Listen for a history of income tax and how it can impact your wallet!
Wars have been fought with silver bullets but Civil War history offers little consolation.
Modern income tax was introduced in 1913 as a tax for the very top earners – irrelevant to most Americans. But in 1942, the script was flipped, the entire nation was mobilized for war, and money was in desperate. Still to this day, the majority of American’s are paying for wars through their income taxes.
Today’s episode is focused on the history of American income tax, and how to factor it into your future financial plans.
The Income Tax Show Highlights:
– The reality of Grandma’s income tax versus yours now ([1:50])
– How politicians are screwing you over ([2:40])
– Read my lips: No More Spinach ([3:30])
– What the rich really give back to society ([5:45])
– How the internal revenue service could be stealing your children’s’ money ([7:00])
– The real truth about paying for the American Civil War ([9:00])
– How to factor in taxes when making future financial plans ([13:00])
The most important question to ask yourself is this: Do you think income taxes will go up or down in the future?
Your answer to that question can tell you a lot about what to do with your money today and tomorrow.
Finally, do you want someone else to help you translate your increased knowledge about income taxes into tangible actions you can take now? Please reach out to us.
Grandma’s Wealth Wisdom-007
A hearty welcome to Grandma’s Wealth Wisdom with your hospitable hosts; Brandon and
Amanda Neely. This is the only podcast for strategies to grow your wealth simply and
sustainably like grandma used to. Without further ado here are your hosts.
Amanda: Hi, I’m Amanda, and welcome to Grandma’s Wealth Wisdom, where we help
you build wealth Grandma would be proud of. This is episode six that we have
titled “We’ve Got a War to Pay For”.
Brandon: And I’m Brandon. Welcome to the podcast. So, you might be familiar with
taxes, I feel like a lot of people are familiar with taxes.
Amanda: We all pay taxes. If you’re in America you pay taxes in some way, shape, or
Brandon: Yup, there’s income taxes, sales taxes, property taxes, excise taxes, not
exercise taxes, excise taxes, for importing/exporting, hopefully they’re not
going to put exercise taxes now that I’ve said it, payroll taxes if you’re an
employer, and the list goes on and on. We even have, here in Chicago, bottled
water tax, and I think they used to have… what was it?
Amanda: It was a pop tax.
Brandon: There was a pop tax, which was soda pop, and there was a tax on plastic bags.
Brandon: We just had that and then that got taken away or something, I don’t know.
Anyway, lots and lots and lots of taxes.
Amanda: And of all of these different kinds of taxes today we’re going to focus on
income taxes. The taxes that you pay on your salary, your wages, the paycheck
that you get.
Brandon: So you might think that Grandma had a lower tax rate because she was able to
save for retirement, she was able to buy that house, she was able to do a lot of
things, but the reality was: Grandma’s income tax rate was much higher than
ours now. For any income up to $38,000 we pay a 12% income tax. To
compare apples to apples let’s take $20,000 annual income as an example.
Today you’d pay the 12%. Back in 1950 the tax rate for that $20,000 was
34.58%. In 1960 it was 38%. That’s a pretty big difference between 38% and
Amanda: Yup. The theory goes that in the 1980’s politicians realized that they could
win elections by promising to lower taxes. That’s what Reagan did. Part of the
theory as to why he got elected is because he was promising to lower taxes.
Now, I was born while Reagan was president so I don’t remember that myself
in particular. I vaguely remember when the first president Bush, I was kind of
too young, but I vaguely remember them harkening back to when he was first
running and his key phrase that came up that time, “Read my lips: No new
taxes.” I had to research it, that actually he said that first in 1988, which I
would not remember, but in the 90’s when he was running for reelection that’s
when I remember people talking about him more. I was old enough to kind of
remember some things at that point, but I was really too young to know what it
meant, you know, “Read my lips: No new taxes,” and I think the only reason I
remember it is because my niece, my sister’s daughter, she had this bib that
Grandma’s Wealth Wisdom-007
someone got her for when she’d eat food and that bib read,” Read my lips: No
more spinach.” Now, I love spinach, but I thought it was totally hilarious, this
bib and this play on taxes, “Read my lips: No new taxes,” and, “Read my lips:
No more spinach,” and how a kid would think about the same kind of- like,
they don’t care about taxes but we don’t want spinach, and kind of equating
taxes and spinach for most people. Now, I love spinach but most people don’t.
