Are we finally done paying our taxes? Tax Freedom Day, as the Tax Foundation styles it, occurred on April 17. That’s when people had paid off all taxes to all levels of government.
It was two days later this year than in 2004. There was no federal tax hike, but people landed in higher tax brackets as their incomes grew.
It could have been worse. The Bush tax cuts have pushed back Tax Freedom Day from May 3 in 2000 — a record, exceeding the tax burden even during World War II.
But residents of Connecticut were still paying until May 3. Residents of Washington D.C. worked for government through April 30. New Yorkers paid until April 29.
Other high tax states include Massachusetts, Wyoming, Maine, Rhode Island, Washington, and California. In sharp contrast are Alaska, at the bottom at April 2, several southern states, Idaho, and North Dakota.
The only way that America’s tax burden looks good is in comparison to other industrialized countries. Canadians work until June 28. Britain’s Tax Freedom Day is May 31. But even the former Soviet satellites have a lower tax burden than does the U.S. Americans have to spend more time working to pay their taxes than to buy other goods and services. For instance, the average American puts in 70 days to cover federal levies — and 65 days for home and household expenses. Health care clocks in at 52 days.
State taxes run 37 days, more than transportation, food, or recreation. Clothing runs just 13 days. And we work only two days to accumulate the money that we save. That’s another good argument in favor of creating private Social Security accounts.
CRITICS OF TAX CUTS spend most of their time denouncing “tax cuts for the rich,” but what they really oppose is tax cuts for anyone. The payroll tax is a bad tax for many reasons, but is linked to Social Security benefits, which are slightly skewed to lower wage earners. “Sin” taxes usually are regressive, but that simply means that more poor people smoke, for instance. No one on the left, at least, suggests lowering them.
Most political battles occur over income taxes. But any fair income tax cut will benefit those who pay income taxes. Many low income people don’t. Explains the Tax Foundation, “Thanks largely to the new child tax credit and the earned income tax credit, approximately 40 million taxpayers own nothing for the entire year.” That’s twice as many as in 1990. Moreover, a general cut will obviously most benefit those who pay the most. Who are — surprise! — those who earn the most.
Indeed, the vast majority of income tax collections come from those who are better off, if not exactly “rich.” For instance, in 2002, which offers the most recent data, the top one percent of taxpayers paid 33.7 percent of federal income levies. The top five percent accounted for 53.8 percent of collections.
The top ten percent paid 65.7 percent. The top quarter kicked in 83.9 percent. And the top half paid 96.5 percent of all income taxes collected. Put another way, the bottom half of Americans contributed just 3.5 percent of total income taxes. So why would they get most of a “tax cut” when they don’t pay much in taxes?
Ironically, the burden on wealthier Americans has actually increased because of the Bush reduction. They would have been paying more money without the cut, but the bottom 50 percent of earners would have been paying proportionately more.
The cost of the income tax is not just money. There’s also time. It’s been estimated that we devote more than a billion additional hours to tax preparation today than we did a decade ago, for a total of 6.6 billion.
Income taxes are necessarily intrusive, allowing government to audit not only one’s work but one’s life. And by encouraging endless tax avoidance and tax shelter activities, the income tax generates inefficiencies throughout the economy.
SO AMERICA NEEDS A SERIOUS tax reform agenda emphasizing both reduction and simplification. If it doesn’t act, the U.S. risks falling ever further behind. Several central and eastern European countries already have moved towards a flat income tax. So has Russia.
Even traditionally high-tax western European states have been forced to take note. Although the dominant reaction has been to try to use the European Union to force up rates in new members to the east, some analysts have been making the case for lower and simpler rates.
The other reform that America badly needs is on the spending side. Far too many federal outlays cannot be justified by any public interest test.
To the contrary, Uncle Sam has proved to be a soft touch when approached by almost any interest group with an official letterhead and at least two members. Special interest subsidies suffuse the federal budget. Washington routinely doles out welfare to profitable corporations.
The biggest spending programs, Medicare and Social Security, target the middle class rather than the poor. More military resources go to subsidize prosperous and populous allies than defend Americans.
The endless parade of pork barrel projects, though relatively small compared to the almost $3 trillion budget, are the greatest scandal of all, as politicians use taxpayers’ money to campaign for reelection. The group Citizens Against Government Waste counts 13,997 pork barrel projects already approved for 2005 at a cost of $27.3 billion, yet the “emergency” supplemental recently passed by the Senate adds even more.
Thankfully, Tax Freedom Day has come, even for residents of Connecticut, who bear the nation’s highest tax burden. But no American should have to spend a third of his or her time working for the government.
To his credit, President George W. Bush made lower taxes a priority. But the campaign for real tax relief and tax reform has barely begun.
Doug Bandow is a senior fellow at the Cato Institute.
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