The Untold History of Taxes & War in America
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Summary
Who came up with the idea of holding your taxes when you get paid in your payroll? Who came up the idea for the IRS? Which president raised the national debt the most? And why does the US have so many military bases around the world compared to Russia, China, and France?
Transcript
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You know, most of the time when we hear about taxes, we hear about Democrats raise taxes,
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Republicans lower taxes, but when you study the history of taxes in the US, there's going
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to be many things today where you're going to say, you've got to be kidding me, Pat.
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You're going to be blown away by who came up with the IRS.
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The whole idea of holding your taxes when you get paid in your payroll, who came up
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Which president raised the national debt the most?
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Which president raised the percentage and dollar amount?
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Then we're going to talk about the correlation between war and taxes, and why does the US
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have so many military bases around the world compared to Russia, China, France?
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All of that stuff we're covering in today's episode.
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All right, so stick around until the very end because I'm going to have my final thoughts
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During that time, the French-Indian War took place, which the Brits started taxing the colonists,
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and the colonists said, wait a minute, why are you raising taxes without asking us?
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How come we don't have any kind of representation?
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American Revolution began, and the founders wanted lower taxes and representation, which
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led to 1775 to 1783, the American Revolutionary War.
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By the time it was done, obviously, US became a country, and US had two forms of taxes, tariffs
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So that led to the Tariff Act of 1789, which was a 50-cent tax on foreign ships per ton, and
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it was six-cent tax on American-owned vessels per ton.
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Then we go to 1792 to 1802, which was the French Revolutionary War, and this introduced
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And then in 1812 to 1815, it was the War of 1812, US declared war against the Brits because
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the negotiation was going nowhere, so Madison wasn't happy about it.
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And by the way, the whole story about Star Spangled Banner comes from the War of 1812.
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So in 1861 to 1865, Civil War breaks out in America, right?
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That's when in 1862, a president known as one of the greatest president of all time,
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if not the greatest president of all time, Lincoln, came up with the Revenue Act of 1862,
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And in 1862 was the first ever progressive tax, 3% on income earners between $600 to $10,000
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a year, 5% on those making $10,000 or more, only about 10% of Americans pay taxes.
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Abraham Lincoln, known as one of the greatest presidents of all time, I have him in one of
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An organization you may have heard of before called the IRS.
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Yes, the IRS was started under Lincoln in 1862 with the idea of having the tax withholding
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system, which means you make $1,000 in a month.
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They wanted the employer to withhold the taxes to pay to the government.
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Because Lincoln said, folks, we just had the Civil War.
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We need you to agree to pay some federal income taxes.
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But when we pay it off, we're going to get away with this.
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Do you think the federal income tax ever went away?
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Ten years later, 1872, they said, we paid off the war.
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They went away with taxes and went back to what it used to be before.
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In 1894, Pollock versus Farmers Loan and Trust Company, 1895, Congress tried to impose
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In 1894, tax was challenged in court by a Massachusetts resident named Charles Pollock.
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The Supreme Court ruled in his favor, striking down the tax, because you cannot go out there
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But the Socialist Union Party, the Populist Party and the Democratic Party sat there and
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said, we've got to figure something out to be able to tax people.
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So in 1913, we came up with the 16th Amendment, and here's how it reads.
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The Congress shall have power to lay and collect taxes on incomes from whatever source derived,
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without appointment among the several states, and without regard to any census or enumeration.
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So that's how the first permanent income was levied in 1913, influenced by the Socialist
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Labor Party, the Populist Party, and the Democratic Party.
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It was 1% for those earning between $0,000 to $20,000, 2% for those $20,000 to $50,000,
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3% for $50,000 to $75,000, 4% for $75,000 to $100,000, 5% for $100,000 to $250,000, 6% for
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$250,000 to half a mil, and then 7% for $500,000 plus.
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And then that leads to World War I, 1914 to 1918, which U.S. got involved April 2nd, 1917.
