626. Ten Myths About the U.S. Tax System

Summary

Freakonomics Radio Episode 626: Ten Myths About the U.S. Tax System

Release Date: March 14, 2025

In Episode 626 of Freakonomics Radio, host Stephen Dubner engages in a compelling and enlightening conversation with Jessica Riedel, a prominent economist specializing in U.S. tax and budget policy. This episode delves deep into the intricacies of the American tax system, debunking prevalent myths, and exploring the dire state of the national debt. The discussion is both rich in insights and grounded in empirical analysis, making complex economic concepts accessible to listeners.

---

Meet Jessica Riedel

Background and Expertise

Jessica Riedel serves as a Senior Fellow in Budget, Tax, and Economic Policy at the Manhattan Institute, a right-of-center think tank headquartered in Manhattan. Her extensive career spans over two decades in Washington, D.C., where she has influenced tax policy and budgetary decisions. Riedel's work includes stints at the Heritage Foundation, serving as Chief Economist for Senator Rob Portman, and contributing to presidential campaigns for figures like Marco Rubio and Mitt Romney.

A Nonpartisan Approaches and Challenges

Riedel prides herself on a nonpartisan approach, maintaining independence by critically analyzing policies from both political spectrums. She emphasizes, “My nonpartisan approach is to be critical of everybody in Washington” (01:52). This stance has garnered her considerable influence, with Washingtonian Magazine recognizing her as one of the most influential economic policy professionals in the capital. However, her commitment to uncovering uncomfortable truths often alienates her from peers, as she candidly admits, “I’ve been sounding the alarm since 2001” (02:12).

Personal Journey and Advocacy

Beyond her professional accomplishments, Riedel shares a personal narrative about her transition from Brian to Jessica, highlighting the support she has received within her professional realm. She states, “My hope for my name change from Brian to Jessica was that it shouldn’t matter. I’m still an economist” (08:29). This personal insight underscores her resilience and unwavering dedication to economic integrity despite societal challenges.

---

Unpacking the Ten Myths About the U.S. Tax System

At the heart of the episode lies Jessica Riedel's authoritative analysis of the U.S. tax system through her articulated "Ten Myths." These myths not only clarify misconceptions but also shed light on the systemic issues exacerbating the nation's fiscal instability.

Myth 1: Tax Cuts Pay for Themselves

Riedel debunks the notion that tax cuts can fund themselves through economic growth. “Tax cuts can bring some extra revenue. They almost never pay for themselves” (26:44). This myth is perpetuated by proponents who overstate the stimulative effects of tax reductions, disregarding historical data that contradicts such claims.

Myth 2: Tax Cuts Will Starve the Beast by Forcing Congress to Cut Spending

Contrary to conservative assertions, Riedel highlights that historically, tax cuts have not led to proportional spending reductions. “When we cut taxes, Congress increases spending, and when we raise taxes, Congress cuts spending” (26:44). This dynamic underscores the resilience of governmental spending irrespective of tax policies.

Myth 3: The Middle Class Pays Higher Tax Rates Than the Rich

Riedel clarifies that, in reality, the top 1% of earners contribute approximately 33% of federal taxes, while the middle class accounts for about 12%, and the bottom earners pay nearly nothing (26:44). This challenges the widespread belief that the middle class bears a disproportionate tax burden.

Myth 4: 91% Tax Rates in the 1950s Generated Substantial Revenue

Riedel points out that the high marginal tax rates of the mid-20th century paid minimal revenue, as very few individuals actually fell into the highest tax brackets (26:44).

Myth 5: Europe Taxes the Rich More to Fund Larger Governments

Contrary to common perceptions, Riedel states that Europe taxes the rich at similar rates to the U.S. The higher revenue in Europe stems primarily from value-added taxes (VATs), which effectively function as national sales taxes targeting middle and lower-income groups (26:44).

Myth 6: Tax Cuts for the Rich Are the Primary Cause of Large Budget Deficits

Riedel argues that since 2000, tax cuts accounted for only about 0.6% of GDP, while increased spending has been the dominant driver of deficits, contributing around 6% of GDP (26:44).

Myth 7: Taxing Corporations and Millionaires Can Eliminate the Deficit

She dismisses this as unrealistic, stating that even hypothetical extreme measures like a 100% tax on the wealthy would barely dent the deficit.

Myth 8: The 2017 Tax Cuts Benefited Corporations and the Wealthy Predominantly

Riedel clarifies that while the wealthy received larger absolute tax cuts, the reduction was proportional to their income tax contributions. Essentially, the entire population saw a drop in their tax rates by about one percentage point (26:44).

Myth 9: Repealing the 1980 Tax Code Would Painlessly Reduce Deficits

Riedel warns that reverting to older tax codes would disproportionately burden the middle class, inflating their tax obligations to unsustainable levels.

Myth 10: America's Corporate Taxes Are Significantly Lower Than International Standards

She refutes this, noting that prior to the 2017 tax cuts, the U.S. held the highest corporate tax rate among developed nations. Even post-cuts, the effective corporate tax rate remains in the top third globally (26:44).

---

Federal Debt and Deficits: A Grim Reality

Riedel paints a sobering picture of the U.S. national debt, which stands at approximately $29 trillion, constituting around 98% of GDP—the highest level since immediately after World War II. The consecutive fiscal irresponsibility has led to skyrocketing interest payments, which have surged from $350 billion in 2021 to nearly $1 trillion, projected to reach $2 trillion within a decade (41:00).

Interest on the Debt

The escalating interest payments now surpass major budgetary allocations such as Medicaid, Defense, and Medicare, positioning interest expenses as the second-largest budget component. This trend is projected to continue, exacerbating the fiscal strain (41:00).

Contributing Factors

Riedel attributes the ballooning debt primarily to unabated government spending. She observes that from 1985 to 2000, government spending decreased from 23% to 18% of GDP. However, post-2000, despite promises of fiscal restraint, spending has consistently increased, driven by both parties' tendencies to prioritize tax cuts and expansive budgets over fiscal prudence (41:46; 42:38).

---

Entitlement Reforms: Social Security and Medicare

The Sustainable Crisis

Riedel underscores that both Social Security and Medicare are unsustainable under current policies. She clarifies the misconception that these programs are fully funded by their respective taxes. In reality, both systems run significant deficits, with projections indicating a $124 trillion shortfall over the next 30 years. This discrepancy arises because current tax mechanisms fund only a portion of the benefits, relying heavily on future taxpayers to cover the gaps (48:31).

Reforming Entitlements

Riedel's proposed solutions encompass a multifaceted approach:

• Social Security: Introduce means testing by reducing benefits for high earners, raising the retirement age, and potentially increasing payroll taxes.
• Medicare: Reform benefits and explore options to partially pre-fund Medicare Part B.

She advocates for a balanced approach that includes both raising taxes and reforming benefits, particularly targeting high earners who disproportionately benefit from these programs. “There’s no way I can support this. I can’t look myself in the mirror, and I can’t have any credibility as an economist” (12:05).

Challenges to Reform

Riedel acknowledges the political hurdles, citing public resistance rooted in the belief that Social Security and Medicare are individually accountable and fully funded. This misconception makes any attempt at reform highly contentious and politically perilous. She notes, “They will not believe you” (52:15), highlighting the deep-seated myths that hinder meaningful discussions on entitlement reforms.

---

The Middle Class Under Taxed: A Paradigm Shift

Current Tax Landscape

Contrary to popular belief, Riedel asserts that the middle class in America is significantly under-taxed compared to their counterparts in developed nations. She emphasizes that while the rich may theoretically "pay less" due to capital gains and other income streams, the actual tax burden on the middle class is minimal. “According to IRS data, the median earning family in America, when you take into account all of their deductions and credits, they pay a 3% income tax rate and a 12% tax rate” (59:00).

Comparative Analysis

When comparing to Europe, the middle class in the U.S. benefits from significantly lower payroll and value-added taxes. Riedel points out that Europe’s higher tax revenues are largely derived from taxing middle and lower earners through mechanisms like VATs, rather than disproportionately targeting the wealthy. This structural difference explains the higher overall tax revenues in Europe without necessarily taxing the rich more (62:17).

