report. The Tax Freedom Day Special Report will be updated for 2009 on March 30, 2009.

Transcription

1 Please do not cite this SPECIAL report. The Tax Freedom Day Special Report will be updated for 2009 on March 30, April 2008 No. 160 America Celebrates Tax Freedom Day By Gerald Prante Senior Economist Tax Foundation Scott Hodge President Tax Foundation Tax Freedom Day will arrive on April 23 this year, the 113 th day of 2008 (ignoring Leap Day). That means Americans will work nearly four months of the year, from January 1 to April 23, before they have earned enough money to pay this year s tax obligations at the federal, state and local levels. Americans, as a whole, work a significant number of days each year to pay for things other than government, but nothing else is so expensive. Figure 1 uses the number of days worked as a yardstick to measure the price of government against the price of other important categories of consumer spending. Americans will work longer to pay for government (113 days) than they will for food, clothing and housing combined (108 days). In fact, Americans will work longer to afford federal taxes alone (74 days) than they will to afford housing (60 days). As a group, Americans will also work longer to pay state and local taxes than they will to pay for food. Figure 2 uses a standard eight-hour workday to make the same comparison. Figure 1 How Long America Works to Pay in Days Compared to Other Major Spending Categories Figure 2 How Long America Works to Pay in an Eight-Hour Day Compared to Other Major Spending Categories Recreation: 21 days Clothing and Accessories: 13 days Transportation: 29 days : 74 days Transportation: 38 minutes Recreation: 28 minutes Clothing and Accessories: 17 minutes : 1 hour, 37 minutes Food: 35 days State/ : 39 days Food: 46 minutes State/ : 51 minutes Health & Medical Care: 50 days All Other: 44 days Housing and Household Operation: 60 days Source: Tax Foundation calculations based on data from the Bureau of Economic Analysis. Health & Medical Care: 1 hour, 6 minutes All Other: 58 minutes Housing and Household Operation: 1 hour, 19 minutes Source: Tax Foundation calculations based on data from the Bureau of Economic Analysis.

2 2 Table 1 Tax Freedom Day & Total Effective Tax Rate Calendar Years Significant Tax Legislation Noted with First-Year Impact on Tax Burden Numer of Days All as Tax Spent Working a Percentage Year Freedom Day to Pay of Income 1900 January % 1901 January * January * January * January January % 1906 January * January * January January * January % 1911* January * January * January * January January % 1916 January January * February * February * February % 1921* February February * February * February February % 1926* February * February February * February * February % 1931* February * February * March March February % 1936 February * March * March March March % The Revenue Act of 1940 (+1.3% of NNP) The Second Revenue Act of 1940 (+1.0% of NNP) 1941 March The Revenue Act of 1941 (+3.1% of NNP) 1942 March The Revenue Act of 1942 (+6.7% of NNP) 1943 April The Current Tax Payment Act of 1943 (+1.4% of NNP) The Revenue Act of 1943 (+0.5% of NNP) 1944 March The Individual Income Tax Act of 1944 ( 0.3% of NNP) Tax Freedom Day in Recent Years Tax Freedom Day had arrived later for the four previous years, but due to an expected slowdown in the nation s economy and a massive one-time fiscal stimulus tax cut passed earlier this year, Tax Freedom Day is projected to arrive three days earlier this year compared to last year. In 2003, the Bush administration enacted its biggest tax cuts, and Tax Freedom Day arrived April 16, which is the earliest Tax Freedom Day in the last three decades. See Table 1 and Figure 3. Business taxes have also risen rapidly since 2003 along with rapidly growing corporate profits, but they are expected to slow down significantly this year. Corporate tax receipts increased by about 5 percent in 2007, but they are projected to fall this year, and even the 5 percent growth in 2007 was significantly slower than the 16 percent growth experienced in In percentages, government at all levels now takes 30.8 percent of the nation s income in the form of taxes. The highest ever was in 2000 when it took 33.6 percent, and the lowest tax burden in recent years was 29.0 percent of income in If current tax laws stay in effect (absent the stimulus), Tax Freedom Day should increase by a few days next year and then fall slightly in 2010 given the full implementation of all the Bush tax cuts (including the estate tax repeal). Moreover, if the Bush tax cuts are allowed to expire and nothing else changes, Tax Freedom Day in post-2010 years would be, on average, about 6 days later than it otherwise would have been. Of course, this ignores the possibility that such tax cut extensions would be financed with deficits. Tax Freedom Day, like almost all tax burden measures, ignores the current year s deficits. For example, if the Congressional Budget Office s projected deficit for 2008 were counted as a tax in Tax Freedom Day, it would arrive on May 3 instead of April 23. Continued

