‘Tax Freedom Day’ Overstates Taxes Most Americans Pay

Tax Foundation's Average Far More Than What Most Americans Pay in Federal TaxesThe Tax Foundation released its annual “Tax Freedom Day” report today that once again presents a misleading picture of the taxes that most Americans pay. It takes a one-size-fits-all approach to taxpayers — one that fits Bill Gates and Warren Buffett a lot better than it fits most Americans. The result is an “average” tax rate that is likely higher than the tax rates paid by eight out of every 10 U.S. households.

The Tax Foundation’s calculation also relies on estimates that often change once the actual numbers come in because it is based on anticipated tax revenue from thousands of states and municipalities. These have proven to be hard to predict, particularly in tough economic times, making the estimated data unreliable. 

The report uses a methodology that stacks the deck against wealthy states. Two-thirds of the calculation is based on federal taxes, including a progressive federal income tax that is higher for wealthier earners. The wealthier the state, the higher the tax ranking — and along the way, middle-class tax levels get overstated. 

The Tax Foundation rankings also offer little insight into a state’s tax policies. It allocates corporate, tourism and energy taxes to the people who pay them rather than the states that collect them. So states with wealthy people who own a lot of stock are assigned the corporate tax that the company pays in another state. Similarly, extraction taxes paid by energy companies in Oklahoma, Texas and West Virginia are counted against taxpayers in large energy-use states. In other words, Pennsylvania could enact the highest natural gas drilling tax in the nation without slipping a notch in the rankings.

Finally, the report fails to explain what Americans get for our tax dollars — everything from clean water and air to good schools to the roads and bridges we drive on every day. Few Americans would feel more “free” if “Tax Freedom Day” came earlier in the year because the federal government stopped providing for national security, conducting food safety inspections, or testing prescription drugs.

The Center on Budget and Policy Priorities has a more detailed analysis of the flaws in the Tax Foundation report.

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