Brandon: And I just think with that whole idea of taxes and lowering taxes that’s how,
again, taxes were won, and we don’t want to pay more than, I don’t know,
we’d rather not pay all those taxes if we don’t have to, and so to win those
elections and do all that I can see why it picked up speed in the 80’s and 90’s
and even now.
Amanda: I mean, you’re a little older than me, what do you remember from when you
were a kid in this season, 1980’s early 90’s, where lowering taxes was the
Brandon: I mean, I remember hearing the elections and, I guess you know, being a kid I
would hear basically that whole, not the other stuff, but I would hear, “No new
taxes,” or, “Lower taxes,” and the thing is; from my little mind at the time I
could understand no new taxes, or lower taxes, meant more money for us,
which meant more ice cream, or cookies, or whatever, toys for me.
Amanda: That’s all you think about.
Brandon: Yeah, so I’m thinking, “Of course we don’t want higher taxes, I don’t want to
give those guys money, I mean, whoever those guys are. I want that money for
our family so that way we can go buy more toys, or ice cream.” I’m a big fan
of ice cream.
Amanda: I found it really interesting; I heard this interview recently of Vanessa
Brandon: Not Vanessa Williams the musician.
Amanda: Right, this is Vanessa Williamson the scholar and researcher, and she was
talking about her recent book.
Brandon: Or Vanessa Williams is an actress I think, sorry.
Both: Vanessa Williamson scholar.
Amanda: Yeah, she was talking about her recent book Read My Lips: Why Americans
are Proud to Pay Taxes, we’ll put a link to it in the show notes, but she was
talking about how many Americans see paying taxes as our patriotic duty
when she interviewed lots of us Americans and she heard this recurring theme
over and over again that paying taxes is a patriotic duty. We want to pay our
fair share, but not a penny more. You know, that is how we felt about it, but I
found it really interesting. Our strongest feelings about taxes, according to her
research, was we get really mad when we believe people are not paying their
fair share of taxes. When they’re skirting the laws, especially when that’s the
rich people. That they’re not paying their fair share, that they might even be
paying less taxes than the average American because, you know, they’re
Grandma’s Wealth Wisdom-007
skirting these laws. Even though they make more money they pay less taxes,
but we think they should pay their fair share just like we do.
Brandon: Yeah, I don’t think we’re going into any of the political landscape now.
Amanda: Yeah, we’re just summarizing her research from what I remember from the
interview I heard.
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Brandon: So, I’d love to know how Americans feel though about the Internal Revenue
Amanda: Yeah, if we think paying taxes is patriotic but how do we feel about the people
that collect those taxes.
Brandon: I mean, I think even in the bible people didn’t like those guys.
Brandon: So, for example, let me just give you this little thought thing: If you have two
or more children and leave money in a tax deferred 401K, when you pass
away the IRS might get the same, or more, than your children. The Internal
Revenue Service is like that third or fourth child that collects-
Amanda: A part of your wealth that you built.
Brandon: So, do you love the Internal Revenue Service as much as your children? I
know I don’t.
Amanda: Or do you have that tax collector, that tax man, at the Internal Revenue
Service that’s your BFF and you want to leave him some of your wealth, or
her, some of your wealth when you pass away. I mean, it doesn’t really go to
them but that’s kind of the idea of how to like think about. What it is, how
you’re setting things up for when you pass away and who the beneficiaries are
and how the IRS can become one of those.
Brandon: Yeah, so do you want to add the IRS as a beneficiary on your estate? Do you
really want half or a third or whatever to go to that? I don’t know, I don’t.
Amanda: Yeah, state taxes are a real thing for sure, and with tax deferred 401K, this is
news to me when I learned it, that when it passes on to your beneficiaries and
they start to take money out of that 401K they pay taxes on it as income tax.
It’s not part of your estate taxes in that way, so it’s something that’s
unavoidable. The Internal Revenue Service is going to get that tax from your
tax deferred 401K one way or another, but here’s the thing that really gets me
about income taxes-
Brandon: Not that that other stuff wasn’t enough, there’s more.
Amanda: Pile on. With the exception of a short lived income tax to pay for the Civil
War America didn’t have any income tax until 1913. We’ll have a graph in the
Grandma’s Wealth Wisdom-007
Brandon: A little over 100 years old.
