Middle Class Taxes and Future Outlook

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Taxes and fees extra, see Mint Mobile for details. It's Steven Dubner, and where I live, it is springtime. That's when a lot of people start thinking about two of our national pastimes. Baseball. And paying taxes. This year, both of these pastimes have some rule changes. Major League Baseball has finally allowed the use of computers to keep human umpires from making bad calls on balls and strikes. And in tax matters, we have a variety of changes brought about by President Trump's One Big Beautiful Bill Act, which was signed last year. Today on Free Economics Radio. We don't have a baseball episode for you, but do have a tax episode. This is an update of an episode we made last year with Jessica Riedel, a tax policy expert. who had published her list of the top 10 tax myths. In the episode you're about to hear, we have updated facts and figures as needed. And at the end, you will hear from Riedel about what's changed since then. As always, thanks for listening. In Washington, DC, 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 DC, 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, DC. 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. My nonpartisan approach is to be critical of everybody in Washington. Do you have any friends? No. Not really. Much of my policy has been sharing uncomfortable truths and frankly angering people. So do you see yourself as someone who's sounding the alarm? Absolutely. I've been sounding the alarm. Since two thousand and one. How's that working out? As you can see from the dat My career has been an abject failure. This friendless soul is Jessica Riedel. When we spoke with Rita last year, she was a senior fellow in budget, tax, and economic policy at the Manhattan Institute. She left that job in November and is now a budget and tax fellow at the Brookings Institution. 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. Num, 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 Freeconomics Radio. Federal debt. and tax myths. Could we possibly be having any more fun? That starts now. This is Freekonomics Radio, the podcast that explores the hidden side of everything, with your host, Steven Dubner. No In December of 2024, 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. The first article I saw was in City Journal, which is published by the Manhattan Institute. It was called Correcting the Top 10 Text Myths. Then came a pair of op eds in the Boston Globe. One was called What Conservatives Get Wrong About Taxes. Liberals get wrong about taxes. I started our conversation by asking for some background on the Manhattan Institute, where she was working at the time. It's a right of center think tank, headquartered in Manhattan, although they have research fellows all over 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 There are a bunch on the left. Nearly all of them talk about How 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? 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. 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 challenge to readers to balance the budget that got you enthusiastic. Is that true? 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 gonna 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 debate. It has therefore a holistic philosophical side of it beyond just the economic nerdery. 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. Try 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 debends. That should scare everybody. 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. I've been in Washington for a quarter of a century. For the first ten years I the Heritage Foundation running their budget policy shop. Then I moved over to the US 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 was director of tax and spending policy for Marco Rubio's twenty sixteen presidential race. And in twenty twelve I was the lead architect of Mitt Romney's 10 year deficit reduction plan. Did you ever think about running for office? I did. I grew up in Wisconsin. I was an advisor to Governor Tommy Thompson when I was in college. 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 re-elected. And had I gotten elected? I would have been thrown out of office so fast. 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? been transgender since I was four. 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 changed 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 to just kind of blend into the background. And I've been really heartened. that that's been the response so far. 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. But to be honest, there's a lot of fighting, there's a lot of dug-in heels and entrenched positions. I'm wondering if that political journey in any way prepared you for this personal transition. 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 truth or dislike me for this? I'm gonna alienate people either way, so the hell with it. When you say that people would become angered by your Cold economic truths. Give me an example. 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 twenty six 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. Boy was the Bush White House unhappy about that. I'm told that Carl 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. 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. My take was I'm gonna go where the numbers say and I'm not gonna 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. recruit 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 one people over. What kind of policies were you proposing or critiquing that inflamed the White House? This was the post nine eleven 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. We checked in with Carl 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. 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. If I had to Shell. You're political, economic, or fiscal position in the spectrum of our current political scheme, where would you put yourself? 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 hauling out errors and trying to bring both sides together as an honest broker. So if you consider yourself pragmatic and right of center, the Biden administration was what? 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. overheated the economy to inflation. I would have preferred a more moderate bipartisan approach. The four trillion in new spending in the Biden administration, give me the Three or five categories there. 