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.