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Because if you go back and look at the taxes, in 1916 the top line taxes was 15%.
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The moment we got involved in 1917, taxes went up to 67%, so that was another reason why taxes
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So then that goes to 1929 to 1933, Great Depression takes place, FDR's the President,
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and in 1933, FDR's new deal is being launched, and there's two plans to it.
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Part one of the deal included the Banking Act of 1933 and the Securities Act of 1933, and
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part two of it was in 1935, which introduced Social Security, Minimum Wage, Fair Labor Standard
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Act, and by 1936 the top tax rate hit 79%, and the economy's output plummeted.
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What we still haven't covered is World War II from 1939 to 1945, which the U.S. got involved
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So combined the Great Depression and World War II led to, in 1945, when FDR died, the
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From 1940 to 1963, the top marginal tax rate hovered between 81% to 91%.
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By the way, just some fun facts, where in 1939, 4 million Americans filed taxes.
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By 1943, 41 million people filed taxes for $13 billion of tax revenue.
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And two years later, 43 million people filed taxes, and the government's revenue went to
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So remember how in 1862, Lincoln comes out with the IRS and says, listen, we need to raise
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money, we need to raise taxes, because the Civil War was so expensive that it led to them
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coming up with the tax withholding system, which means the employer is about to pay the employee
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They withhold the taxes, and they send to the government.
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And then it went away, because Lincoln said, when we pay off this debt, this income tax will
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The party, the Socialists, the Liberals, the Democrats, went to get help from a guy named
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Milton Friedman, where in 1943, he helped the tax withholding system become official, where
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they could start taking taxes out of your income, with the employer sending the money
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Essentially, the employer became the tax collector, not the government.
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And here's what Milton Friedman had to say about this later on in life.
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This would have been introduced had I been involved or not.
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At the time, we concentrated single-mindedly on promoting the war effort.
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We gave next to no consideration to any longer-term consequences.
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It never occurred to me that, at the time, I was helping to develop machinery that would
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make possible a government that I would come to criticize severely as too large, too intrusive,
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too destructive, of freedom, yet that was precisely what I was doing.
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So you may be saying, Pat, what's the big deal about this?
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Because when Lincoln did it, he said, when we pay off all the costs that we paid for
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However, in 1913, when Wilson introduced this, saying, when we pay off the bill for World
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War I, when FDR said, when we pay off the bill for World War II, we will stop taking income
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And then the tax withholding system, check, made it very permanent, FYI.
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The whole tax withholding thing with your income when you get, your W-2 when you get somebody
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that takes all the taxes out, it's only 78 years old.
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Because no one said anything about it, and it's now been around for this many years.
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This entire time, Democrats keep raising taxes.
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Taxes raised 94%, 81%, all this stuff being raised.
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And then a JFK shows up and says, what are we doing?
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And he gives this legendary speech in August of 1962, and here's what he has to say.
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A creative tax cut, creating more jobs, income, and eventually, more revenue.
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And the right time for that kind of bill now appears in the absence of an economic crisis
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today, and if the job is to be done in a responsible way, is January 1963.
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Such a bill will be presented to the Congress for action next year.
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It will increase an across-the-board, top to bottom, cut in both corporate and personal
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It will include long-needed tax reforms that logic and equity demand.
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And it will date that cutting taxes to take effect as of the start of next year, January
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The billions of dollars this bill will place in the hands of the consumer and our businessmen
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will both have immediate and permanent benefits to our economy.
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Every dollar released from taxation that is spent or invested will help create a new job
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And these new jobs and new salaries can create other jobs and other salaries.
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And more customers and more growth for an expanding American economy.
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A democratic president for tax cuts and for entrepreneurs.
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By the way, when he said January 1st, 1963, he gave the speech on August 13th of 62.
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The tax bill went into effect, 64, under Lyndon Johnson.
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He took the top line from 91 to 70%, and he took corporate taxes from 52 to 48%.
