Special Report

Free at Last

Tax Freedom Day is today. Congratulations. At the rate we're going, next year you'll have to work well into May before the money you earn is yours and not the big spenders'.

By 4.30.07

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Americans stop paying for government today. According to the Tax Foundation, "Tax Freedom Day" is April 30. That's when local, state, and federal officials stop fingering the average American's wallet.

Unfortunately, Tax Freedom Day has been getting later. The Bush tax cuts dropped TFD from May 1 in 2001 to April 21 in 2002 and April 18 in 2003. But TFD rose to April 19 the following year, and jumped ahead a full week in 2005. It was April 28 in 2006. Now it is almost back to where it started when President George W. Bush took office.

The increases are striking since there have been no big tax hikes, despite the fondest desire of many Democratic politicians. But, explain Curtis S. Dubay and Scott A. Hodge of the Tax Foundation:

The steadily later arrival of Tax Freedom Day these last four years is not surprising. No major tax cuts have been enacted at the federal level since 2003, and the economy has been growing rapidly. The nation's tax burden tends to rise as income rises because thriving taxpayers are pushed into higher income tax brackets at the federal and state levels. Also, the federal government raises the income cap on Social Security taxes each year, and local governments have been collecting much more in property taxes.

The Tax Foundation's numbers disprove the usual liberal mantra that Americans are "undertaxed." TFD did not hit February until 1918, after America's entry into World War I. The date only hit March first in 1933 and then 1937 for good in the midst of the Great Depression. TFD advanced to April in 1943, during World War II. If fell back before heading back into April in 1950 with the Cold War and very hot Korean conflict.

It took almost another half century before TFD broke the May barrier, in 1998. Although we then fell back to April, past history suggests that next year could find the TFD pushing back into May, and for good.

This year the average American will spend 79 days working to pay Uncle Sam. That's longer than for any other purpose -- housing and household operations only take 62 days. Next runs health care at 52 days.

State and local levies come next, accounting for 41 days. In contrast, food and transportation each only run 30 days. Recreation hits 22 days, while clothes take just 13 days.

At the federal level the various payroll levies are almost as burdensome as the income tax, running 29 and 33 days, respectively. (Many low-income Americans no longer pay any income taxes; most wage earners making less than $100,000 pay more in payroll taxes.) At the state level, sales and property taxes (13 and 12 days) outrange income taxes (10 days). The federal corporate income tax makes Americans work another 12 days; estate, gift, and other levies fall far behind.

Of course, April 30 is just the national average. State TFDs range over nearly 40 days. Best is Oklahoma at April 12, followed by Mississippi and Alaska, both April 13. Worst is Connecticut, which tops off the list at May 20, followed by New York at May 16 and New Jersey at May 10.

Although taxpayers usually worry most about their federal taxes, state and local levies are hitting a record 11 percent of income this year. In another Tax Foundation report, economist Curtis S. Dubay reveals that highest state burden is imposed by Vermont, which takes 14.1 percent of its citizens' earnings. Maine and New York are right behind at 14.0 and 13.8 percent, respectively.

Connecticut collects $6,756, the most in state and local taxes (which explains why it has the nation's highest TFD), but its citizens have the highest per capita income, $55,536, so the burden is "only" 12.2 percent, or eighth in the nation. (Non- state Washington, D.C. actually comes in a bit higher on both counts.)

UNFORTUNATELY, TAXPAYERS HAVE LITTLE REASON for optimism about the future. Federal outlays, which ultimately drive tax collections, climbed about 9 percent last year, the largest annual rise since 1990. Reported Dan Mitchell, then of the Heritage Foundation, last September:

This is not just a one-year phenomenon. Total federal spending has skyrocketed 45 percent since President George W. Bush took office in 2001. Adjusted for inflation, spending has jumped by 27 percent in just five years--more than twice as much as real spending grew during the eight years of the Clinton Administration. Measured on an annual basis, inflation-adjusted spending during the Bush years has increased more than three tines as fast as it did during the Clinton years. Indeed, spending as a percentage of GDP has grown more under George W. Bush than it has under any other President since Franklin D. Roosevelt.

The rise in outlays has been spurred in part by the increase in programs. Chris Edwards of the Cato Institute points out that there are now 1696 federal subsidy programs. That's a 44 percent jump since 1990. The number has risen by 271, or one-fifth, since President Bush was elected.

