Deconstructing Tax Freedom Day

Today, the Tax Foundation officially announces that Tax Freedom Day will fall on April 26.

Tax Freedom Day is supposed to mark the transition from the portion of the year during which "Americans work to pay taxes" to the part during which "they work to support themselves." It's a clever bit of libertarian propaganda, though one I'll confess I've always thought was based on a bit of a bullshit number. Not in the sense that it's wrong--I'm sure it's properly calculated--but because it's "calculated by dividing the official government tally of all taxes collected in each year by the official government tally of all income earned in each year." Now, obviously, people are paying different marginal rates, so there's not going to be one "tax freedom day" for everyone: People in higher tax brackets are going to spend more of their year working to pay taxes; people in lower brackets less.

But using these aggregates of total taxes and income skews the average up: The top ten percent of tax payers shouldered almost two-thirds of the federal income tax burden as of 2003. They also, of course, earned a disproportionate amount of the income, but using aggregates for both numbers puts a huge amount of weight on the relatively small proportion of people who are in the highest tax brackets, and therefore have the latest "tax freedom day"--far more than if you'd just calculated a "tax freedom day" for each individual or household and then averaged that number for the population. So insofar as people are suppsed to think that Tax Freedom Day represents something like the amount of time they personally are working to pay off their taxes, it seems sort of misleading.

One thing that saves the number from being completely bogus is that it counts all federal state and local taxes, which significantly flattens the rate of taxation across income groups. Still, it seems like a weird way to go about computing Tax Freedom Day if the point is to get a picture of how long the "average person" is working to pay taxes. (It is not, of course, a weird way to do it if the point is just to get the average person as pissed off about taxes as possible.)

Comments

[Timothy]

The reason is obvious: if you're trying to spark popular outrage about taxes, then presenting an inflated number about how long everyone works to pay the government is to your benefit.

[Roy]

Shocking! -rooc6me

[Tiny Violin For The Top Ten Pe]

Yes, but the important thing is that income rather than wealth is the baseline for taxation at all. That is why it is important to celebrate tax freedom day. So that the commitment of the worker to protecting other people's accumulated wealth is recognized in a positive way. Progressive taxation does dampen this dynamite dynamic, but we must never allow the progressiveness get pronounced to destroy it!

[Marcvs]

Maybe we should have a "Mean Tax Freedom Day" and "Median Tax Freedom Day". Plus, I just like the sound of "Mean Tax Freedom Day".

[Ben]

Julian--the point of it is to show how over taxed we are as a nation. Stop nitpicking and get angry about it.

[KipEsquire]

Now, obviously, people are paying different marginal rates, so there's not going to be one "tax freedom day" for everyone..."

Two points:

1. You can still use the time series of how the "average" date has been pushed ever further back over the years as an indicium of the expanding government fisc.

2. The fact that different people have different dates is a helpful phenomenon, in that it demonstrates the insane progressivity of the federal income tax (the bottom 40% of households representing 50% of the population have no federal income tax burden). That comes in handy when leftists insist that "the rich don't pay their fair share."

[uncle sam]

And it doesn't include how the cost of living for everyone, especially the poor, is increased by those taxes in that everything they buy includes the cost of other peoples' income taxes.

[thoreau]

Well, perhaps we could identify a range of 8 days during which a large portion of the population reach tax freedom and turn it into a "Libertarian Hannukkah".

"Put on your tinfoilah, celebrate tax freedomah..."

Yeah, somehow it just doesn't quite seem catchy enough.

[MikeP]

For those who recognize the burden that government puts on the economy, having that day be total tax over total income makes sense.

It's the day the economy can celebrate its freedom.

[Brian24]

Mike P: It may "make sense" having that day be total tax over total income, but that is not how it is being sold to the average American. That's why it's misleading.

(the bottom 40% of households representing 50% of the population have no federal income tax burden).

C'mon, seriously? Half the population doesn't pay income tax? There's no way that's true, unless possibly you're including all children. I've made some pretty low salaries over the years and I've still paid federal income tax.

[Warren]

Put away the twenty-sided die Julian. Is there any number associated with taxation that isn't 90% bullshit? How could it be otherwise?

Tax Freedom Day is calculated in an honest straightforward manner and that's all we can ask of it. It is a nice bit of libertarian propaganda.

[Timothy]

Brian24: Depends what you can deduct. If I bought a place instead of rented (possible in San Antonio even on my entry-level salary), I'd have basically no Federal tax liability aside from Social Security and Medicare. 10%, no deductions. I think that'd be the best way to go.

[MikeP]

Mike P: It may "make sense" having that day be total tax over total income, but that is not how it is being sold to the average American. That's why it's misleading.