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 veteran spending in the PAC Act. There was the infrastructure bill. And we had a lot of student loan bailouts. Okay, and now same thing for the second Trump administration again. Your pragmatic right of center, he or it is what? Keep in mind, 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. 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. You've written that Donald Trump's economic policies are, quote, aggressively inflationary. Can you say a bit more on that? want to cut taxes, which is inflationary, increase spending. impose tariffs, which will raise prices. Pour immigrants, which will create shortages in certain industries that push up prices. After all those inflationary policies. 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. pull my hair out most days because I see two sides that are Dunning Krugering up and down screaming at each other when both are making big mistakes. For people who aren't familiar with the Dunning Kruger effect, what do you mean by that? The Dunning Kruger effect is The reality that sometimes the people who know the least are the most confident that they're right. So Jessica, you recently published a piece in City Journal, the journal of the Manhattan Institute. The headline was Correcting the Top Ten Tax Myths. I never thought I would say this about a fairly long, wonky chart filled article about taxes, but Borderline thrilling. First of all, thank you for making tax policy a little bit sexy. I wanna dig into the ten myth, but first let me just ask you, why did you write this in What were the circumstances? 'Cause 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. Is it just something you dash off on a napkin and publish? This report was in many ways. 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 four trillion dollars 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 the liberal myths. You're right, as Washington prepares for twenty twenty five 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 twenty twenty five 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's 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. 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. Can you unpack it? Trumpists have said in the past that If we do a huge Blitz of activity in the first couple 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 talks about this. If you look at Doge, for instance. All this time that Elon Musk is getting all these headlines for cutting what? 135th of one percent of the federal budget? Congress is putting together four trillion dollars in tax cuts. 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 twenty seventeen cuts, correct? Least Those tax cuts were made permanent as part of the one big beautiful bill. As for Doge, the Department of Government efficiency. It was disbanded in November, eight months ahead of schedule. Doge architect Elon Musk claimed that the program would reduce federal spending by $1 trillion. In fact, total spending went up during the Doge era. 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 framework makes the mistake of vastly overrating. the positives of tax cuts. The first two myths are that tax cuts pay for themselves. 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 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. Now let me have the principal false narratives from the liberal sign. The liberal narrative is an equity distribution narrative. It is that The middle class pays all the taxes. 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. 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. 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. Absolutely. Politicians win elections by creating narratives. The narratives are meant. to explain why the things their base naturally wants good ideas. If you tell conservatives 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. politicians saying, 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. Progressives promise their people that We can tax everybody else and you'll get lots of spending. 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. 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. 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? 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 gonna 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. And so you get spending without taxation, which just drives your Beloved deficit even further. Exactly. Coming up after the break, we run through Jessica Riedel's 10 tax myths one by one. I'm Steven Dubner, this is Freeconomics Radio, we'll be right back. Free economics radio is sponsored by Audi. We all know that feeling. Change of plans, an unexpected curve, a new opportunity. Instead of overthinking, what if you just said yes? With the all new Audi Q3, the answer is easy. The Q3 is made for the yes life. power and room to handle whatever pops up. Yes to adventure, yes to escape, yes to right now. Because saying yes without hesitation, that's real luxury. 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Freakonomics Radio is sponsored by Cigna Healthcare. For many men, mental health challenges aren't recognized until they've already taken a toll. Work pressure, financial stress, changing relationships, and traditional expectations around masculinity can quietly wear men down, often without clear warning signs. In season three of The Visibility Gap, Dr. Guy Winch and his guests explore how these pressures show up, how to spot them earlier, and how men can access meaningful support. Listen to the new season of The Visibility Gap. Podcast presented by Cigna Healthcare. Here are what Jessica Riedel calls the top 10 tax myths. in the US system. 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 one percent pays thirty three percent. The middle class pace twelve. 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. 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 two thousand We've cut taxes by two percent of GDP. of which maybe 0.6% of GDP is on the rich. but we've increased spending by six percent of GDP. much bigger driver. Myth seven asserts that taxing corporations and millionaires can eliminate the deficit. You could tax them at a hundred percent 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 one percentage point. Myth nine. is that if we go back to the nineteen eighty tax code, essentially repealing the Reagan, Bus, 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 ten. 