Russian proverb. Well, to get to the proverb, in fact, I have a...

31:16I got an old picture of Russian nursery rhymes and stuff, and got this here. Not only should we be concerned with the tax rate, but also put on the tax code, deduction, rules and regulations. That means that the middle income people could not afford to hire a tax expert or tax lawyer or tax attorney to help them to... That's right, beat the system, yeah, yeah. See, so, you know, the rich folks are capable of hiring those people so to lower their tax.

32:03That's true. This tech lawyer that I have mentioned, that I worked for, he used to say, I can take any person and reduce his tax to zero. Any person. He says that the legal expenses might be a little high, but he said, I can reduce it to zero. Again, along that line, I hope today, at some point, you might talk about some system that might put in play where the cost of compliance would not be what they think $300-600 billion a year. Yeah, that's right, yeah. I hope we'll talk about some...

32:52I can play, a few, but not very many, so there's no question that the income tax with its complexity is an invitation for planning, you know, for tax planning, you can do wonders, and that's why, you know, guys like me around, you know, I remember the, I told you something about my life, those of you that were here, But as I started off, I got involved in tax just accidentally because I went to a firm and I was just the youngest guy there and just passed the bar and so they gave me tax cases because everybody hated them, you know, and so that got me involved in it.

33:41But I remember an event in my life that was quite significant. Tried a case, you know, a personal injury case, it wasn't a big deal and we were in I was in court for two weeks, and we spent a lot of time, you know, witnesses and all that, blah, blah, blah. And we ended up and got a verdict, what today would be maybe $20,000. And it would hardly begin to pay for the time we spent, because we got, I think, a third at the time. And that's what these guys do get. And I had been, they gave me a case with one of the very wealthy farmers out there, I did some work on it and I studied it and I figured out that I could save about four or five million dollars in taxes, you know, a couple of days' work.

34:29And not two weeks beating your head out, plus two weeks, you know, all the deposits and all that kind of, and I said, Jesus, this can't be right. So I called up my old tax prof, a guy named Ralph Rice at UCLA, and he remembered me, and I said, can I have a lecture with you? I want you to look at what I figured out. Sure, Charles, come on down. So I went down, took him out for lunch, and then I came back and I laid the papers out. And I said, is that going to work? And he said, I know it's outrageous, but it'll work. That's what he told me. And so we're opposite of Ventura, and this is down in LA, and I'm driving home on freeways, we're just getting started, I get started and I'm thinking, I says, what am I doing?

35:18When I can sit there and spend two days and say to somebody, four million dollars and here I am beating my head out on these crummy cases, I said, I'm wasting my time. And that was a big change in my life, it really was, because I just decided that I was more You don't know how you beat the tax man because there was no smart people in the tax division to counter you.

36:05If they just have a nice, simple, flat tax and no baloney, it would be different, but my wife thinks I should tell that. I did tell her that I told the bell story. You remember the bell story in France where they rang the bell and so forth? And so when I got home the other night, I said, why do you like that story so much? I mean, I think it's a cute story, and for those of you that didn't hear it, it goes was back to France, and they sent out the salt tax inspectors in the Normandy to try and catch the salt tax makers who were evading the salt tax, because salt was a heavy tax commodity, and so the Intendant, who was the title to the French head of their Internal Revenue Service, so to speak, he got his men hiding in the forest, and they're going to Pounce on these guys as soon as they come out to collect their salt, and just as they

37:06were getting ready, the bell rings. And the bell, bing, bing, bing, bing in the town, that's a warning, you see the tax people here, and so they all disappear and they come charging out and they never got anything. So they're so mad at who rang the bell that they called in the mayor of a little French town and they says, we want you to punish the culprit. The bell rang, punished the culprit, he says, no problem, we'll do it. So they took the bell down, they took it into town, and they whipped the bell. And so I asked my wife, I says, why did you like that story so much? And she said, well, when I was a little girl, and my mother would say, Demara, why don't Why didn't you pick up your toys? Why didn't you pick up your toys and put them in the toy box?

37:57And she would go over the toys and she'd say, You naughty toy, you should be in the toy box. How come you didn't go in the toy box? She did this as a little girl. And she remembers that in the bell thing. It's the same story. I thought you'd like to know the origin of the way she liked that. Well, the next thing that happened in the income tax in America was the, okay, the tax, we have the question of the progressive rates, because C-II presented not a progressive tax as such, and the first progressive rates took place before the income tax amendment because the income tax was okay to apply to corporations, a few things like that, And so they had a tax to pay for the veterans of the Spanish-American War.

38:48It was the first federal inheritance tax, and it varied, the rates varied. And so on the Supreme Court, you can't do that, it's not uniform. Well, the 1899 case said, in answer to the argument that progressive rates would get out of hand, and, instead, the great consequences which it is asserted will come to pass if you have a graduated progressive tax, they said, would mean that representative government is a failure, so we're not going to recognize the argument, because we don't believe representative, we don't believe that people who go out of their way to overly tax and burden really make an Justice upon the Wealthy, and at this time it made pretty good sense.

