Tax Freedom Day? Not Really.

Every year the Tax Foundation, a conservative think tank, releases a report about “Tax Freedom Day,” a made-up day of the year that indicates when the nation as a whole has earned enough money to pay this year’s federal, state, and local taxes. This year, the report says, Tax Freedom Day falls on April 16, 2019.

Despite the catchy approach, there are several problems with the Tax Foundation’s Tax Freedom Day, both in terms of how it is calculated and conceptually. The Center on Budget and Policy Priorities put out a great report on April 10th discussing these problems.

First, the way the Tax Foundation calculates its Tax Freedom Day is misleading. They calculate the day the “nation as a whole has earned enough money to pay its total tax bill for the year” by measuring tax revenues as a share of the economy (i.e. the average tax rate). But in the U.S., which has a progressive tax rate, it is only tax payers who are in the upper income levels that pay, on average, rates equal to or above federal revenues as a share of the economy.

Look at the graph to the left. The Tax Foundation’s average tax rate is 18.7%. But 80% of tax payers in the U.S. pay less than that tax rate. So reports that discuss Tax Freedom Day as the day a typical American worker would have to work to pay their taxes is misleading. CBPP explains how here: “The following example shows how the Tax Foundation’s methodology can overstate the tax burdens of the typical family.  Suppose four families with incomes of $50,000 each pay $2,500 in taxes (5 percent of their income) while one wealthy family with income of $300,000 pays $90,000 in taxes (30 percent of its income).  Total income among these five families is $500,000, and the total amount paid in taxes is $100,000.  Thus, 20 percent of the total income of the five families goes to pay taxes. But it would be highly misleading to conclude that 20 percent is the typical tax burden for families in this group.” (https://www.cbpp.org/sites/default/files/atoms/files/4-10-19tax3.pdf)

The Tax Foundation’s Tax Freedom Day Report also ranks states by which ones reach their Tax Freedom Day sooner, meaning their residents don’t have to work as long to pay their share of taxes. Alaska is ranked #1 because residents there bear the lowest average tax burden. Pennsylvania ranks 30th. However, as CBPP discusses, there are several flaws with their state-by-state estimates. These include overstating middle-class tax levels, reflecting state affluence as opposed to state taxes, including taxes paid in other states, and relying heavily on estimates from years-old data.

Aside from the Tax Foundation’s flawed calculations, let’s address the conceptual problems. Establishing what they call a “Tax Freedom Day” divides up the year into a time an individual is paying taxes to the government and a time of year they are taking care of themselves financially. This paradigm undervalues the importance and impact of taxes on our lives every day throughout the year and it, wrongly, assumes we live independently from the rest of our city or township, our state and our nation.

Our taxes go towards funding our roads, bridges, and transportation systems to ensure we, our families, and our businesses and goods can flow freely from one place to another. They fund health care for our communities’ elderly and low-income neighbors. It funds the education systems for our kids. It funds the military, the justice system, Social Security, and more. These things help to make up the society we are embedded in and rely on daily. They can’t simply be pulled out and considered as separate. Our jobs, income, and economy rely on this infrastructure and systems which is funded by our taxes.

The real sham here is not that we pay taxes that help our society run smoothly, but rather, that so many Fortune 500 companies that rely on us (as consumers and their workforce) to make their profits, do not. The Institute on Taxation and Economic Policy just put out a report that shows 60 of America’s largest corporations, making $79 billion in pretax income, paid nothing into our tax system, thanks to  the 2017 Tax Cut and Jobs Act. In fact, they made billions and got a $4.3 billion rebate. (For more details, see Jeff Garis’s blog post here.)

And in Pennsylvania, our richest residents (the top 1%, with an average income of $1.7 million/year) pay only 6% of their income on state and local taxes compared to our poorest residents (the lowest 20%, making below $20,000/year) who are paying 13.8% of their income on these taxes.

A true Tax Freedom Day will be when corporations and the rich pay their fair share in taxes. Then we can actually provide quality health care to everyone, provide a good education to all our kids regardless of income or zip code, and fund college for those interested in pursuing an advanced degree, without graduating with crushing debt. That sounds like freedom to me. 

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