3 3 Table 1 (continued) Tax Freedom Day & Total Effective Tax Rate Calendar Years Significant Tax Legislation Noted with First-Year Impact on Tax Burden Numer of Days All as Tax Spent Working a Percentage Freedom Day to Pay of Income 1945* March % The Revenue Act of 1945 ( 2.9% of NNP) 1946 March April * March The Revenue Act of 1948 ( 2.1% of NNP) 1949* March March % The Revenue Act of 1950 (+1.7% of NNP) The Excess Profits Tax of 1950 (+1.2% of NNP) 1951 April The Revenue Act of 1951 (+1.8% of NNP) 1952 April * April * April (The Excise Tax Reduction Act of 1954 ( 0.3% of NNP) The Internal Revenue Code of 1954 ( 0.1% of NNP) 1955 April % 1956 April * April * April April * April % 1961* April April The Revenue Act of 1962 (0.0% of NNP) 1963 April April The Revenue Act of 1964 ( 1.9% of NNP) 1965 April % 1966 April The Tax Adjustment Act of 1966 (+0.7% of NNP) 1967 April April The Revenue and Expenditure Control Act of 1968 (+1.9% of NNP) 1969* April The Tax Reform Act of 1969 (+0.4% of NNP) 1970* April % 1971 April The Revenue Act of 1971 ( 0.4% of NNP) 1972 April * April * April The Employee Retirement Income Security Act of * April % The Tax Reduction Act of 1975 ( 0.7% of NNP) 1976 April The Tax Reform Act of 1976 ( 0.9% of NNP) 1977 April The Tax Reduction and Simplification Act of 1977 ( 1.0% of NNP) 1978 April The Revenue Act of 1978 ( 0.6% of NNP) 1979 April Continued Tax Freedom Day in History The United States has traditionally been a low tax nation. From the founding of the country until the early part of the twentieth century, the United States was in part defined by its mistrust of government power and its correspondingly low taxes. In 1900, as Table 1 shows, Americans paid only 5.9 percent of their income in taxes and Tax Freedom Day arrived on January 22. Between 1900 and 1917 the nation s tax burden was steady, never going over 6.7 percent, and the latest date for Tax Freedom Day was January 25. World War I more than doubled the nation s tax burden. From 1917 s January 24, Tax Freedom Day jumped to February 8 in 1918 and February 22 in were cut somewhat after the war but never to pre-war levels. Tax Freedom Day arrived in February throughout the twenties. It was at this time in our tax history that Justice Holmes famously called taxes the price of civilized society, and a low price it was, too. In 1933, trying to free the country from the Great Depression, President Roosevelt embarked on a massive federal government expansion. His New Deal programs required higher taxes and pushed Tax Freedom Day into March. The tax burden lightened in the mid-thirties, and Tax Freedom Day arrived in February again from 1934 through But as World War II loomed, spending and taxing surged again, and Tax Freedom Day never saw February again. World War II was the catalyst that pushed Tax Freedom Day into April in 1943, and it dipped back into March for the last time in In 1950, Tax Freedom Day fell on March 31, and after a decade of modest government growth, it arrived on April 11 in The Kennedy tax cut pushed through by President Johnson in 1964 helped stem the tide of rising taxes, pushing Tax Freedom Day back to April 9 in Under Johnson and Nixon, the Vietnam War combined with Johnson s Great Society programs to force taxes up in the late sixties