Amanda: Right, 105 years old, the income tax in the United States. We’ll have our
graph in the show notes to show you how the income tax has changed, but
essentially the tax rates increased during and after World War One and World
War Two, and then they remained high during the 50’s, 60’s, and 70’s, we
were, you know, in the midst of Korean War, Vietnam War, those kind of
things during that time, and then like we talked about before they were
reduced during the Reagan administration during the 80’s, but if you look at
the entire last 105 years of income tax rates in the United States we are at
historically low income tax rates.
Brandon: Yeah, I think really, really low.
Amanda: Yeah, but yeah just like Grandma we have a war to pay for. We have this war
on terror, Afghanistan/Iraq, that bill is coming due and, you know, just like
Grandma had to pay for those other wars during the 40’s, 50’s, and 60’s, and
into the 70’s, and then also unlike Grandma we also have a huge population
about to take social security and Medicare. The money to pay for all of this
has to come from somewhere. Where’s it going to come from? There’s a few
ideas. Raising taxes is towards the top of that list. Another one is changes the
laws related to tax deferred plans like 401Ks and IRAs. Politicians can get
pretty creative in how to balance a budget. There’ll probably be lots of fights
about it, who knows what’s really going to happen.
Brandon: Yeah I think that’s kind of scary, looking at some of the debt, looking at social
security, looking at all those ideas, and thinking, “Okay, where is that going to
Amanda: Yeah, I think you’ve got some numbers for us about the debt.
Brandon: So let’s consider this: The national debt is 19.19 trillion dollars. 19.19 trillion
with a T. The total U.S. retirement assets hit 24.9 trillion in 2018. Again, 24.9
trillion. So, if the U.S. government wanted to seriously balance a budget or
pay off some of the national debt where do you think they might go? They
might look at those numbers and say, “They’re very similar. We could maybe
take from there.”
Amanda: So, all this is purely speculation. We do know one thing is fairly certain: Taxes
are highly likely to go up in 2025, when the current tax reform is done, so
when they passed the tax cuts and jobs act of 2017 we were pretty much told
that taxes would go up in 2025. That they were cutting taxes temporarily to
allow people to move some money around, do some different things, and then
taxes would go up in 2025. So, if you’d like to see how you could make some
changes with your money over the next few years, until 2025, and spend and
save accordingly knowing that taxes are most certainly going to go up then,
we’d love to talk with you and strategize some ways without being salesy or
anything like that. All you have to do is go to grandmaswealthwisdom.com
and click on “Request A Meeting” and schedule just an intro call with us. 15
minutes, we’ll see how we can help you, and we’ll go from there. We’ll look
forward to talking to you and helping you develop that plan.
Grandma’s Wealth Wisdom-007
Brandon: So don’t be surprised in 2025 if you’ve heard here and taxes do go up. Don’t
come to us saying, “Oh taxes are up, I’m surprised by that.” Don’t be.
Amanda: Yeah, you have a clear countdown-
Brandon: You’ve been warned.
Amanda: Yeah, to do something about it. To make some changes. To create your plans,
do something different knowing that you’ve got this countdown to 2025.
Brandon: So the long and short of it is that the Internal Revenue Service wants your
money. It actually needs your money. I mean, we need it for all the things of
what’s going on around us. Factoring in taxes when making your financial
plans is super important. If you think income tax rates are going up in the
future you’ll plan differently in the future than if you think they’ll be lower, or
the same. If you believe the tax laws around 401Ks and IRAs will change you
might use them differently. The truth is that none of us knows what the future
holds, but in the famous words of Benjamin Franklin, “In this world nothing
can be said to be certain except death and taxes.”
Amanda: And he said that before he wrote the United States Constitution. This was sort
of pre-United States Constitution that we know the certainty of death and
Brandon: They knew they needed some money somewhere.
Brandon: So spend and save accordingly.
Amanda: That’s what Grandma would say. Taxes are certain, make your spending plans
and your saving plans accordingly, which is a good segue to our next podcast
episode about leaving a legacy for future generations. Poor people plan for
Saturday nights, rich people plan for three generations. Grandma prefers the
Brandon: So until next time, keep building your wealth simply and sustainably for your
own future and the future of your grandchildren’s generation. The topics
presented in this podcast are for general information only and not for the
purpose of providing legal, accounting, or investment advice. On such matters
please consult a professional who knows your specific situation.
Remember to download Grandma’s free wholesome wealth recipes book by dropping into http://grandmaswealth.com. Time-honored wealth strategies served with a helping of balance and trust.
If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting https://grandmaswealthwisdom.com/call…just like Grandma would want us to do.