39:42There was a guy named Edwin Seligman who wrote a book called The Income Tax, and you might even find one in your library, and he was one of the great proponents of the income tax and a great proponent of progressive rates, because at that time Britain had had income tax for more than 60 years, and the highest rate was 5%. So he said in his book, he said all this talk about outrageous runaway rates hadn't happened in Britain, any concern about it has disappeared, never going to be a problem, and that's what he said in his book. And then the argument was made, well what about Germany? The Prussians had an income tax during the 19th century and the rates graduated up to 8%, not too bad.

40:34But the worst thing about the Prussian system was the administration of it, that the German people were hauled in before the tax bureau and were examined on their income. And it was a very oppressive system. And Seligman said, oh, that won't happen here. Americans would never tolerate that kind of stuff, like audits, you know, we would never tolerate anything like that. And the same thing happened in France. When France got an income tax during this period, they brought up the German story. Well, look at the Germans. They got these tax people to haul you in and give you a revenue examination, you know, IRS type. And the French said the same thing. They said, oh, well, let the Germans do that. Those people are that kind of people. They put up with governments that are overburdening, big and powerful. It'll never happen in France.

41:23What's so interesting is to read this stuff, this is stuff that was almost 100 years old, and see how the world has changed. All of these fears that these people saw have come to pass. And the idea that we would never tolerate it isn't true, we do. The idea that the French wouldn't tolerate it, that's true. The British tolerated it. Do you think in general that's because of the wave of socialism that swept the world in the early part of the century and seeped into America with a new deal and all that stuff. I think that's why it's been tolerated in a way.

42:19As a necessary evil for revenue, collecting is fine, but then they get excessive and they become intolerable, and it's just, what can you do about it? If you have governments that don't have any standards, any constitutional restraints, see that was the whole purpose that Hamilton spoke about, And when he said that the way we will protect, you know, those in control from abusing the minorities is because the Constitution says taxes have to be uniform, and that means they be safe for everybody, therefore they can't burden it over because the burden themselves, it applies to everybody. And then, of course, we went ahead and the Supreme Court came along and made this stupid The idea of uniformity applied for the same for everybody, does that imply that it should be 10% on the $20,000 man and 10% on the $1,000,000 man rather than the rest?

43:32is the same rates for everybody, and it's the only way you can prevent terrible abuses. Like for example, one of the things I wanted to mention here, which I think you'll appreciate it, will show it to you, I guess it was William Black, though, and he said, yeah, he says Because once you abandon the principle of uniformity, the road is open to extortion. And there was another writer that made the same thing, that a tax that is not uniform is not a tax, but it's a form of extortion. And even interesting on this, how this was believed was, I went through the records when When I was looking back for Elizabeth's tax policies, and I found a list of the revenues of England during the time of Cromwell, and it had so much for the land tax and so much from customs and so much from stamp tax, and it said extortions.

44:41There was a big number for extortions. What were they talking about? What they were talking about was a special tax upon the loyalists to Charles I. So if you were loyal to the king, then there was a 10% excise tax on you. And the British government had enough honesty to call that extortions. And it's right there in the river. I was amazed that they recognized that because these people had not been taxed with their and their consent, and that's the word. If you're taxed without your consent, then the road is open to extortions. And so, of course, we don't like that word, it's kind of an ugly word, but I think the fact that the British government had enough honesty to call the tax on the loyalist extortions was amazing to me.

45:39I don't know, I see some of the things you run into when you do research. Well, let's talk about… 35 years ago, when I was just a young lawyer, I had my first audit. An agent comes in, he was an old-timer, and he looked over at this young buck, you know, sitting there, and he said, you know, son? And then he called me son. He said, I don't know, I was 25 or something at the time, and he said, He said, you know, he was doing the tax audit, and he said, you know, our income tax is an honor system, and it's the only way it will work in a free society.

46:28You know, he owned me for a long time, in my mind I say, because it was a matter of honor, and it was a matter of honor in those days. In those days, you know, here we're talking about 1960, and at that time we had some interesting comments by the commissioners of eternal revenue, Mortimer Kaplan was the commissioner around 1960, and he said no other nation in the world is so honest when it comes to paying the taxes like the Americans are, and it's a great feather in our cap, that we are honest and we pay our taxes and we assess them, and we're just really decent. Robert Jackson, who was the lead on the Supreme Court, but he was the chief counsel of the IRS, and he made another statement about 1962, about how this is where the honor system and Americans are so honorable in paying the tax, even though it's burdensome.

47:31We still pay the tax. Well, Chief Justice Richard Neely, on the West Virginia Supreme Court, wrote a little book about that time and he said, cheating on the federal income tax is all pervasive in all branches of society and except for the compulsively honest neurotics, cheating Everything occurs in direct proportion to the opportunity. Now this is an American judge, and you can see in the 20 years from when Kaplan wrote how wonderful and how honest we are, here's a chief justice, that it's all pervasive in our society, and it's just a matter of opportunity and you will cheat.