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 twenty seventeen corporate tax cuts. Our statutory and effective corporate tax rate is still in the top one third. We also collect slightly more than other countries in business taxes when you include pass-through corporations. Okay, those are your ten myths. On the final one about corporate tax rates, I assume You were giving substantial credit there to the twenty seventeen Trump cuts, or no? I mean, that's where it came from. The twenty seventeen tax cuts dropped us from being number one to about number eleven or twelve in the OECD for corporate taxes. 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. 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 taxed until you sell them. So it is true that in a given year. Increase in wealth is not necessarily being taxed at a high rate. 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. 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? The Biden administration said rich people only pay an eight percent 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 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 policy makers 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 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. All of those explanations are correct. 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 want to be, which is 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. May I predict you won't. 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. Here's a sobering line from your article. You're right, 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. We have, everyone would agree, a disaster of a tax code today. Extraordinarily complicated. It is extraordinarily inefficient. We all make mistakes on our tax forms because we can't even tell Doesn't raise enough money. To fund our spending. That's the real cost. Share of our current Fiscal irresponsibility, let's call it. would you say can be attributed directly to tax policy? Oh boy. Can't believe I stumped you on that one. 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 two thousand Third of the rise in deficits. can be attributable tax policy and about two thirds of it can be attributable to spending policy. 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. 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 gonna stay between 17 and maybe up to 20% of GDP in revenues. It's still not gonna be enough to fix the budget, though, because spending is rising so fast. 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 ten tax myths may be more like the whole and not the donut. 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 gonna be able to chase 33% of GDP and spending. You need to address that side too. Let's address that side. I'm Steven Dubner. This is Free Economics Radio. We'll be right back. Freak Ecomics Radio is sponsored by Audi. We all know that feeling. A change of plans, an unexpected curve, a new opportunity. Instead of overthinking, what if you just said yes? With the all new Audi Q3, the answer is easy. The Q3 is made for the yes life. power and room to handle whatever pops up. Yes to adventure, yes to escape, yes to right now. Because saying yes without hesitation, that's real luxury. The all-new Audi Q3, made for the yes life. Lear more at AudiUSA.com. Freaking numb 32 is sponsored Acrobat. We've all been there, your team's feedback is scattered across emails, chats, and sticky notes. It's a mess. But PDF spaces in Adobe Acrobat gives you one collaborative workspace to streamline every file and comment. So if you need six departments to finally agree on a proposal, do that with Acrobat. Need to turn a mountain of feedback into one plan of action? Do that with Acrobat. Want to stop searching for files and finally get everyone on the same page? Do that. Do that. Do that with Acrobat. Learn more at adobe.com slash do that with Acrobat. Free Economics Radio is sponsored Amika. You know what they say, if you want to go fast, go alone. If you want to go far, go together. So go with Amica and get coverage from a mutual insurer that's built for their customers, one that looks after what's important to you together. Auto, home, life, and more coverage that fits your unique needs, Amika helps you protect what matters most. Visit amika.com and get a quote today. Okay let's define some terms. The federal deficit is the difference between what the government spend 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 year's and the years before that, This is what's called the national debt. As of this recording, the US national debt is around $9 trillion. To put that in perspective, here's one more number. Our national debt currently stands at around 124% of 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 political plan to address it? They are right to be concerned. For starters, just paying the interest on that debt is extraordinarily expensive. Since 2021, interest on the debt has tripled from 350 billion to nearly a trillion dollars, and it's gonna 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 gonna pass social security in twenty forty two. 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. federal government that absolutely cannot stop spending money. This is going to amaze younger people. But from about nineteen eighty five to two thousand 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 Um We're seeing 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? Politicians don't know how to win otherwise. They believe they would lose. In the eighties and nineties. When you ran for president You had to show that every promise was totally paid for. That's not expected today. I mean, you make Washington sound like a flock of Queens. Who just discovered Clarna or Afterpay. And they just go crazy buying every pair of shoes and gaming system. Is that essentially what we're looking at? 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 gonna 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. 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 eight, twelve, sixteen, twenty years, do you see that this is how the republic ends? That's a really big question. The national debt's projected to rise to $20 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. 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 that 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 veins. 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. 