Having just heard the bottom-of-the-hour news report on NPR, I must agree with your sentiment.

But it still makes sense to me!

[fyodor]

Maybe we should have a "Mean Tax Freedom Day" and "Median Tax Freedom Day".

That was my exact same thought while reading the post too. Only I was going to add: "Now, if I can only keep track of which one was which!!"

[Eryk Boston]

The cool part is that no liberal can call bullshit without first admiting that the rich really do pay far more taxes.

[Russ 2000]

Julian,

That's true if you're only talking about income taxes. But if you include the added costs for all the market protectionism and regulations (air bags, ag subsidies, etc.) you'll not only flatten it significantly more, you'll also expand it.

[Wndt]

Averages might not reflect this, but here's two individual "tax freedom days" I can calculate off the top of my head:

T. H. Kerry = February 16th

Me = May 21st

Of course, my annual income is an inconsiderable percentage of what hers was reported to be during the last election.

"Progressivity" is a shield for wealth against uppity earners, and a jobs program for tax attorneys. The actual rich don't pay more as a percentage than Joe and Jane Remote Control--ever. Usually far, far less. Far.

Since a couple of professional IRS blockers would cost me more than I'd save by hiring them, I, like most high-income, low-wealth, above-his-station types, pay the highest rates, and I can't take any iffy deductions or make any shelters, because an audit would probably destroy me.

So averaging those two dates and calling April 6th (or whatever) our shared Tax Freedom Day would be more misleadingly propagandistic than what the Tax Foundation does. But the few days it shaves off might cause a few less "average people" to think bad thoughts about the government.

Which evidently would please Julian. Shocking!

[matt]

I wonder if it's possible to throw in the relatively hidden costs of government regulations and prohibitions. Add a "you have to work this much longer to pay for gov't regulations" to the taxes already extracted from you and "freedom" day might be some time in late summer or early fall.

[Rich]

Headline: Self-Admitted Propaganda Tactic Is Misleading

In Other News: Water Is Wet

[P Brooks]

"...income rather than wealth is the baseline for taxation...."

And you're saying... that an annual tax on accumulated wealth, aka "retained earnings" is what we need?

So if we assume that I had a pretty good year (and I didn't): I add up all my 1099s and do my taxes, and put the remainder in my little piggy bank. Next year, I would have to add up all my 1099s, PLUS THE CONTENTS OF MY PIGGY BANK (on which I had already paid tax in prior years), and do my taxes, et c.

"I've been to one World's Fair, a picnic, and a rodeo, and that's the stupidest thing I ever heard come over a set of headphones."

[Wealth Means Wealth]

And you're saying... that an annual tax on accumulated wealth, aka "retained earnings" is what we need?

I did not say "retained earnings" and I emphatically do not mean retained earnings. I mean wealth. How's the equity in the house coming along? How big is that retirement account? Bad? Umm sorry, no taxes for you, then.

[Wealth means Wealth]

Like you know that part of capital gains tax where there has got to be gains. I am suggesting a tax on the capital instead of the gains.

[Hmmmmm]

Suppose there is one country with a tax on wealth. And next to it is a country with no tax on wealth.

Where do you suppose all the wealth will end up?

[P Brooks]

As far as equity in the house goes, not so well, actually. Do I get a rebate?

The retirement account is for all intents and purposes indistinguishable from my little piggy bank.

Sorry, I am not 100% with you on the "...tax on the capital instead of the gains" part. Are we indexing for inflation? Does the Federal Capital Assessment Board determine the value of capital?

I do not believe, specifically or in general, that the tax code is properly the instrument of social engineering.

[Andrew]

Nice to see libertarians uniting with defenders of ever-larger government at the Center on Budget and Policy Priorities in their attack on Tax Freedom Day.

Julian, the objection that Tax Freedom Day doesn't give the actual tax burden faced by particular individuals really misses the point. The study doesn't purport to do that. It's not a distributional analysis of effective tax burdens, it's an economy-wide average of the nation's income absorbed by governments at all levels.

That figure is useful enough for the OECD to report regularly (see here). Tax-to-national income ratios provide a useful measure of the size of the government role in the economy. This is what the Tax Freedom Day study does, and it's what it clearly states if you read the actual paper (see here)

You're right that Tax Freedom Day isn't the median tax burden. But it isn't trying to be. TF publishes a completely different study on median tax burdens, which serves a very different purpose (see here).

Is presenting the nation's tax burden as "Tax Freedom Day" -- rather than a dry percentage -- provocative? Sure. But even the most solid products, of which Tax Freedom Day is definitely one, needs marketing. It's done in an attempt to get Americans to put down their "People magazine"s and turn off "Desperate Housewives" long enough to pay attention to something that matters enormously for their liberty.