48:25Another guy who wrote a book sometime ten years later, many of you used to probably We listened to David Brinkley in the Brinkley Report on the news, and Brinkley Chet Huntley was his sidekick, and Chet died, and he wrote a book called, You're Entitled My Opinion, I think it was that it came out, and he said that there's wholesale cheating in America, that the underground economy is booming, and that people deal in cash and pay in cash and and don't pay any taxes. And he said there's three reasons for it. One is that these people think that the tax system is unfair.

49:11Two, they think it's too complex. And three, they think that the government spends their money for things they don't approve of. And that's the recipe for evasion. So, and now, of course, with this massive surveillance We have over our lives, then the idea that this is an honor system. Somebody wrote and asked me to write something some years ago about how the world has changed in the last 40 years. Yeah, that's what I thought of. I said, well, it's changed. The income tax was an honor system. Did you know nothing was reported in the days? Nothing was reported. Not even the interest on your bank accounts was reported. And one of the reasons you had the reporting of your salaries on the W-2s was so you could file for a refund.

50:06But all these massive reporting, information return, none of them existed. Yes? The first two reasons are reasons enough to change or get rid of the system. The third reason is reason enough to make your representatives who go up there and spend the money more accountable. It's more than a task as to what they are going to spend or not spend. We ought to tie it like corporate hands. You know, if your profits go down, your stock options go down.

50:55The pork barrel is the most popular part of the budget. ______? The former federal. Oh yeah, and you had corporate port and all the rest of them. Well, going back to Gladstone, which I mentioned just over 125 years ago, and Gladstone says the real problem is the public expenditure. Yes? Is it pretty much accepted that it couldn't go back to an honor system because I always think about the fact that you want to report honestly for some reason, a few reasons, outside of the threat of punishment if you don't, if you need to get credit for a loan or if you want someone to invest in your business, you want to report more profits for those reasons.

51:45There are some incentives, to be honest, without this huge, you know, watch this stuff. Yeah, well, you know, I went over the list of what, you know, what you have to report. You know, practically everything. The only thing you don't report is when you go to the bathroom because there's no revenue involved. Now, if we had a, well, they used to, in Rome, they did have a tax on toilets. They really did. Well, maybe a tax on toilets, then we'd have to report that. But it is awesome what we have to report, and so much of it's done automatically. But when I was a young buck, and when that guy said that it's an honor system, he was right. There was nothing he reported. Nothing. Where do your 1090s come in? Oh, I don't know.

52:31In the mid-80s? Yeah. In the mid-80s. But you're probably a little startled when I tell you that 35 years ago there was nothing reported on anything. There's something philosophically or inherently wrong when you use the word cheap. And the government, it's not their property to begin with, and yet they use the term cheap. And if there's something totally wrong with the system, when that's allowed to just get by and no one says anything about it. Well, that's a good point. In fact, the thing that's so interesting is that if you deal with revenue agents and they talk about the government's money.

53:20What the hell is going on? My money, I earned it. They didn't print it. I won't say that. John's got to give one to that call affording extortion money. Yeah, but that's true. I remember I've had my share of experience with these guys. They keep talking about the government's money. What do you mean the government's money? This is my client's money. He earned it. What did the government contribute? A couple, two, three weeks ago, Hillary made a speech to some wealthy, democratic women, and I had the quarter at home, but it was something to the effect that, I know you all don't want to hear this, but we're going to have to take back some of your, we're going to have to take things from you, in other words, we're going to have to send some of these tax cuts for the common good.

54:17I guess we're all victims, but see I have the, us older folks have the advantage of having lived and seen this thing happen. The, you know, the creeping intrusions, the information returns, and my God, that was unbelievable. And, in fact, I was talking to my partner some years ago and he said, you know, we were lucky. We had it when it was easy, you know, talking about the tax work we did. I'm not talking about anything, it was just the law was easy to deal with in those days and we had an easy time of it. But that lawyer that said he could reduce any tax to zero, I don't think you could deal with Howard Hughes.

55:08He did mention, I would talk a little bit about him, maybe I'll get you started on him, he didn't like to pay taxes, he didn't pay taxes, nothing. His zeal to beat the tax man has been one of the greatest boons to American society Because he created the Hughes Medical Foundation. And that has become a billion dollar, one of the biggest medical research foundations in the world. And it was all by chance happened, and he never had a charitable bone in his body. He had no intention of creating any kind of a foundation for any charitable purpose.

55:58But his lawyers said, look, here's how you can beat the system. You take the huge, the stock in the huge tool company. Now the huge tool company was the company that his father had developed that had the drilling bit and had the patents on the oil well drilling bit, which was worth billions and which made him what he was. And his father died when he was young and when he was only 17 or 18, he took over the huge tool company. The lawyers and the tax money said, I'll tell you what you can do. We'll form the huge medical research foundation and you will donate your stock to it and then the income from the stock will be tax free under the tax code at that time.

56:48You will then borrow the-