Tax Freedom Day

Today, April 30, is "Tax Freedom Day". If, beginning January 1, Americans devoted all of our income to meeting our various tax obligations for the year, today is the day we would pay them off. Now, beginning May 1, we'll finally be working for ourselves!

This has nothing directly to do with April 17, that formidable deadline two weeks ago when we had to file our income tax returns. That's "just the paperwork". We're also talking about all of our taxes: social security, our share of corporate income taxes, sales taxes, everything, including those daunting income taxes. So, turned around, this is about how long it takes to pay the total cost of government that is imposed on the American people.

Depending on tax laws and the strength of the economy, the date for "Tax Freedom Day" varies. In 2000, just at the peak of the tech boom and with income tax rates higher than they are now, it didn't come until May 5. Right after the Bush tax cuts were fully effective and with income squeezed by the after-effects of recession, the 2003 date was April 12. Last year, it was April 28.

This calculation is devised by the Tax Foundation, a nonpartisan think-tank in Washington that researches the impact of taxes. Their economists have tabulated the dates for each state as well. In high-tax states, it is later: May 20 in Connecticut, May 16 in New York. In contrast, in Texas, the date came April 19 and as early as April 12 in neighboring Oklahoma.

For the nation as a whole, federal income taxes take 33 days of the year to pay off and state and local income taxes another 10. Social security, unemployment insurance and other "social insurance" levies absorb another 30 days. All taxes, at 120 days, take longer to provide for than our private outlays for the necessities of food (30 days), clothing (13) and shelter (62) put together (105 days).

Questions about Taxes
If taxes, obligatory payments to the government, take one-third of our national income, it's worth asking some questions about them! What do they pay for? Are they fair? What about people who don't pay any taxes?

How tax dollars are spent opens up the whole hornet's nest of government budgets. That topic will take its own blog-post or three or five and is an issue, like a hornet's nest, that we will approach very carefully. Stay tuned for that one!

Is the tax system "fair"? This question is complex because tax systems are used for more purposes than simply raising government revenue. Excise taxes, for instance, are applied to certain imports to regulate foreign trade. Gasoline taxes in most locales are applied directly to road-building and maintenance; ironically, the spreading popularity of fuel efficient vehicles has begun to eat into these state tax receipts. What's the fair answer to that? The social security tax is meant to finance that system, but soon it won't be enough and the longer we wait to make some changes, the more drastic those changes will have to be. Simply raising that tax rate may not cover the entire need, and besides, many people already pay more of that tax than they do of income tax. Is that fair? We'll revisit these issues, you can be sure.

But since we've just finished filing our income tax returns, let's talk about them and their fairness for a bit. The IRS publishes a barrel of detailed data, so we can see how much tax is paid by income bracket, what various types of income are reported, what deductions and so on. The latest of the detailed information covers 2004.

A quick glance at our graph shows that the top 10% of taxpayers shell out the vast majority of income taxes, more than 68%. The top half of taxpayers pay 96.7%. This means, of course, that the bottom half, more than 66,000,000 taxpayers, is responsible for a mere 3.3% of all federal income taxes.

In an eMo on March 15 called "Taxman", Mother Crafton tells that she believes it is a privilege to pay taxes. Here is surely one reason: she and many others of us could just as easily find ourselves in the lower half of income earners who pay no taxes. So, hard and distasteful as we might find it to pay Uncle Sam, the mere fact that we do is one sign of our own good fortune.

Tax Avoidance? Or Low Income . . . .
Sometimes, though, people take a different tack with "nonpayment of taxes". Many believe that those who don't pay taxes get out of it through some trickery. This may be the case on occasion, when people participate in some elaborate tax-avoidance scheme, not technically breaking any law, but violating the spirit of our common life as a nation. In 2004, the Tax Foundation points out, some 43 million tax returns carried no tax liability – almost one-third of all returns. Is tax avoidance this widespread?

In a survey for the Tax Foundation taken in March, the Harris Poll organization told the survey respondents this number and asked them what they thought of it. Only 24% think it is "fair" while 61% agree with the statement that "everyone should be required to pay some minimum".

The extensive IRS details tell us about the returns that carry no tax, and we looked over those figures. Frankly, we wouldn't want to be the people filing those returns. Their average adjusted gross income was only $15,200, compared with $80,400 for returns with taxes due. The portion of returns showing wage and salary income was about the same with or without tax liability, around 85%, but the amount of wages and salaries averaged only $11,000 for the ones not owing tax, compared with $76,500 for those who do. A number of the no-tax filers reported that they engaged in their own business activities, a larger proportion, 18%, than on the taxable returns, 14%. But the no-tax returns showed average net income from the business of just over $5,200, while the taxable returns made $16,500 from it. Farming is the category with the biggest loss: returns paying taxes had an average net loss of $5,800 from farming; those without tax lost $8,200 in that activity. Finally, non-taxed returns reported social security and pension benefits as major income sources, so retirees obviously make up a sizable portion of "taxpayers" who pay no taxes.

Thus, the no-tax returns come from workers with low-paying jobs, from small business owners who didn't fare well, from farmers who did very poorly indeed and from retirees. In several of these, the filers of the returns took business risks that didn't work out. So the conclusion of our analysis here is that the vast majority of tax return filers, even if they owe no tax, have made legitimate efforts to generate income. They probably wish they had done better and they, like Mother Crafton, would probably find it a privilege to pay income taxes.