I thought libertarians understood that. Guess I was wrong. Maybe nitpicking your allies is really more important than -- once per year -- reminding the public about the true size of government.

[Jersey McJones]

For all you "rich pay more taxes" geniuses - do a simple equation:

The top 10% pay 2/3rds of the taxes.

The top 10% control about 2/3rds of the wealth.

Now that's pretty balanced - it could be more progressive, but it couldn't be less no matter how vapidly libertarian one is.

JMJ

[Did he say Flat Rate?!?!]

I do not believe, specifically or in general, that the tax code is properly the instrument of social engineering.

who said anything about social engineering? The facts are that terrorists and enemy nations target the US because of its material wealth. Not because of its income as such (though this can be considered as a small portion of total wealth), but because of its wealth. We therefore have an army, police force and other security personnel (who I will call the night watchman) put into place to protect all that wealth. Lots of wealth = big fat night watchman.

Logically speaking, the wealth should pay to protect itself. Not the tiny sliver of wealth called income or capital gains that you and I share disproportionately in. The whole of the wealth, rather, should be the pot out of which protection is paid and paid at a flat rate. Our income would still be taxed, but the rates would have to go down dramatically to avoid drowning Washington in money from taxes on the portions of the wealth that get protected, but not taxed, under the current system.

[Amateur economist Ghost]

Suppose there is one country with a tax on wealth. And next to it is a country with no tax on wealth.

Where do you suppose all the wealth will end up?

To the nation that doesn't disincentivize income and smart investment with overtaxation relative to wealth that just sits there doing nothing?

[Julian Sanchez]

Andrew, dude, I love you, but give me a break here. Obviously, taxes/GDP is an important measure in itself. And of course I understand the idea behind "marketing" the notion that government is too big as "Tax Freedom Day" rather than a simple taxes/GDP ratio. The problem is the the "marketing" only works because the way it's presented in the press disingenuously creates the impression that it's somehow a measure of how much time most Americans spend working to pay off their taxes. This "well, we make it clear in the full report..." line is a cop-out; you know perfectly well that the news hook for TFD relies precisely on misapprehension about what it's really measuring. I promise, I'd just as soon not find myself on the same side of an argument as CBPP. Stop giving them opportunities to raise sound objections and I won't have to.

[Eric the .5b]

The top 10% pay 2/3rds of the taxes.
The top 10% control about 2/3rds of the wealth.

Except, of course, this isn't true.

[P Brooks]

"The facts are that terrorists and enemy nations target the US because of its material wealth. Not because of its income as such (though this can be considered as a small portion of total wealth), but because of its wealth."

I have read this repeatedly, and I think it would be wise for me to retire from the field of combat. I'm going to go lie down now, in a dark room, with a cool damp cloth over my eyes.

[Swillfredo Pareto]

C'mon, seriously? Half the population doesn't pay income tax? There's no way that's true, unless possibly you're including all children. I've made some pretty low salaries over the years and I've still paid federal income tax.

I am not sure what how the numbers work out, but when you net in the EITC taxpayers with the people who have zero tax liability and start working up through those with nominal liability, I would not be surprised if 25-35% of the taxpayers net out to zero taxes paid. I would be surprised if it was 50%, especially since the figure I usually hear is that the top 50% of the taxpayers pay 95%. That last 5% comes from somewhere.

[Taiko]

"The top 10% pay 2/3rds of the taxes.
The top 10% control about 2/3rds of the wealth.

Except, of course, this isn't true."

No, this is true. I saw a study in this several months ago and the numbers really stuck with me. I believe that the top 1% owned around 33% of all the wealth, the top 5% was around 50-55% and the top 10% was close to 70% of all the wealth in this country. The bottom 50% owned something like 3%. Again, these numbers are just off the top of my head. We had the highest rates of wealth inequality in the industrialized world. I believe the study was done by the Fed in conjunction with a university or two. But I have seen several other studies over the years which have basically reported the same thing. Take these numbers as you want--good, bad, whatever, but let's not deny them.

[Eric the .5b]

"Saw a study" you care to link to?

[80sfan]

I remember when Ted Kennedy used to complain about "The Top Ten Percent"; he's since switched to 2%

[P Brooks]

I read the "rebuttal" (why no "comments? hmmm?) and it's official.

Julian Sanchez is a big bully.

[uncle sam]

The top 10% pay 2/3rds of the taxes.
The top 10% control about 2/3rds of the wealth.

An interesting but not very useful factoid. What does is mean? What do we do with it?
In old Soviet Union, was not true, but who wanted to live under USSR? If a fellow owns a factory, it's not like he can consume it, it actually gives him great responsibility. Lots of people depend on his management skill. Do you want that job? I wouldn't.