The federal government, in particular, is a huge wealth redistribution machine. Andrew Chamberlain, Gerald Prante, and Scott A. Hodge of the Tax Foundation figure that in 2004 government redistributed between $1.03 trillion and $1.53 trillion to people in the three lowest income quintiles. That's as much as 44 percent of total government outlays. Unfortunately, what Uncle Sam is best at is not preserving our lives, wealth, and liberties, but in robbing Peter to pay Paul, plus a few government employees along the way.

The rich pay the most in taxes, of course. Those in the top quintile account for almost half of all taxes, 48.8 percent. Members of the second quintile pay 22.4 percent of the total. The center bracket covers 14.8 percent. The bottom two pay 9.6 percent and 4.3 percent, respectively.

Federal taxes are a bit more progressive, hitting the wealthiest taxpayers the most. The ratio of taxes paid by top to bottom quintiles is over 20 to one. For state taxes the disparity is "just" 5.5 to one. Top earners pay more of every levy other than tobacco taxes.

There has been little change in the distribution of the tax burden over time. The wealthy (constituting the top quintile) paid a little bit more, 50.6 percent, in 2000 compared to 48.8 percent in 2004. They paid a little less, 46.4 percent, in 1991. Despite a roller coaster of tax hikes and cuts under Presidents Bill Clinton and George W. Bush, respectively, the share paid by top earners has remained relatively consistent.

Those in the bottom quintile pay the least in taxes but receive the most tax dollars in return. They collect an estimated $8.21 in "benefits" for every dollar they pay in taxes. Those in the middle quintile, with incomes between $23,700 and $42,305, get $1.30 back for every dollar paid. The rich receive 41 cents.

OBVIOUSLY, SOME OF THOSE GOVERNMENT payments are for "public goods," such as the court system and defense. It's not easy to apportion federal spending, but the Tax Foundation counts this 26.2 percent of outlays as serving everyone. Never mind that many of these programs don't benefit the public and, in some cases, actually hurt those they are supposed to help.

The Tax Foundation figures another 32 percent of outlays as "private or quasi-private goods," which "could theoretically be allocated to households based on utilization rates, but for which there is little data available to do so." Roads, parks, schools, and libraries are obvious examples. In most of these cases the benefits are primarily private and changing technology makes it ever easier to charge for such goods and services, many of which were long thought to be "public," such as roads. However, politics mitigates against even the most modest cuts in these benefits.

The final 41.8 percent of the budget is transfer payments-- shifting vast amounts of money around from economic producers to tax consumers. There's Social Security, Medicare and Medicaid, as well as a host of housing, health care, and social service programs. Since Congress hopes to win votes by adding new programs irrespective of public need, there is an endless array of transfer programs that cover almost every area of life.

The Tax Foundation figures that low-income people get the most in total government spending ($35,510 for every low income household) and government outlays minus public goods ($27,361). Benefits received successively fell for members of the 2nd through 4th quintiles but then, ironically, jumped for the highest earners.

Still, as a percentage of household income, government outlays are very progressive. Total expenditures and total expenditures other than public goods ran 106.4 percent and 82 percent, respectively, for the poorest Americans, 58.4 percent and 42.5 percent for the second quintile, 36.8 percent and 26 percent for the middle group, 24.1 percent and 16.9 percent for the next quintile, and 14.1 percent and 10.7 percent for the top earners. As government spending has risen in recent years, the share of government outlays going to the top quintile has fallen sharply, making the overall system even more progressive.

If taxpayers were getting good value for their money, government's massive redistribution machine might not seem quite so obscene. But the Uncle Sam provides nearly $100 billion in corporate welfare to well-heeled businesses. The biggest social programs, Social Security and Medicare, are racing towards financial catastrophe.

Foreign aid outlays do nothing to promote international development. Public schools spend ever more to impart ever less knowledge. The panoply of farm subsidy programs is a public embarrassment. Energy subsidies have enriched big firms without providing new, cost-effective sources of energy. And so it goes.

But don't worry, be happy. At least you've finally stopped paying for government this year. Unless you live in Connecticut. Or one of the other 16 higher-tax jurisdictions.

And just wait until next year.

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About the Author
Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).