Implications for Deficit Reduction

Riedel argues that solely focusing on taxing the rich is insufficient for deficit reduction. She contends that substantial tax increases on the middle class are necessary to achieve meaningful fiscal balance. By highlighting that even extreme measures on the wealthy wouldn’t suffice, she makes a case for broad-based tax reforms that include the middle-income earners (58:38).

---

Policy Recommendations and Potential Reforms

Consumption Taxes Over Income Taxes

Riedel advocates for a shift towards consumption-based taxes rather than income-based taxes. She believes that taxing expenditures encourages savings and investment, thereby fostering economic growth. However, she acknowledges the political challenges, particularly the regressive nature of consumption taxes, which may disproportionately affect seniors and necessitates offsetting measures to maintain progressivity (62:17).

Simplifying the Tax Code

A recurring theme in Riedel's analysis is the need to simplify the tax code. The current system is riddled with complexities, deductions, and preferences that create inefficiencies and opportunities for manipulation. Simplification would not only enhance compliance but also ensure a more equitable distribution of tax burdens.

Balancing Tax Revenues and Spending

Riedel emphasizes that tax policy reforms alone are insufficient to address the fiscal crisis. Comprehensive solutions must also tackle the burgeoning government spending. Her 30-year budget plan aims to stabilize the debt by implementing strict reforms on both revenue generation and expenditure control, particularly targeting Social Security and Medicare (50:56).

---

Political Challenges and Bipartisan Solutions

Partisan Polarization

Riedel highlights the entrenched partisan divides that obstruct meaningful fiscal reforms. Both Republican and Democratic lawmakers are entrenched in narratives that favor their respective bases, making bipartisan cooperation elusive. She notes, “If you just try to do one piece of it, we're just going to raise taxes. We're just going to reform Social Security and Medicare” (54:59).

Behind-the-Scenes Efforts

Despite the public gridlock, Riedel mentions that there are bipartisan efforts underway to formulate comprehensive fiscal policies. These efforts, however, remain concealed from the public eye due to the fear of political backlash and the high stakes of public perception.

Reform Proposals

To overcome political inertia, Riedel suggests mechanisms such as a balanced budget amendment, where lawmakers are required to balance budgets in real-time, forcing fiscal responsibility. Additionally, she advocates for making lawmakers personally accountable for their budgetary proposals, ensuring that populist promises align with long-term fiscal sustainability (47:11).

---

The Path Forward: Integrating Behavioral Economics

Public Perception and Behavioral Insights

Riedel discusses the potential of leveraging behavioral economics to shift public perceptions and foster support for necessary fiscal reforms. Recognizing that people are inherently shortsighted and prioritize immediate benefits over long-term gains, she suggests that framing fiscal responsibility in terms of present-day benefits could be more effective.

Lessons from Climate Change Advocacy

Drawing parallels with climate change activism, Riedel observes that successful movements have galvanized young people by emphasizing the long-term consequences of inaction. She proposes that similar strategies could be employed to raise awareness about the fiscal crisis, encouraging collective action to secure economic stability (63:20).

---

Conclusion: A Call to Action

Stephen Dubner concludes the episode by reflecting on Riedel's insights, acknowledging the monumental challenges posed by the entrenched myths and political barriers. He underscores the importance of applying rigorous standards of honesty and integrity to political discourse, as advocated by Riedel.

Riedel, in her closing remarks, remains cautiously optimistic that the immutable laws of economics will eventually drive necessary reforms, despite the current partisan impasse. Her conviction that “the laws of economics always win” serves as a beacon of hope for listeners grappling with the complexities of the U.S. tax system and national debt (65:51).

---

Key Takeaways

1. Debunking Tax Myths: Understanding the real dynamics of tax policies is crucial for informed public debate. Myths such as tax cuts paying for themselves and the middle class bearing a disproportionate tax burden are not supported by empirical evidence.

2. Fiscal Responsibility: The national debt is reaching unsustainable levels, primarily driven by unchecked government spending rather than tax cuts. Addressing this requires comprehensive reforms in both revenue generation and expenditure control.

3. Entitlement Reforms: Social Security and Medicare are major contributors to fiscal deficits. Reforming these programs through measures like means testing and increasing the retirement age is essential but politically challenging.

4. Middle Class Taxation: The middle class is significantly under-taxed compared to global standards. Raising taxes on this demographic is necessary for deficit reduction, challenging the conventional focus on taxing the rich.

5. Political Barriers: Partisan polarization hinders meaningful fiscal reforms. Bipartisan cooperation and innovative policy mechanisms are needed to overcome political inertia.

6. Behavioral Economics: Leveraging behavioral insights can play a pivotal role in shifting public perceptions and fostering support for necessary economic reforms.

---

Notable Quotes with Timestamps

• Jessica Riedel on Her Role: “My nonpartisan approach is to be critical of everybody in Washington” (01:52).

• On Tax Cuts: “Tax cuts can bring some extra revenue. They almost never pay for themselves” (26:44).

• Deficit Concerns: “The federal debt crisis is even worse than you think, and few politicians have the courage to do anything about it” (02:34).

• On Partisan Politics: “Politicians win elections by creating narratives... [they] promise big tax cuts and big spending increases” (42:38).

• Entitlement Reform Necessity: “Social Security and Medicare do not pay for themselves in taxes. They both run huge deficits” (48:31).

---

Final Thoughts

This episode of Freakonomics Radio serves as a crucial exposé on the myths entrenched within the U.S. tax system and the broader fiscal policies that govern the nation's economic health. Jessica Riedel's expertise provides listeners with a clear-eyed analysis of the challenges and potential pathways to fiscal responsibility. By debunking misconceptions and highlighting the pressing need for comprehensive reforms, the episode encourages a more informed and pragmatic approach to economic policy debates.

For those unacquainted with the nuances of tax policy or the complexities of federal budgeting, this episode offers a thorough and engaging exploration that underscores the hidden costs of fiscal imprudence and the transformative power of informed policy-making.

---

This summary was crafted to encapsulate the key discussions, insights, and conclusions from Episode 626 of Freakonomics Radio, providing a comprehensive overview for listeners who have yet to engage with the episode.

Transcript

[Stephen Dubner]

Freakonomics Radio is sponsored by Audi it's not every day you get excited by a new car, but the all new Audi Q6E Tron is more than a new EV. It's a new way to experience driving. Embrace the thrill of the drive. With effortless power, serious acceleration and the most advanced tech of any Audi ever. With an all new panoramic digital stage and legendary Audi performance, it's impossible not to love the all new Audi Q6E Tron. Learn more at audiusa.com@t mobile we'll give.

[T-Mobile Ad]

You four free 5G phones and four lines for only $25 per line per month with eligible trade ins. And no, it's not a contest, it's every day for a limited time. Everyone's a winner on America's largest 5G network.

Minimum of 4 lines for $25 per line per month with autopay discount using debit or bank account. $5 more per line without autopay. Up to $830 off each phone via 24 monthly bill credits plus taxes, fees and $10 device connection charge. 4 well qualified customers contact us before canceling entire account to continue build credits or credit stop and balance agreement too bill credits and if you pay UP devices early ct mobile.com.

[Stephen Dubner]

In Washington, D.C. there is a set of people who move into town when their party comes to power and who eventually leave once their party is voted out. These are the high profile residents of D.C. the ones who make headlines. But for every one of these people, there are thousands more that you rarely hear about or hear from. This is the other Washington, D.C. these people work behind the scenes on all sorts of important matters like US Tax policy or the runaway national debt. Our guest today is a specialist in both those matters.

[Jessica Riedel]

My nonpartisan approach is to be critical of everybody in Washington.

[Stephen Dubner]

Do you have any friends?

[Jessica Riedel]

No, not really. Much of my policy has been sharing uncomfortable truths and frankly angering people.

[Stephen Dubner]

So do you see yourself as someone who's sounding the alarm?

[Jessica Riedel]

Absolutely. I've been sounding the alarm since 2001.

[Stephen Dubner]

How's that working out?

[Jessica Riedel]

As you can see from the debt, my career has been an abject failure.

[Stephen Dubner]

This friendless soul is Jessica Riedel.

[Jessica Riedel]

I'm a Senior Fellow in Budget, Tax and Economic Policy at the Manhattan Institute.

