Nearly everything that politicians say about taxes is at least half a lie. They are also dishonest when it comes to the national debt. Stephen Dubner finds one of the few people in Washington who is willing to tell the truth — and it’s even worse than you think. SOURCES:Jessica Riedl, senior fellow in budget, tax, and economic policy at the Manhattan Institute. RESOURCES:"The House Wants to Pass Trump’s Agenda in One Big Bill. Here’s What’s in It." by Margot Sanger-Katz and Alicia Parlapiano (New York Times, 2025)."Correcting the Top 10 Tax Myths," by Jessica Riedl (Manhattan Institute, 2024)."Spending, Taxes, and Deficits: A Book of Charts," by Jessica Riedl (Manhattan Institute, 2024)."Why Did Americans Stop Caring About the National Debt?" by Jessica Riedl (Reason, 2024)."A Comprehensive Federal Budget Plan to Avert a Debt Crisis," by Jessica Riedl (Manhattan Institute, 2024)."When Does Federal Debt Reach Unsustainable Levels?" by Jagadeesh Gokhale, Kent Smetters, and Mariko Paulson (The Wharton School of Business, 2023)."The Limits of Taxing the Rich," by Jessica Riedl (Manhattan Institute, 2023). EXTRAS:"Farewell to a Generational Talent," by Freakonomics Radio (2024).
Chapter 1: Who is Jessica Riedl and what is her expertise?
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 2001. How's that working out? As you can see from the debt, my career has been an abject failure.
This friendless soul is Jessica Riedel.
I'm a senior fellow in budget, tax, and economic policy at the Manhattan Institute.
Despite her claim to failure, Riedel is consistently named by Washingtonian Magazine as one of the most influential economic policy professionals in D.C. 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 U.S. tax policy is wrong. Today on Freakonomics Radio, federal debt and tax myths. Could we possibly be having any more fun? That starts now.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.
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Chapter 2: What are the main myths about the U.S. tax system?
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 Ten Tax Myths.
And 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.
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 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?
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 done your homework. I was a high school debater my senior year. U.S. 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.
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Chapter 3: How do political narratives shape tax policy perceptions?
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 saying, 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 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.
What kind of policies were you proposing or critiquing that inflamed the White House?
This was the post 9-11 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 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 the think tank CEO's who to hire.
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Chapter 4: What are the challenges of tax policy in America?
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-ing 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 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. Is it just something you dash off on a napkin and publish?
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 of so that we could have a smarter national debate.
And that meant going after the conservative myths and the liberal myths.
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,
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Chapter 5: Why do political figures manipulate tax policy narratives?
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 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 as 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.
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 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.
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Chapter 6: What are the long-term implications of misunderstood tax policies?
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.
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
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 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. 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. 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.
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