4 4 and seventies, adding 15 days work to the price of government. Tax Freedom Day in Table 1 (continued) Tax Freedom Day & Total Effective Tax Rate Calendar Years Significant Tax Legislation Noted with First-Year Impact on Tax Burden Numer of Days All as Tax Spent Working a Percentage Freedom Day to Pay of Income 1980* April % The Crude Oil Windfall Profit Tax Act of 1980 (+0.5% of NNP) 1981* April The Economic Recovery Tax Act of 1981 ( 1.4% of NNP) 1982* April The Tax Equity and Fiscal Responsibility Act of 1982 (+0.6% of NNP) The Highway Revenue Act of 1982 (+0.1% of NNP) 1983 April The Social Security Amendments of 1983 (+0.2% of NNP) The Interest and Dividend Tax Compliance Act of 1983 ( 0.1% of NNP) 1984 April The Deficit Reduction Act of 1984 (+0.3% of NNP) 1985 April % The Consolidated Omnibus Budget Reconciliation Act of 1985 (0.0% of NNP) 1986 April The Tax Reform Act of 1986 (+0.5% of NNP) 1987 April The Omnibus Budget Reconciliation Act of 1987 (+0.2% of NNP) 1988 April April The Omnibus Budget Reconciliation Act of 1989 (+0.1% of NNP) 1990* April % The Omnibus Budget Reconciliation Act of 1990 (+0.5% of NNP) 1991* April April April The Omnibus Budget Reconciliation Act of 1993 (+0.4% of NNP) 1994 April April % 1996 April The Small Business Job Protection Act of 1996 (+0.0% of NNP) 1997 April The Tax Relief Act of 1997 ( 0.1% of NNP) 1998 April May May % The Economic Growth and Tax Reform Reconciliation Act of 2001 ( 0.8% of NNP) 2001* April * April The Job Creation and Worker Assistance Act of 2002 ( 0.6% of NNP) 2003 April The Jobs and Growth Tax Relief and Reconciliation Act of 2003 ( 0.6% of NNP) 2004 April April % 2006 April April April * Year in which the economy shrank during at least one quarter. Note: Leap Day is omitted. Source: Tax Foundation calculations based on data from Office of Management and Budget; Internal Revenue Service; Congressional Research Service; and National Bureau of Economic Research arrived on April 24 the latest date ever at that point. Just as the Kennedy tax cut had done in 1964, the Reagan tax cut in 1981 the Economic Recovery Tax Act restrained the tax burden. At the same time, downward pressure on state and local taxes spurred by California s Proposition 13 brought Tax Freedom Day earlier, and in 1984 it arrived on April 17. But a surge in economic growth during the late eighties along with an increase in payroll taxes raised the tax burden, and in 1989, Tax Freedom Day arrived on April 22. The next significant change in the tax burden came during the mid-to-late nineties. New higher tax brackets were added to the federal code in 1993, and the nation s tax burden rose considerably as income surged, pushing people into those higher brackets. By 1997 Tax Freedom Day came later than ever, April 28, and despite a targeted federal tax cut that year, the nation was in for a string of record-setting tax burdens. The tax burden reached new highs in 1999 and 2000, and Tax Freedom Day arrived in May for the first time. Tax Freedom Day arrived 123 days into the year, on May 3, 2000, and that still stands as the latest date ever. Predictably, following such a tax surge, American opposition to taxes grew, and President Bush was narrowly elected on a tax-cut platform. At the same time, income was slowing, and in 2001, before most of the Bush tax cuts had taken effect, Tax Freedom Day arrived on the 120 th day of the year, April 30. The tax burden fell again the next year by a whopping 11 days work, and Tax Freedom Day arrived on April 19. As more federal tax cuts were enacted during 2002 and 2003, the tax burden continued falling, and Tax Freedom Day arrived on April 16 in 2003, the earliest date in 20 years. Income and Payroll Dominate the Tax Burden Americans face an array of different taxes in their day-to-day lives. Figure 4 presents a breakdown of the nation s tax bill for 2007 by type of tax. The largest and most visible of these taxes are directly subtracted from