[Stephen Dubner]

Despite her claim to failure, Riedel is consistently named by Washingtonian Magazine as one of the most influential economic policy professionals in dc. She has testified before Congress, she routinely briefs lawmakers in both political parties, and she has two messages. Number one, the federal debt crisis is even worse than you think, and few politicians have the courage to do anything about it. And number two, just about everything you know about US Tax policy is wrong. Today on Freakonomics Radio, federal debt and tax myths. Could we possibly be having any more fun that starts.

[Jessica Riedel]

Foreign this is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.

[Stephen Dubner]

In December, a month after Donald Trump was elected to his second term but before he had taken office, Jessica Riedel published a few articles that made me think she would be a good person to speak with and to learn from. First came her piece in City Journal, which is published by the Manhattan Institute. It was called correcting the top 10 tax myths. Then came a pair of op eds in the Boston Globe. One was called what Conservatives Get Wrong About Taxes. The other what Liberals Get Wrong About Taxes. I started our conversation by asking for some background on her employer, the Manhattan Institute.

[Jessica Riedel]

It's a right of center think tank headquartered in Manhattan. Although they have research fellows all over.

[Stephen Dubner]

The country, it's interesting to admit that something is a right of center think tank or a left of center think tank, because I find that so many institutes. There are a bunch on the right, there are a bunch on the left. Nearly all of them talk about how they aim to be nonpartisan. I just about never buy it. So can you give us a quick buyer's guide to assess the research coming out of institutes like yours?

[Jessica Riedel]

Generally, the research fellows here are more supportive of free markets, lower taxes, free trade. But ultimately the research fellows are free to publish what they want. We don't get dictated by our bosses, but they do tend to attract people at this organization who are a little more free market oriented.

[Stephen Dubner]

Let's talk a little bit more about you. How and when did you become interested in tax policy and budget policy? I've read about some US News and World Report challenged to readers to balance the budget. That got you enthusiastic. Is that true?

[Jessica Riedel]

Yes. Wow. You've. You've done your homework. I was a high school debater. My senior year, US News came out with a cover story that said, so you think you can balance the budget? You open up to this set of spreadsheets of the federal budget and they make a game out of it. I just rolled up my sleeves given the nerd I am and went, this is going to be fun. The thing I like about budget policy, beyond the fact that it's really important, is that when you study taxes and spending, you really get into the philosophical questions of what is the role of government? What do we want government to focus on how big should it be? You're really at the center of all Washington policy debates. It has therefore a holistic philosophical side of it beyond just the economic nerdery. I've grown more focused on it the more I studied it because I realized, oh my gosh, we're in deep trouble. One scary way of looking at it is that a year and a half ago, economists at the Wharton School, University of Pennsylvania tried to project out the economy over the next 30 years under current deficit projections. The model crashed. They could not project a functioning US Economy under current debt trends. That should scare everybody.

[Stephen Dubner]

Okay, consider all of us scared. Let's go back for a minute. I'd like to hear about your experience staffing and advising political candidates and elected officials.

[Jessica Riedel]

I've been in Washington for a quarter of a century. For the first 10 years I worked at the Heritage foundation running their budget policy shop. Then I moved over to the U.S. senate, where I spent six years as chief economist to Senator Rob Portman, a Republican from Ohio. And for eight years to the day, I have been at the Manhattan Institute. In addition to these jobs, I've worked on several presidential campaigns. I work was director of tax and spending policy for Marco Rubio's 2016 presidential race. And in 2012 I was the lead architect of Mitt Romney's 10 year deficit reduction plan.

[Stephen Dubner]

Did you ever think about running for office?

[Jessica Riedel]

I did. I grew up in Wisconsin. I was an advisor to Governor Tommy Thompson when I was in college. But ultimately I didn't run for office for the two reasons that number one, I didn't want to have to ask people for money. Number two, I'm too stubborn. I'm the last person who's going to pander to people to get reelected. And had I gotten elected, I would have been thrown out of office so fast.

[Stephen Dubner]

Okay, so you were known for most of your life as Brian Riedel. In fact, that's your byline on this piece in City Journal. But now you're Jessica Riedel. Can you just give me the TLDR on that?

[Jessica Riedel]

I've been transgender since I was 4. Several years ago, I began transitioning to Jessica and the response has been very supportive and positive. I still have my job. I still have my career. I'm working with members on Capitol Hill. It's been heartening that people are making it irrelevant. That's what I want. My hope for my name change from Brian to Jessica was that it shouldn't matter. I'm still an economist. My research is still what it is. And I want my gender just kind of blend into the background. And I've been really heartened that that's been the response so far.

[Stephen Dubner]

I'm really happy for you. That's great news to hear, Jessica. I do wonder whether working in policy and politics, which is not the most serene environment, let's be honest, there's a lot of fighting. There's a lot of dug in heels and entrenched position. I'm wondering if that political journey in any way prepared you for this personal transition.

[Jessica Riedel]

You know, I talk about this with my wife. I've never been popular in the first place. I have never been part of the in group. So I get to the point where you kind of think people aren't gonna like me for this. And I think to myself, you know what? They didn't like me before. It's just a matter of do you want to dislike me for my cold economic truce or dislike me for this? I'm going to alienate people either way, so the hell with it.

[Stephen Dubner]

When you say that people would become angered by your cold economic truths, give me an example.

[Jessica Riedel]

I'll go back to when I started at the Heritage Foundation. I got my first job in Washington. I had just graduated from graduate school. I'm 26 years old. I get hired at the preeminent conservative think tank. You're expected to support the home team. You're expected generally to say nice things about Republicans and not Democrats. Instead, I start putting out report after report after report saying Bush is a big spender and deficits are skyrocketing. The media liked it because the media loves to hear conservatives criticizing Republicans. So the next thing I know, I'm being cited on the front page of the Washington Post and the New York Times. And boy, was the Bush White House unhappy about that. I'm told that Karl Rove reached out to the president of my think tank and told him to shut me up. They told me that you are not to have access to the Bush White House ever again. It got pretty dicey for a while.

[Stephen Dubner]

Were you fired?

[Jessica Riedel]

I was not fired. I was worried I would be credit to my bosses for standing up for me. Stuart Butler was my vice president who stood up for me. But my take was I'm going to go where the numbers say and I'm not going to be bullied or intimid, really care. The vindication that I got is that although I was banned from the Bush White House, I eventually became close friends, colleagues and coworkers with many of the Bush economists. Bush's budget director, Rob Portman, recruited me to become his chief economist after he got elected to the Senate in 2010. So ultimately, my criticism, my stubbornness, and my just the facts approach eventually won people over.

[Stephen Dubner]

What kind of policies were you proposing or critiquing that inflamed the White House?

[Jessica Riedel]

This was the post 911 era, where in order to win defense spending hikes, Bush was offering Democrats big hikes on discretionary spending. Then in 2002, there was a farm bill that increased farm subsidies by 80%. And then in 2003, there was the Medicare drug entitlement. And I felt as a fiscally conservative deficit hawk, there's no way I can support this. I can't look myself in the mirror, and I can't have any credibility as an economist. So I really went after the farm bill, I really went after the Medicare bill, and I went after all the domestic spending, and I was told that it was not appreciated.

[Stephen Dubner]

We checked in with Karl Rove to see if he had indeed reached out to the head of the Heritage foundation to shut Riedl up. Here's what Rove told us. Not true. I'm actually a fan of Riedel's work, and we had better things to do than try dictating the think tank CEOs who to hire. So if I had to nutshell your political, economic, or fiscal position in the spectrum of our current political scheme, where would you put yourself?

[Jessica Riedel]

I would call myself pragmatic and right of center. Generally. I support free markets, less spending, but I'm nonpartisan. I'm independent. Although I have worked for Republicans in the past, I am not a Republican today. My research is really focused on calling out errors and trying to bring both sides together as an honest broker.

[Stephen Dubner]

So if you consider yourself pragmatic and right of center, the Biden administration was what?

[Jessica Riedel]

Too big government and too big spending. Biden was elected as a moderate return to normalcy after Trump, and Instead he added $4 trillion in new spending, enacted some tariffs, pushed up budget deficits, and overheated the economy to inflation. I would have preferred a more moderate, bipartisan approach.