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17 years later, in 1981, we had the economic recovery tax of 1981 by Ronald Reagan, which
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Reagan lowered taxes pretty much for everybody.
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Tax rate, the top line, went from 70 to 50, bottomed from 14 to 11, capital gains went
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from 28% to 21, higher estate tax exemption went from $175,625 to $600,087.
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And this was all helped through Arthur Laffer, the economist.
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And FYI, while Reagan came up with us in 1981, in 85, the IRS announced that America has officially
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produced 400,000 new millionaires due to Reagan's new tax laws.
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So now I'm going to stop right here because I don't want this thing to be a 30 minute episode.
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Obviously after this we have Bush Senior, we have Clinton, we have Bush, we have Obama,
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But I want to kind of show you a couple trends I noticed here, a couple things.
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Number one, a lot of times you'll hear about taxes, you know, rich don't pay taxes, poor
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pay too much taxes, the rich don't pay any taxes.
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I wanted to find out who actually pays the most taxes, and what has happened over the
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Are the rich paying less taxes, or are the rich paying more taxes?
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You can see the majority of the taxpayers is bottom 50%.
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Then the gray is 5 to 10, the top 105%, and the black is the top 1%, the richest people,
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how much, how big of a population there is of the top 1%, right?
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The next one directly from the IRS is, is the 1% paying more or less over the year?
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If you look at from 1980 to 2018, the top 1% keeps paying more and more and more taxes.
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So does the top 5%, but the top 10% is about the same from 1980 till today.
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The top 25% is getting smaller, the top 50% is getting smaller, but the bottom 50% is definitely
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Now some of you may be watching this politically, you're on the left and you say, wait a minute,
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Look the whole purpose of me doing it this way is to show how much contradiction there
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Because everything about the timeline I showed was what?
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Every time we have a war, there is consequences.
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Look how many times we have to raise taxes, come up with new taxes just to pay off debt
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from a war that we caused or we got involved in.
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This led me to find out, how many military bases do we have worldwide?
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If I were to ask you right now, how many military bases do you think US has outside of the US
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Do you want to know how many military bases China has in foreign countries outside of China?
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One is in Africa, right by the Suez Canal, the choke point.
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It's the only one they have because they're taking those resources and they're investigating
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So now some of the folks on the right may be saying, what are you saying, Patrick?
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Are you saying taxes are going up because we're going to war too many times?
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Yes, America tends to get involved in too many wars that they don't need to be getting
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While instead of keeping that money and investing it into infrastructure, maybe in a different
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way for military, we're allowing China to get stronger because they only have one military
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You want to know how many total they have combined?
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So you see what's happening when I'm showing these debt.
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So some of you guys are saying, well, that's right.
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Which president do you think increased the national debt the most by percentage?
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Top percentage of national debt increase during their term.
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By the way, FDR came out with the New Deal, Woodrow Wilson came out with the 16th Amendment.
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Barack Obama, 74%, although he has the biggest dollar amount of $8.59 trillion increase.
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Then it's George H.W. Bush, then it's Ford, then it's Carter, then it's Nixon, then it's Trump.
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But taking a deep dive into the topic of taxes, I realized even more that taxes is not black
1.00
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There's a lot of gray area, whether it's political, the influence of it, the cause of it with war.
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I've got another 50 pages that I haven't covered with you.
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If you want me to go even deeper with different forms of taxes, what other countries do with
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taxes, press the thumbs up button and share this episode.
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If this does well, I'll probably do another part two to this.
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And if you want today's message in a PDF, text the word TAX to 310-340-1132.
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One more time, text the word TAX, T-A-X, to 310-340-1132.
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And if you're not in the States, go in the description, click on the newsletter, subscribe
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to it, and we'll send you the PDF to you as well.
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And last but not least, I did another episode similar to this on the topic of inflation.
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If you've not watched it, click over here to watch that episode.