5 5 Americans paychecks individual income taxes and payroll taxes. Income Individual income taxes represent the largest component of Americans tax bills, and they are the best known for a number of reasons. All workers have a portion of their paychecks withheld to pay federal, state and in some cases local income taxes. Each worker then needs to file the famous Form 1040 with the IRS by April 15 of each year so the government can find out if too much or too little was withheld over the year. All but seven states levy some sort of income tax on top of the federal income tax, and a few localities do as well. When these are added to the federal income tax burden, income taxes are projected to amount to an average of 42 days worth of work for Americans in Payroll We also project for 2008 that Americans will spend another 28 days working to afford their payroll taxes, or social insurance taxes those taxes dedicated to funding social insurance programs such as Social Security and Medicare. Almost all taxpayers are aware of these taxes because they appear as line item deductions on the pay stubs of most Americans. Other Some taxes are less apparent to the taxpayer than income and payroll taxes because they are difficult to total up. Foremost among these less well-known taxes are sales and excise taxes. We project that Americans will work 16 days to pay these add-on taxes that are imposed at all levels of government and that raise the prices of nearly all goods and services. Another 12 days will be spent working to pay property taxes, which are primarily levied by local governments but increasingly by states as well. Property taxes have been the hot tax topic on the state and local level since the beginning of the recent real estate boom as many taxpayers have complained of rising tax bills. Now that the housing market is contracting, property taxes will continue to be a big story in Figure 3 Tax Freedom Day Number of Days Worked Apr 22 Apr Recessions Apr 22 Apr 19 Apr May 1 Apr 30 Apr 28 Apr 24 Apr 21 Apr Calendar Year 98 May 3 April 30 Apr 23 Apr April 23, Source: Tax Foundation calculations based on data from the Bureau of Economic Analysis and Congressional Budget Office.

6 6 This year, we project that Americans will have to work an additional 13 days to pay their share of corporate income taxes. The reason these taxes are rightly counted as part of the nation s tax burden is that taxes on businesses are ultimately passed on to individuals: consumers, employees, and shareholders in the form of higher prices, lower wages or employment levels, and lower share value. Finally, Americans will log a few more hours working to pay other business and miscellaneous taxes. Figure 4 Average Number of Days Worked to Pay by Type of Tax and Level of Government Days Spent Laboring to Pay in Days Individual Income Social Insurance Sales & Excise Property Corporate Income Other Estate & Gift 42 Days 28 Days 16 Days 12 Days 13 Days 1 Day 1 Day 32 Days 28 Days 2 Days 0 Days 11 Days 0 Days 1 Day 10 Days 0 Days 14 Days 12 Days 2 Days 1 Day 0 Days Source: Tax Foundation calculations based on data from the Bureau of Economic Analysis.