[Stephen Dubner]

The 4 trillion in new spending in the Biden administration. Give me the top three or five categories there.

[Jessica Riedel]

Nearly half of it was the American rescue plan, which was the big stimulus bill shortly after taking office. We also had big increases in discretionary spending across the board. We had increases for veterans spending in the PACT act, there was the infrastructure bill, and we had a lot of student loan bailouts.

[Stephen Dubner]

Okay, and now? Same thing for the second Trump administration. Again, your pragmatic right of center, he or it is what Keep in mind.

[Jessica Riedel]

Trump added $8 trillion in new spending and tax cuts in his first term. And this time around we're seeing already trillions of dollars in new tax cuts and pretty empty promises of spending cuts. Doge is not really cutting spending, so it looks like Trump is also going to be a tax cut and spending Republican pushing deficits up too.

[Stephen Dubner]

You've written that Donald Trump's economic policies are, quote, aggressively influen. A bit more on that.

[Jessica Riedel]

Trump wants to cut taxes, which is inflationary, increase spending, impose tariffs which will raise prices, deport immigrants, which will create shortages in certain industries that push up prices. After all those inflationary policies, he continues to threaten the Federal Reserve to keep interest rates low, which will push up inflation even higher. And pretty ironic for someone who was elected president running against Biden's inflation. I pull my hair out most days because I see two sides that are dunning Kruger ing up and down screaming at each other when both are making big mistakes.

[Stephen Dubner]

For people who aren't familiar with the Dunning Kruger effect, what do you mean by that?

[Jessica Riedel]

The Dunning Kruger effect is the reality that sometimes the people who know the least are the most confident that they're right.

[Stephen Dubner]

So, Jessica, you recently published a piece in City Journal, the journal of the Manhattan Institute. The headline was correcting the top 10 tax myths. I never thought I would say this about a fairly long wonky, chart filled article about taxes, but it was borderline thrilling. First of all, thank you for making tax policy a little bit sexy. I want to dig into the 10 myths, but first, let me just ask you, why did you write this and what were the circumstances? Because I could imagine that you or someone decided that this needs discussion now because tax policy is always important. But I also wonder if this is just what you think about and maybe even dream about every night, or is it just something you dash off on a napkin and publish?

[Jessica Riedel]

This report was in many ways the product of many of my reports, which is I got really mad reading some articles and I got really mad reading Twitter. I see people arguing, using all wrong information. And not just on Twitter, but I hear politicians saying stuff and going that is just not true. I write some of these reports with my hair on fire and smoke coming out of my ears going no, no, no. But the other reason I wrote this was we were at the time last December when this was released, heading into one of the most consequential years in tax policy. We have $4 trillion in 10 year tax cuts to renew, and a new president who's made all sorts of tax promises. So I wanted to give people the background knowledge so that we could have a smarter national debate. And that meant going after the conservative myths and. And the liberal myths.

[Stephen Dubner]

You write. As Washington prepares for 2025 dominated by tax policy, the debate is likely to bring a fresh recirculation of the most common myths. Let me just explore that first statement of yours. Are we sure that 2025 is going to be dominated by tax policy? Because it seems that in the first several weeks of the Trump administration, as we speak, that the agenda has been dominated by many, many, many issues. Big issues, Russia and ukra, immigration and so on. And one topic I'm hearing very little conversation about so far at least, is tax policy.

[Jessica Riedel]

You are correct to correct me, I should have better anticipated the return of the highly rated Trump show. Every day, you just never know what the Trump show is going to bring. Although some will suggest that the reason we're hearing about this flurry of activity is so that we don't hear about the taxes and spending being debated in Congress.

[Stephen Dubner]

What do you mean by that? That sounds like a nice little Washington conspiracy theory. Can you unpack it?

[Jessica Riedel]

The Trumpists have said in the past that if we do a huge blitz of activity in the first couple of weeks, the media can only cover so much. The people can only focus on so much. They might pick 10% of it to get angry about and create a backlash, but that means the other 90% is gonna slip through. Steve Bannon, talk this. If you look at Doge, for instance, all this time that Elon Musk is getting all these headlines for cutting, what, 1 35th of 1% of the federal budget? Congress is putting together $4 trillion in tax cuts, and people aren't talking about it. Isn't that interesting?

[Stephen Dubner]

When you say putting together 4 trillion, you mean in the form of extending the 2017 cuts, correct? @ least, yeah. You write that there are, quote, false narratives about taxes from both the conservative and liberal sides. Could you just lay out quickly the false narratives? Let's do. First, the conservative side, the conservative tax.

[Jessica Riedel]

Framework, makes the mistake of vastly overrating the positives of tax cuts. The first two myths are that tax cuts pay for themselves, they typically don't. And that tax cuts will bring spending cuts by starving the beast. Both of those myths are really about the magical power of tax cuts, that while I like tax cuts, I'm a fiscal conservative. I want revenues to be as low as can be sustained. These arguments are Heavy exaggerations of the power of tax cuts.

[Stephen Dubner]

Now let me have the principal false narratives from the liberal sign.

[Jessica Riedel]

The liberal narrative is an equity distribution narrative. It is that the middle class pays all the taxes. Big business and wealthy individuals don't pay anything. The reason we have deficits is because of these tax cuts. And we can fix deficits if we just do what Europe does and tax the rich and corporations at high levels. It's a really convenient narrative because it tells people what they want to hear, which is that you're getting screwed. And if we just screw the big guys, we can solve the problem without touching you. But the numbers are very clear that that narrative is extraordinarily exaggerated and that actually the rich pay most of the taxes, perhaps not as much as liberals want. And we actually have in America the most progressive tax system in the oecd. It is more progressive than Europe, not less.

[Stephen Dubner]

Can you talk for a moment about where those misperceptions come from? Because as I hear you speak, the only legitimate source I can imagine for these misperceptions is from the politicians themselves. In which case it's the political system that is largely responsible for the misperception.

[Jessica Riedel]

Absolutely. Politicians win elections by creating narratives, and the narratives are meant to explain why the things their base naturally wants are good ideas. If you tell conservatives, look, I know you guys don't want to pay taxes, but you can collect just as much revenue and cut spending. You're telling them what they want to hear to justify what they already want. On the liberal side, there's also the view of, well, I don't want to pay taxes. The rich people should have to pay. If politicians say, yes, you're right, don't worry, you won't pay anything. Jeff Bezos and Elon Musk will pay it all. And in fact, you can have a socialist utopia and it won't cost you anything. Both sides are promising their voters a free lunch. Republicans promise their people that with low taxes you'll get all this revenue and spending cuts. And progressives promise their people that we can tax everybody else and you'll get lots of spending.

[Stephen Dubner]

You make the point that Republicans typically campaign on this set of lower taxes, lower spending ideas. But if they win, and especially if they control Washington, then they just spend like crazy. Spend as much, if not more than Democrats.

[Jessica Riedel]

Yes. Republicans say if you cut taxes, you'll take away the government's allowance and they'll have no choice but to cut spending. It hasn't happened.

[Stephen Dubner]

Now for the Democrats, would you say that at least they tend to be a little bit more honest in carrying out their campaign promises in that they say they want to tax and spend and then they do.

[Jessica Riedel]

Yes, although Democrats don't end up raising taxes. The only real broad tax hike we have had in the last half century was the Clinton tax hikes of 93, and they were pretty small. As much as Democrats talk about we're going to go in and tax the rich and pay for all of this, Joe Biden didn't significantly raise taxes, Barack Obama did not significantly raise taxes.

[Stephen Dubner]

And so you get spending without taxation, which just drives your beloved deficit even further.

[Jessica Riedel]

Exactly.

[Stephen Dubner]

Coming up after the break, we run through Jessica Riedel's 10 tax myths one by one. I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back. Freakonomics Radio is sponsored by LinkedIn. As a small business owner, your business is always on your mind. So when you're hiring, you need a partner who's just as dedicated as you are. That hiring partner is LinkedIn jobs. They make it easy to post your job for free, share it with your network and get qualified candidates that you can manage all in one place. LinkedIn's new feature helps you write job descriptions and quickly reach the right candidates with detailed insights. At the end of the day, the most important thing to your small business is the quality of candidates, and with LinkedIn you can feel confident that you're getting the best. Post your job for [e-mail] freq that's LinkedIn.com freak to post your job for free. Terms and conditions apply.

