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Podcast

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

Freakonomics Radio

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  • White House Ban
    • Jessica Riedel criticized President Bush’s spending, leading to a White House ban.
    • She later worked with Bush’s budget director, Senator Rob Portman. Transcript: Stephen Dubner By your cold economic truths, me an example. Jessica Riedl 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. Were you fired? 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 intimidated. I don’t 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 co-workers 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 approach eventually (Time 0:10:10)
  • Political Stance
    • Riedel identifies as pragmatic and right-of-center, prioritizing free markets and lower spending.
    • She criticizes both Democratic and Republican administrations for excessive spending. Transcript: Stephen Dubner Checked in with Karl Rove to see if he had indeed reached out to the head of the Heritage Foundation to shut Riedel 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 to 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 Riedl 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. So (Time 0:12:56)
  • Trump’s Inflationary Policies
    • Riedel criticizes Trump’s economic policies as aggressively inflationary.
    • She cites tax cuts, spending increases, tariffs, and immigration policies as contributing factors. Transcript: Stephen Dubner You’ve written that Donald Trump’s economic policies are, quote, aggressively inflationary. Can you say a bit more on that? Jessica Riedl 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. 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 up and down, screaming at each other when both are making big mistakes. (Time 0:15:21)
  • Tax Myths
    • Riedel discusses the false narratives surrounding tax policy from both conservatives and liberals.
    • She emphasizes the need for a more informed national debate on these issues. Transcript: Stephen Dubner 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 Ukraine, Doge, immigration and so on. And one topic I’m hearing very little conversation about, so far at least, is tax policy. Jessica Riedl 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. What do you mean by that? That sounds like a nice little Washington conspiracy theory. Stephen Dubner Can you unpack it? Jessica Riedl 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 going to slip through. Steve Bannon talks about this. If you look at Doge, for instance, all this time that Elon Musk is getting all these headlines for cutting, what, one thirty-fifth of one percent of the federal budget? Stephen Dubner Congress is putting together four trillion dollars in tax cuts and people aren’t talking about it. Isn’t that interesting? When you say putting together four trillion, you mean in the form of extending the 2017 cuts, correct? (Time 0:18:20)
  • Corporate Tax Rates
    • The 2017 Trump tax cuts lowered the U.S. corporate tax rate significantly.
    • The U.S. moved from the highest corporate tax rate to around 11th or 12th in the OECD. Transcript: Stephen Dubner OK, 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 Riedl The 2017 tax cuts dropped us from being number one to about number 11 or 12 in the OECD for corporate taxes. When (Time 0:31:02)
  • Buffett’s Secretary
    • Riedel addresses the misconception about high earners paying lower tax rates than their secretaries, popularized by Warren Buffett.
    • She explains that this overlooks differences between salaried income and investment earnings. Transcript: Stephen Dubner 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 Riedl 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. Jessica Riedl Can you talk about that for a minute? 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. I (Time 0:31:34)
  • Tax Policy Costs
    • Current U.S. tax policy is disastrously complicated and inefficient.
    • It does not generate sufficient revenue, leading to substantial budget deficits. Transcript: Jessica Riedl 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? Oh, boy. (Time 0:36:17)
  • National Debt
    • The U.S. national debt is about $29 trillion, nearly 98% of GDP, its highest since World War II.
    • This high debt level raises serious concerns about the nation’s fiscal health. Transcript: Stephen Dubner OK, 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 U.S. 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 U.S. 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. (Time 0:42:03)
  • Political Incentives
    • Politicians prioritize getting elected over fiscal responsibility.
    • They often make unsustainable promises of tax cuts and spending increases. Transcript: Stephen Dubner The biggest spending increases we’ve seen in 50 years. You say politicians make these promises. What would happen if they didn’t? Would they simply lose? Jessica Riedl 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. Stephen Dubner That’s not expected today. 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 Riedl 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 going to try to pander the best I can and hope that when the consequences come, my successor is in office instead of me. (Time 0:44:30)
  • Entitlement Reform
    • Riedel argues for entitlement reform.
    • Social Security and Medicare face a $124 trillion shortfall over the next 30 years. Transcript: Stephen Dubner To address the problem that stick out as particularly interesting to me, and I would think they’d stick out to most listeners as 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? Here is something scary about the federal budget. Jessica Riedl 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. Okay, even I can tell that’s a lot of money. But let me just back up for a minute. Stephen Dubner Why doesn’t tax withholding cover that? Jessica Riedl For Social Security, 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 Riedl 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? I (Time 0:50:00)
  • Middle-Class Taxes
    • Riedel highlights that taxing the rich alone cannot solve the deficit problem.
    • She suggests that the American middle class is dramatically undertaxed compared to other developed nations. Transcript: Stephen Dubner Argument that stood out to me as particularly vexing for some people, the need to raise taxes on the middle class. Jessica Riedl 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. Don’t forget the yachts. That’s the example you use. The yachts. 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. And it would crash all the stock markets. Could you be taking all the money out of the stock markets? Your 401k becomes a 201k. Another way of looking at it is even if we created a hundred percent 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 undertaxed compared to everywhere else in the developed world. You can’t get there without taxing the middle class more. Let (Time 0:59:20)
  • Tax Distribution
    • The top 20% of earners pay 90% of income taxes.
    • The bottom 40% pay a net negative income tax rate due to credits and deductions. Transcript: Stephen Dubner Federal taxes. 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 Riedl 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. (Time 1:02:41)
  • Consumption Taxes
    • Consider consumption taxes as an alternative to income taxes.
    • Taxing what is taken out of the economy is better than what is put in. Transcript: Stephen Dubner Net negative federal tax was essentially a tradeoff for lower entitlements, no? Possibly, but entitlement spending is still pretty high up. 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 Riedl 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. (Time 1:03:50)