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. tax cuts and big spending, and we dump the cost on people who gonna pay it for 2, 30 years and aren't paying attention. How do you rally everybody to change those incentives? 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 particularly fixing. 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. 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 thirty years. Social security and Medicare are gonna run a cash deficit? Of a hundred and twenty four. trillion dollars. 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, 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. 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. Exactly. It was pay as you go because there were no savings at that point. On Medicare 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 a hundred and twenty four trillion dollar 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 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. 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? put out a 30 year budget plan last June. Stableized the debt over thirty years, fulfilled. No gimmicks. 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. Why are lower benefits for high earners not already either on the table or standard? 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? What you're talking about is a form of means testing, correct? Absolutely. Means testing as a concept seems to have become a bit of a third rail in Washington. Am I wrong on that? 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. 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? Because it would be electoral suicide. There is a perception that social security is 100% pre-funded and 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 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. 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. 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 DC 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? I would like to think Republicans would be encouraged and work with the president, but I think partisanship 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. Politics don't work. I can't get behind it. Do you know whether Biden does receive social security benefits? I would assume he does. Social security, you have to start drawing at a certain point. 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 not you? What would happen then? 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 cover 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 gonna 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 gonna raise taxes, we're just gonna reform social security and Medicare. That's gonna be seen as a partisan scheme to try to hurt the other side. But based on everything you've told me today, there is no way I'm going to hold my breath until that happens. 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. That was my next question. In fact, I was looking them up as you were talking and I was finding no help online. If I revealed the names, I would not be able to start my car. And that's the discouraging side of this is that are building plans behind the scenes, but they also are scared to death of ever doing this publicly. 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. 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. Child's nerve 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, eight months once. And it would crash all the stock markets. Could you be taking all the money out of the stock markets so your four oh one K becomes a two oh one K. Another way of looking at it is even if we created a hundred percent tax rate on all income over five hundred thousand. And everybody still worked? You still wouldn't have enough to come close to balancing the budget. It is mathematically impossible. 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 me pause you there for a moment and just reflect on what you just said. The middle class in America is dramatically undertaxed. I would guess that maybe three percent of the people who listen to this show would nod their heads and the other ninety seven percent are sure that either they misheard Or that you are some kind of fill in the blank with the worst word you can imagine. 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. 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 class has had. since before World War Two. Compare this to Europe. where the middle class pays substantially higher taxes 'Cause 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. When we first published this episode, many listeners wrote in to say that Riedel was giving the U.S. too much credit here for low taxes, especially compared to Europe, because, they argued, taxes in Europe pay for a much more robust social services system. than we have in the US. including things like childcare and health care. That said, here is Riedel's analysis of taxes paid by the lowest earnest in the US. Bottom forty percent. 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. twenty twenty four. The bottom forty percent. paid a total of sixty billion dollars in federal taxes. The top 2%? Paid three point three trillion dollars in 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? 90% of the income taxes are paid by the top earning 2%. 18% are paid by the second. earning twenty percent. And the rest pays negative 3% of the income tax burden collectively. These numbers are way up from where they were thirty, forty years ago. Way up, meaning the system has gotten more progressive over time. Substantially more progressive. Have Republicans contributed to that progressivism as much as Democrats, or no? Absolutely. One of the ways the tax code has become more progressive is that we've taken ten million families off the income tax roll since two thousand with Lower tax rates, child credits, the EITC. That's why we're so progressive. We tax the rich at normal international levels. We don't tax the poor. Now to be fair, that net negative federal tax was essentially a trade-off 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. 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. Well, let me ask you this. I already brought up the game theorists. There's another sector in economics, the behavioral economists. 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? That's a great question. You mentioned Danny Cannaman. He was my professor in graduate school. Do think principles that you learn in behavioral economics like loss aversion.