[T-Mobile Ad]

If you have a locked AT&T phone, we're here with bolt cutters. T Mobile will help pay off your locked phone and give you a new 5G phone for free. All on America's largest 5G network. Visit t mobile.com carrierfreedom via virtual prepaid.

MasterCard in 15 days. Free phone up to $830 via 24 monthly bill credits plus tax and a $10 device connection charge. Qualifying port in trade in service on Go5G next and credit required. Contact us before canceling entire account to continue bill credits or credit stock and balance on required finance agreement as do you have bill credits and if you.

[NetCredit Ad]

Pay off devices early, NetCredit is here to say yes because you're more than a credit score.

[Stephen Dubner]

Apply in minutes and get a decision.

[Jessica Riedel]

As soon as the same day. Loans offered by NetCredit or lending partner.

[NetCredit Ad]

Banks and service by NetCredit application subject.

[Jessica Riedel]

To review and approval.

[NetCredit Ad]

Learn learn [e-mail] partners, NetCredit credit to.

[Stephen Dubner]

The People okay, here are what Jessica Riedel calls the top 10 tax myths in the US system.

[Jessica Riedel]

Myth one is that tax cuts pay for themselves. Tax cuts can bring some extra revenue. They almost never pay for themselves. Myth two is that tax cuts will starve the beast by forcing Congress to cut spending. But historically, it's the opposite. When we cut taxes, Congress increases spending, and when we raise taxes, Congress cuts spending. Myth three is that the middle class pays higher tax rates than the rich. This is not true. If you take a look at all combined federal taxes, the top 1% pays 33%. The middle class pays 12. The bottom pays roughly zero. Myth four is that those old 91% tax rates in the 1950s produced all this new revenue. The reality is nobody actually paid the 91% tax rates back then. In fact, virtually Nobody paid over 50% in a tax bracket. And those tax brackets raised virtually no revenue. Myth five is that Europe funds its bigger governments by taxing the rich more. In reality, they tax the rich about the same as the United States. And the entire overage in tax revenue for Europe is the result of value added taxes, which are essentially national sales taxes that hit the middle class. Myth six is that tax cuts for the rich are the reason we have large budget deficits. The reality is that since 2000, we've cut taxes by 2% of GDP, of which maybe 0.6% of GDP is on the rich. But we've increased spending by 6% of GDP, much bigger driver. Myth 7 asserts that taxing corporations and millionaires can eliminate the deficit. You could tax them at 100% and seize all their wealth. It doesn't come close. Myth eight is that most of the 2017 tax cuts went to corporations and the wealthy. The reality is, while they received bigger tax cuts in terms of pure dollars as a share of the taxes they were paying, it was a roughly proportional income tax cut. Everybody got their tax rate dropped by about 1 percentage point. Myth nine is that if we go back to the 1980 tax code, essentially repealing the Reagan, Bush, and Trump tax cuts, we'll have painless deficit reduction. In reality, if we did that, the tax burden on the middle class would go through the roof. Not just the rich, but the middle class to unacceptably high levels. Myth 10 is that America's corporate taxes are far below international standards. The reality is we had the highest corporate tax rate in the developed world until 2017. And even right now, after the 2017 corporate tax cuts, our statutory and effective corporate Tax rate is still in the top 1/3. We also collect slightly more than other countries in business taxes when you include pass through corporations.

[Stephen Dubner]

Okay, Those are your 10 myths. On the final one about corporate tax rates, I assume you were giving substantial credit there to the 2017 Trump cuts or no. I mean, that's where it came from.

[Jessica Riedel]

The 2017 tax cuts dropped us from being number one to about number 11 or 12 in the OECD for corporate taxes.

[Stephen Dubner]

When you're talking about the perception that if you just tax the rich a lot more, then everything will be fine. And you lay out in this piece why that is an absurdly narrow and wrong view. It does make me think of the famous quote, I guess, from Warren Buffett, talking about how my secretary pays a lower tax rate than I do. Can you talk me through that? I think this is one of the big misunderstandings, the difference between a salaried worker and someone whose earnings are coming from investment generally.

[Jessica Riedel]

Warren Buffett said that he pays a lower tax rate than his secretary because much of his income is in the form of capital gains, which is your investment returns. And capital gains don't get taxed until you sell them. So it is true that in a given year, the increase in wealth is not necessarily being taxed at a high rate. But if you look at the actual data, even if you take into account capital gains taxes, high earners pay a significantly higher rate than low earners.

[Stephen Dubner]

In promoting what you call this myth that high earners are underpaying, you talk about how the Biden administration recategorized a bunch of income from the top piece of the pyramid. Can you talk about that for a minute?

[Jessica Riedel]

The Biden administration said rich people only pay an 8% tax rate the way they calculated. That was pretty dishonest. First off, they weren't just counting income. They were counting total wealth, including theoretical wealth, like your investment status today, which has not been realized as income. It's really just a number on a spreadsheet that hasn't been produced. The other thing is, not only did they exaggerate their income to make it look like their taxes weren't enough, but they also didn't count the corporate and estate taxes that wealthy people are paying. So they lowballed their taxes while raising their income in order to produce a lower tax rate. It was pretty dishonest.

[Stephen Dubner]

I know a lot of economists who have worked in Republican White Houses and Democratic White Houses and in different organizations affiliated with the White House. And I know them primarily from academia, within academia. I've always had the belief that you have to be an honest broker because your arguments and research are being interrogated so rigorously by your peers and you just can't really bs. So when I hear you talk about economists and policymakers in the Biden administration telling this story, that just doesn't sound like you could justify it at all. It makes me wonder what's going on there. When Bright and I assume well intentioned people, economists and others come to Washington and I'm talking about the left and the right and is this dishonesty going on? Is this just like how the game is played and we have to play it this way? Is it that it's such a complicated scenario that they figure they can tell a little white lie and get away with it because it's too hard to figure out the bigger truth?

[Jessica Riedel]

All of those explanations are correct. At this point, I pretty much know everybody who works in economic policy in Washington. I've worked with everybody and I've seen some of them who spent their entire careers pushing for certain ideas and policies with intellectual integrity get into a position of real power and influence and frankly become hacks. It's the seduction of power. It's also a certain view that this is how the game is played. The other side is gonna play dirty, so we have to play dirty too. But it's the noble lie that will eventually get us to where we wanna be. The right policies. I can't work that way. This is one reason I haven't worked in a White House yet, because I can't do that.

[Stephen Dubner]

May I predict you won't?

[Jessica Riedel]

No, I can't play this game. Even when I worked on Capitol Hill, I was very fortunate to work for one of the most honest senators, Rob Portman, who was a former president's budget director. But even just working on the Hill and seeing the dishonesty and compromises that had to be made, I couldn't do it. Your credibility in Washington is all you have.

[Stephen Dubner]

Here's a sobering line from your article. You write, destructive tax policies often result from both parties relying on a series of outdated, simplistic and false assumptions about the federal tax system and its relationship to the economy. What would you say are the ultimate costs of tax policy being so widely either misunderstood or manipulated?

[Jessica Riedel]

We have, everyone would agree, a disaster of a tax code. Today, it's extraordinarily complicated. It is extraordinarily inefficient. We all make mistakes on our tax forms because we can't even tell. And it doesn't raise enough money to fund our Spending. That's the real cost.

[Stephen Dubner]

What share of our current fiscal irresponsibility, let's call it, would you say can be attributed directly to tax policy?

[Jessica Riedel]

Oh, boy.

[Stephen Dubner]

I can't believe I stumped you on that one.

[Jessica Riedel]

That's a philosophical question. To a certain degree, it depends on what you think the optimal level of taxes and spending should be. I will say that since 2000, about a third of the rise in deficits can be attributable to tax policy, and about two thirds of it can be attributable to spending policy.

[Stephen Dubner]

So if we somehow miraculously had what Jessica Riedel considers the optimal tax policy, how far would that go toward addressing the larger issue of fiscal irresponsibility?

[Jessica Riedel]

Right now we collect about 17% of GDP in federal taxes, which is approximately the historic level since 1960. There's a lot of ways I would improve the tax code. I would get rid of a lot of deductions. I would simplify, I would get rid of tax preferences. But really, we're going to stay between 17 and maybe up to 20% of GDP in revenues. It's still not going to be enough to fix the budget, though, because spending is rising so fast.

[Stephen Dubner]

So if we want to look at the big picture, the entire fiscal irresponsibility, including the national debt, I'm starting to Wonder if these 10 tax myths may be more like the whole and not the donut.

[Jessica Riedel]

I would agree with that. If you want to know why we're facing big deficits. Spending has historically been 20% of GDP. Revenues have historically been 17. Spending is going to 33% of GDP over the next 30 years. You can get tax policy right, but you're not going to be able to chase 33% of GDP and spending. You need to address that side, too.

[Stephen Dubner]

Okay, let's address that side. I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back. Freakonomics Radio is sponsored by Allmodern. Have you met Allmodern? Allmodern thinks making your space modern with fresh furniture and decor should be easy. That's why Allmodern's team of modern obsessed experts hand vets each design for quality. And not to mention, they offer fast and free shipping. Yep, that means you can upgrade your home in days, not weeks. So whether you are updating your living room with a plush new sofa, setting up an al fresco dining area with a modern table and chairs, or designing a cozy fireside retreat, Allmodern has everything for your modern outdoor escape all in one place. That's modern made for real life. Shop [e-mail] or visit them in store in Linfield and Dedham, Massachusetts or in Austin, Texas.

[T-Mobile Ad]

At T Mobile. We'll give you four free 5G phones and four lines for only $25 per line per month with eligible trade ins. And no, it's not a contest. It's every day for a limited time. Everyone's a winner on America's largest 5G network.

Minimum of 4 lines for $25 per line per month with autopay discount using debit or bank account $5 more per line without autopay up to $830 off each phone via 24 monthly bill credits plus taxes fees and $10 device connection charge. 4 well qualified customers. Contact us before canceling entire account to continue bill credits or credit stop and balance on required finance agreement too bill credits and if you pay off devices.

[Pataday Ad]

Early ct mobile.com Halliday presents in the red corner, the undisputed undefeated weed Whacker guy, champion of hurling grass and pollen everywhere. And in the blue corner, the challenger, Extra strength Hataday eye drops that work all day to prevent the release of histamines that cause itchy allergy eyes. And the winner by knockout is Pataday Hataday. Bring it on.

[Stephen Dubner]

Okay, let's define some terms. The federal deficit is the difference between what the government spends and what the government takes in over a given year. Last year, the US deficit was $1.8 trillion. When you stack last year's deficit onto the previous years and the years before that, this is what's called the national debt. As of this recording, the US national debt is around 29 trillion. To put that in perspective, here's one more number. Our national debt currently stands at around 98% of our GDP, and that is the highest it's been since right after World War II. So when people like Jessica Riedel say they are very concerned about our national debt and the lack of a political plan to address it, well, they are right to be concerned. For starters, just paying the interest on that debt is extraordinarily expensive.

[Jessica Riedel]

Since 2021, interest on the debt has tripled from $350 billion to nearly a trillion dollars. And it's going to go to $2 trillion a decade from now. What that means is that over the past three years, interest has surpassed Medicaid, Defense, and now Medicare to become the second largest item in the budget after Social Security. And it's going to pass Social Security in 2042.

[Stephen Dubner]

There is no one simple explanation for why the debt has ballooned like this. There are a variety of contributors, and the COVID pandemic certainly didn't help. But if you had to identify one main villain, Riedel has an obvious candidate. A federal government that absolutely cannot stop spending money.

[Jessica Riedel]

This is going to amaze younger people. But from about 1985 to 2000, spending fell from 23% of GDP to 18% of GDP, and politicians got elected promising not to increase spending since about 2000. After we finally balanced the budget, lawmakers threw out any sort of fiscal responsibility. And even after the budget unbalanced, we created this arms race where neither party believes they can get elected without promising big tax cuts and big spending increases for everybody. Particularly under Trump's first term, Biden, and Trump's current term, we're seeing the biggest spending increases we've seen in 50 years.

[Stephen Dubner]

You say politicians make these promises. What would happen if they didn't? Would they simply lose?

[Jessica Riedel]

Politicians don't know how to win. Otherwise, they believe they would lose. In the 80s and 90s, when you ran for president, you had to show that every promise was totally paid for. That's not expected today.

[Stephen Dubner]

I mean, you make Washington sound like a flock of tweens who just discovered Klarna or afterpay, and they just go crazy buying every pair of shoes and gaming system. Is that essentially what we're looking at?

[Jessica Riedel]

Yes. It's frustrating for me because I work closely with members of Congress and top members of presidential administrations. I come in, I brief members of both parties, I testify before Congress. I'm in the strategy sessions when fiscal issues are discussed. And they will tell you in the meetings that they know this is irresponsible. They know this is unsustainable. They know the difficult decisions must be made, and they know we're going to crash if we don't. But then they say, yeah, but I can't say this publicly or I'll lose my seat. So they say I'm just gonna try to pander the best I can and hope that when the consequences come, my successor is in office instead of me.

[Stephen Dubner]

You mentioned that Trump outspent Biden 2 to 1. Now in Trump 2, I'm curious where you think that's heading.

[Jessica Riedel]

All indications are we're gonna get really big deficits. Just like Trump won, We're already having $4 trillion. It will cost to extend the expiring 2017 tax cuts. TRUMP wants to do the additional tax cuts. No taxes on tips, no taxes on overtime, no taxes on Social Security benefits. That could very easily bump us up. To $6 trillion in tax cuts over 10 years. Then, on the spending side, Trump and congressional Republicans are already looking to substantially increase spending for defense and border security. Right there, you're looking at about $8 trillion. We can talk about Doge. Doge does not give any indication that it's a serious effort. Elon Musk and his merry band of budget cutters seem to be focusing on symbolic things like DEI contracts, political subscriptions, federal employment that serve a culture war purpose for MAGA warriors. But in terms of the budget deficit, they're not even a rounding error. And the danger, I will say, about Trump's approach, when he took office in 2017, the deficit was 585 billion. Today, he takes office with a deficit of 1.8 trillion. So doing business as usual, deficit irresponsibility is a lot worse when you're already inheriting such a mess.

[Stephen Dubner]

So whether it's the second Trump administration, whether it's the administration that follows that one, which, if you listen to Trump himself, he might like it to be a third Trump administration. But whoever comes after, if you look down the road for 8, 12, 16, 20 years, do you see that this is how the Republic ends?

[Jessica Riedel]

That's a really big question. The national debt's projected to rise from about 30 trillion today to $200 trillion in 30 years, even before you take into account new expansions. So something's gotta give. But it's hard, because how do you convince people to make tough decisions today to avoid something bad happening in the future? They don't want to.

[Stephen Dubner]

The problem you're describing now, which is that politicians make promises that are bad for the country but good for them to get elected, and they believe that if they made promises were good for the country, they simply wouldn't get elected. It feels as though a very clever game theorist could help adjust that equilibrium. I've heard you talk about politicians as being weather vanes. They just reflect what's blowing out there. They don't actually set the agenda. Can you see a way, whether it's through game theory or something perhaps more practical, that would reset the notion of what it means to be a sane and fiscally responsible elected official?

[Jessica Riedel]

This is what the very dry topic of budget process reform is often about. Trying to constrain ourselves today, to feel the pain today so that we don't have the avalanche later. And you hear things like, you know, balance budget amendment, make lawmakers pay for their proposals today, make them pay for new proposals so that we can have the cost hit us right away, rather than Making promises for the future. The problem we face on these reforms is how do you get the inmates to lock the asylum? Politicians pander voters get big tax cuts and big spending and we dump the cost on people who aren't gonna pay it for 20, 30 years and aren't paying attention. How do you rally everybody to change those incentives?

[Stephen Dubner]

There are two arguments you make to address the problem that stick out as particularly interesting to me. And I would think they'd stick out to most listeners as particular particularly vexing. One of them is the need for entitlement reform, especially Social Security, but also Medicare and Medicaid. And the second is the need to raise taxes on the middle class. So let's do those one at a time, starting with entitlement reform. What solutions do you propose there?

[Jessica Riedel]

Here is something scary about the federal budget. Social Security and Medicare do not pay for themselves in taxes. There's a myth that your payroll taxes and your Medicare premiums pay for your Social Security benefits and that they can't run deficits. This is wildly false. They both run huge deficits. Over the next 30 years, Social Security and Medicare are going to run a cash deficit of $124 trillion.

[Stephen Dubner]

Okay, even I can tell that's a lot of money. But let me just back up for a minute. Why doesn't tax withholding cover that for Social Security?

[Jessica Riedel]

Because your taxes today just pay for current beneficiaries. It's not saved for you when you're older. And if you have a lot more people retiring, you're not going to have enough taxpayers to pay all the benefits.

[Stephen Dubner]

Is that because when Social Security benefits first began being distributed, there was nothing in the bank because the beneficiaries of those distributions hadn't contributed via tax.

[Jessica Riedel]

Exactly. It was pay as you go because there were no savings at that point on Medicare. Your payroll tax only pre funds Medicare Part A, which is hospital insurance. You do not pre fund Medicare Part B. Again, Social Security and Medicare face $124 trillion shortfall. The rest of the budget is actually balanced over the next 30 years. It's not seniors fault. This is the system that was handed to them. It's the system they paid into. They did nothing wrong. However, the reality is that even if you adjust for net present value, seniors are getting substantially more from Social Security and Medicare than they ever paid into the system. Even if you adjust for inflation and interest rates and all of that. In fact, for Medicare, the typical senior is getting back triple what they paid in. If you multiply that by 74 million people all retired now, all getting triple what they paid in. The math doesn't work.

[Stephen Dubner]

So do you have any ideas to deal with that problem? And let's keep in mind what happened in France when Emmanuel Macron required that people work a little bit longer before they draw their retirement savings. And that produced a political catastrophe. What do you see as viable ways to address that problem?

[Jessica Riedel]

I put out a 30 year budget plan last June that stabilized the debt over 30 years, fully scored, no gimmicks, it put everything on the table. But the reality is most of the savings have to come from Social Security and Medicare because that's where most of the deficit is coming from. For Social Security, there's only three levers. Raise the tax, raise the age, reform benefits. My plan includes new taxes and a higher age and lower benefits for high earners.

[Stephen Dubner]

Why are lower benefits for high earners not already either on the table or standard?

[Jessica Riedel]

That's a good question. Right now, somebody who makes a lot of money over their lifetime retires very wealthy, can start out with about 60 or $65,000 in annual Social Security benefits. If you're married, you're looking at about 130,000. We're talking millionaires. And they're getting back more than they ever paid in. I don't understand why we wouldn't start there and say, if you're a millionaire, why are you getting so much back in Social Security?

[Stephen Dubner]

What you're talking about is a form of means testing, correct?

[Jessica Riedel]

Absolutely.

[Stephen Dubner]

Means testing as a concept seems to have become a bit of a third rail in Washington. Am I wrong on that?

[Jessica Riedel]

It has become a third rail. Democrats don't like it, Republicans don't like it. But the case for means testing is, look, if you're gonna reform benefits, should you start with the poor or the rich? Seems to me that you should start with the people who can afford it. Especially when Social Security is supposed to be a poverty prevention program. It's not supposed to be a universal huge get rich benefit.

[Stephen Dubner]

So why do you think that kind of reform gained zero traction? As far as I'm aware, at least during the Biden administration, Other than the obvious fact that it would be electoral suicide.

[Jessica Riedel]

Because it would be electoral suicide. There is a perception that Social Security is 100% pre funded in payroll taxes. Everybody's just getting back what they put in. And any cut against that is an outrage and theft. None of that is true. But no one wants to have that fight. I get yelled at nonstop by people who actually believe that their Social Security taxes are sitting in A bank account in the Social Security trust fund with their name on it. You can tell them it's not true. They will not believe you.

[Stephen Dubner]

What do you think would have happened if Joe Biden, in the last year of his term, let's say before he dropped out, when there was still a substantial amount of credibility, had made a commercial and looked in the camera and said, look, look, the deficit has gotten crazy. Democrats have contributed. Republicans have contributed. It's been going on for many, many years. No one seems to acknowledge it's a big problem. But those of us who know in D.C. on both sides, realize it is a big problem. A huge part of that is Social Security benefits. And a huge part of the issue there is that many people who don't, quote, need those Social Security benefits. If they drew less, we would go a long way toward solving this problem. And let me nominate myself as someone who's earned enough money over the course of my lifetime that the Social Security benefit that I receive is literally meaningless to me, and I'm gonna surrender it, and I'd like to lead a charge to do that by the millions. What do you think would happen with that?

[Jessica Riedel]

I would like to think Republicans would be encouraged and work with the president, but I think partisanship would probably win the day. I think Democrats would not have the confidence to take that message to the American people and therefore would distance themselves. What's frustrating about all of this is Republican and Democratic lawmakers, they would agree with that commercial. They would agree with every word of it. But what they would say is, the politics don't work. I can't get behind it.

[Stephen Dubner]

Do you know whether Biden does receive Social Security benefits?

[Jessica Riedel]

I would assume he does. Social Security, you have to start drawing at a certain point.

[Stephen Dubner]

So that suggests we have another president who could give the same commercial. What do you think would happen if Donald Trump would say to the camera, look, people, I've looked at the deficit situation. Social Security is a huge part of this, and a huge part of that is that too many rich people are drawing Social Security benefits that they don't need. So for the good of this country, let's stop that. I'm a billionaire. I don't need the Social Security. I'm gonna give it up. Why don't you? What would happen then?

[Jessica Riedel]

I think Republicans would get on board because I think Republicans are a little more apt to support Social Security reform. And if they have the COVID of Trump, they'll do what Trump says. I think Democrats would light themselves on fire outside of the White House as A protest. Because not only is it a president that they don't like for many good reasons, but this would be seen in the context of. This is the beginning of cutting Social Security to pay for tax cuts for the rich. The only way we're going to fix this stuff is if both parties privately come together and put everything on the table. You really have to do the tax side and the Medicare side and put it all together so that everybody is working together and everybody is sacrificing. Because if you just try to do one piece of it, we're just going to raise taxes. We're just going to reform Social Security and Medicare. That's going to be seen as a partisan scheme to try to hurt the other side.

[Stephen Dubner]

But based on everything you've told me today, there is no way I'm going to hold my breath until that happens.

[Jessica Riedel]

Yes. Although, interestingly, there are. You can call this encouraging or discouraging, it's up to you. There are dozens of members of Congress and senators who are holding bipartisan meetings, coming up with ways to solve this. On the one level that's encouraging that they're doing this behind the scenes, it's discouraging because I'm not allowed to tell you their names.

[Stephen Dubner]

That was my next question. In fact, I was looking them up as you were talking and I was finding no help online.

[Jessica Riedel]

If I revealed the names, I would not be able to start my car. And that's the discouraging side of this, is that they are building plans behind the scenes, but they also are scared to death of ever doing this publicly.

[Stephen Dubner]

Let's go to your second big argument that stood out to me as particularly vexing for some people, the need to raise taxes on the middle class.

[Jessica Riedel]

There's so many directions to go on this. But let me start out with if we seized every penny of wealth from every billionaire in America, their homes, their cars, their stocks, their child's Nerf football, and we sold every penny of it.

[Stephen Dubner]

Don't forget the yachts. That's the example.

[Jessica Riedel]

You use the yachts. But you could pay for eight months of government spending once, and then it would be gone forever. Not eight months every year eight months once.

[Stephen Dubner]

And would crash all the stock markets.

[Jessica Riedel]

Because you'd be taking all the money out of the stock market. So your 401k becomes a 201k. Another way of looking at it is even if we created 100% tax rate on all income over 500,000 and everybody still worked, you still wouldn't have enough to come close to balancing the budget. It is mathematically impossible to get there by taxing the rich. The reality is the middle class in America is dramatically under taxed compared to everywhere else in the developed world. You can't get there without taxing the middle class more.

[Stephen Dubner]

Let me pause you there for a moment and just reflect on what you just said. The middle class in America is dramatically under taxed. I would guess that maybe 3% of the people who listen to this show would nod their heads and the other 97% are sure that either they misheard or that you are some kind of fill in the blank with the worst word you can imagine.

[Jessica Riedel]

Don't shoot the messenger, please. According to IRS data, the median earning family in America, when you take into account all of their deductions and credits, they pay a 3% income tax rate and a 12% tax rate. If you include their Social Security taxes, the corporate taxes passed on to them, tobacco and alcohol, 3% and 12%. This has dropped dramatically over the last 40 years. The tax rate paid by the middle class is less than half what it was when Reagan got elected. In fact, it's the lowest tax rate the middle classes had since before World War II. Compare this to Europe, where the middle class pays substantially higher taxes because Europe hits voters with very high payroll taxes and significant value added taxes, which are essentially a national sales tax. The reason Europe collects more money than the US Is not because they tax the rich more. It's because they tax middle and lower earners more.

[Stephen Dubner]

To blow minds even further, how would you characterize the tax rate paid by lower earners in the US?

[Jessica Riedel]

The bottom 40%. Once you take into account the Earned Income Tax credit and the child credit, the bottom 40% collectively pay a negative income tax rate and almost no taxes overall. In 2024, the bottom 40% paid a total of $60 billion in federal taxes. The top 20% paid $3.3 trillion in federal taxes.

[Stephen Dubner]

Let's take that pyramid from the bottom up. Now. The lower earners, the middle earners and the upper earners. What's the best way to give a macro description of the share of tax revenues being gleaned from those three sections?

[Jessica Riedel]

90% of the income taxes are paid by the top earning 20%. 13% are paid by the second earning 20%, and the rest pays negative 3% of the income tax burden. Collectively, these numbers are way up from where they were 30, 40 years ago.

[Stephen Dubner]

Way up. Meaning the system has gotten more progressive over time.

[Jessica Riedel]

Substantially more progressive.

[Stephen Dubner]

Have Republicans contributed to that progressivism as much as Democrats or No, absolutely.

[Jessica Riedel]

One of the ways the tax code has become more progressive is that we've taken 10 million families off the income tax roll since 2000 with lower tax rates, child credits, the EITC. That's why we're so progressive. We tax the rich at normal international levels, but we don't tax the poor.

[Stephen Dubner]

Now, to be fair, that net negative federal tax was essentially a trade off for lower entitlements, no?

[Jessica Riedel]

Possibly. But entitlement spending is still pretty high up.

[Stephen Dubner]

So let me ask you finally, tell me some favorite tax reforms that you think might work in this country or tax policies from other places and or times.

[Jessica Riedel]

I like consumption taxes better than income taxes because I think it's better for the economy. You should tax what you take out of the economy, not what you put into the economy. But at this point, switching to a consumption tax is pretty politically risky because it'll hit seniors who consume more. Some of the wealthier people who don't spend as much won't be hit as hard. So you have to make adjustments to make it a little more progressive on the rich and give seniors a break.

[Stephen Dubner]

Well, let me ask you this. I already brought up the game theorists. There's another sector in economics, the behavioral economist. One thing that behavioral economists and psychologists like Danny Kahneman and others focus on is the very problem that you've identified, which is people are really bad at making decisions now with the future in mind, whether it's their future self or the future economy and the future debt of their country. Is there anything in the behavioral economics literature that you feel might be fruitful in trying to change public perception?

[Jessica Riedel]

That's a great question. You mentioned Danny Kahneman. He was my professor in graduate school. I do think principles that you learn in behavioral economics, like loss aversion, people are more worried about losing what they have than gaining what they can. But ultimately, what I've learned is people are going to pick what's comfortable for them or advantageous for them in the short term, which is to say, give me more money, government, and then reason backwards on why that's actually an okay policy.

[Stephen Dubner]

I love that I asked you for a solution. You gave me more of the problem, which I guess indicates how bad the problem is. But maybe you could go back to a time or maybe you can point to other countries where people believe the reality that even if future gains cannot be held in your hand today, they are very valuable. Can you point to a place or time where that belief has been mainstream?

[Jessica Riedel]

Not as much in economics, but one example that's gotten a lot of attention from us economic nerds is the way young people have rallied around climate change. That's something where the main effect is going to be decades away. Yet a lot of young people talk about we need to make sacrifices now because if we wait 30 or 40 years for the climate, it'll be too late. A lot of economists try to figure out how can we get young people to apply that same framework towards the debt.

[Stephen Dubner]

So it sounds to me as though you consider yourself a principal empirical researcher. I'm in favor of all three of those words, I have to say. Is there room in the world for a creature like you?

[Jessica Riedel]

Increasingly not. One of the things I see about the debate right now on taxes and spending and deficits is it's all driven by partisan tribalism. The people who cheer my criticisms of one party's president will get angry when I apply the same standard to their party's president. Ultimately, I have faith that the math eventually always wins. The laws of economics always win. Eventually, we're gonna get to where we need to be, whether we like it or not.

[Stephen Dubner]

I'd like to thank Jessica Riedel for this conversation and for the information. I take her last point as a challenge to all of us to apply the same standards to the politicians you support as the ones you don't. It's probably unrealistic to suggest this, maybe even idiotic, but if every one of us were to start thinking that way and acting that way, we might start pushing back against the political absurdities that have gotten us locked into this situation. I'm probably wrong. It's unlikely to happen. But I'd rather start rowing in the right direction, even against the tide, than to keep drifting further out to sea. What do you think? Let me know. Our email is radioeeconomics.com Coming up next time on the show, what would the US look like if it were run by Trader Joe's?

[Jessica Riedel]

What happens when you go to the dmv? Well, what happens is you stand on one side of a counter and then there's your opponent on the other side of the counter. What if it wasn't adversarial? What if you guys were both on the same side? I don't walk into Trader Joe's with a to do list. It's not a chore when I walk into Trader Joe's. It's a variety seeking exercise to do what they do.

[Stephen Dubner]

You can't just hire the same people they hire.

[Jessica Riedel]

You have to emulate the private label strategy, the real estate strategy, the pricing.

[Stephen Dubner]

The quirky culture that's very hard to replicate.

[Jessica Riedel]

Replicate.

[Stephen Dubner]

I am of course kidding when I say that America should be run by Trader Joe's. But am I? That's next time. Until then, take care of yourself. And if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. You can find our entire archive on any podcast app [e-mail] where we publish transcripts and show notes. This episode was produced by Teo Jones. The Freakonomics Radio Network staff includes Alina Coleman, Augusta Chapman, Dalvin Abu Aji, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippon, Jasmine Klinger, Jeremy Johnston, John Schnarz, Morgan Levy, Neal Carruth, Sarah Lilly, and Zach Lipinski. Our theme song is Mr. Fortune by the Hitchhikers. Our composer is Luis Guerra. As always, thank you for listening. I think our listeners are gonna love this conversation, and I really appreciate it.

[Jessica Riedel]

I hope so. It's a dry and depressing topic, but.

[Stephen Dubner]

But other than that.

[Jessica Riedel]

But it's also interesting and it affects all of us. And I've had a great time. The Freakonomics Radio Network. The hidden side of everything Stitcher.

[NetCredit Ad]

I know I'm not alone when I say adulting can be overwhelming. And what we all could use is a drink. That's where Apple and Eve juice comes in. As the rulers of the juice box, they've been making juice joyful for 50 years with refreshing juice blends bursting with bold flavor. One sip sends you right back to childhood. So when the grind dulls your shine, remember to kid yourself. Apple and Eve has delicious juices for at home and on the go shop. Today.

[Pataday Ad]

Hanaday presents. In the red corner, the undisputed, undefeated Weed Whacker guy, champion of hurling grass and pollen everywhere. And in the blue corner, the challenger, Extra strength Hanaday Eye drops. The at work all day to prevent the release of histamines that cause itchy allergy eyes. And the winner by knockout is Pataday. Pataday. Bring it on. You don't wake up dreaming of McDonald's fries.

[Jessica Riedel]

You wake up dreaming of McDonald's hash browns. McDonald's breakfast comes first.

[Stephen Dubner]

Ba da ba ba ba.