7 7 Tax Freedom Day by State The total tax burdens borne by residents of different states vary considerably, as illustrated by Figure 5. This occurs not only because residents of different states pay different amounts of state and local taxes, but also because their federal tax payments can vary dramatically. Table 2 and Figure 5 rank each state on its Tax Freedom Day and days spent working to pay for government. Residents of Alaska will bear the lowest average tax burden in Because of their modest incomes and extremely low state-and-local tax burden, we estimate Alaska s Tax Freedom Day for 2008 to be March 29. Mississippi, Montana, West Virginia, and Alabama round out the five states that we project will experience Tax Freedom Day earliest in At the other end of the tax burden spectrum are states with comparatively late Tax Freedom Days. The residents of Connecticut will celebrate last as usual, working until the 128th day of the year, from January 1 to May 8, before earning enough to pay all their taxes. Because Connecticut s per capita income is higher than in any other state, its residents pay extraordinarily high federal income taxes. Nearby states New Jersey and New York are second and third, respectively. California and Washington state round out the top five. Figure 5 Tax Freedom Day by State and Rank AK March 29 (50) CA Apr 30 (4) OR (32) WA Apr 29 (5) NV (11) ID (19) UT Apr 21 (17) AZ (20) MT Apr 8 (48) WY (21) CO Apr 23 (15) NM Apr 12 (42) ND Apr 12 (39) SD Apr 12 (41) NE Apr 19 (25) KS Apr 18 (26) TX Apr 12 (40) OK Apr 11 (43) MN Apr 27 (8) IA (34) MO Apr 14 (36) AR (30) LA Apr 13 (38) WI Apr 24 (14) I L Apr 23 (16) MS Apr 7 (49) MI (31) I N (29) KY Apr 10 (45) TN Apr 11 (44) AL Apr 9 (46) OH (28) GA Apr 19 (23) WV Apr 8 (47) PA Apr 21 (18) VA Apr 25 (12) NC (27) SC (33) FL (9) NH Apr 15 (35) VT Apr 19 (24) NY May 5 (3) DC May 3 ME (22) MA Apr 28 NJ May 7 (2) (6) CT May 8 (1) MD Apr 28 (7) RI Apr 24 (13) DE Apr 14 (37) HI (10) Latest 10 Earliest 10 Source: Tax Foundation calculations based on data from the Bureau of Economic Analysis.

8 8 SPECIAL (ISSN ) is published at least 6 times yearly by the Tax Foundation, an independent 501(c)(3) organization chartered in the District of Columbia pp. Single copy: free Multiple copies: $5 each The Tax Foundation, a nonprofit, nonpartisan research and public education organization, has monitored tax and fiscal activities at all levels of government since Tax Foundation Editor and Communications Director, Bill Ahern Copy Editor, Alicia Hansen Tax Foundation 2001 L Street, NW, Suite 1050 Washington, DC (202) (202) fax TF@TaxFoundation.org Tax Freedom Day: Origin and Methodology Tax Freedom Day was conceived by Florida businessman Dallas Hostetler in He Table 2 Tax Freedom Day and Days Worked in Each State Days Spent Tax Working to Freedom Pay Day Rank United States 113 April 23 Alabama 99 April 9 46 Alaska 88 March Arizona 110 April Arkansas 107 April California 120 April 30 4 Colorado 113 April Connecticut 128 May 8 1 Delaware 104 April Florida 116 April 26 9 Georgia 109 April Hawaii 116 April Idaho 110 April Illinois 113 April Indiana 107 April Iowa 106 April Kansas 108 April Kentucky 100 April Louisiana 103 April Maine 110 April Maryland 118 April 28 7 Massachusetts 118 April 28 6 Michigan 106 April Minnesota 117 April 27 8 Mississippi 97 April 7 49 Missouri 104 April Montana 98 April 8 48 Nebraska 109 April Nevada 116 April New Hampshire 105 April New Jersey 127 May 7 2 New Mexico 102 April New York 125 May 5 3 North Carolina 107 April North Dakota 102 April Ohio 107 April Oklahoma 101 April Oregon 106 April Pennsylvania 111 April Rhode Island 114 April South Carolina 106 April South Dakota 102 April Tennessee 101 April Texas 102 April Utah 111 April Vermont 109 April Virginia 115 April Washington 119 April 29 5 West Virginia 98 April 8 47 Wisconsin 114 April Wyoming 110 April District of Columbia 123 May 3 Note: Leap day is omitted. Source: Tax Foundation calculations based on data from the Department of Commerce, Bureau of Economic Analysis. performed the calculation himself and promoted his copyrighted concept until his retirement in He deeded the intellectual property to the Tax Foundation, and since then the Tax Foundation has used historical data to calculate Tax Freedom Day back to the beginning of the 20th century, and in 1990 sufficient data became available to calculate a separate Tax Freedom Day for each state. Tax Freedom Day is a vivid, calendarbased illustration of government s cost, and it gives Americans an easy way to gauge the overall tax take. We count every dollar that is officially part of national income according to the Department of Commerce s Bureau of Economic Analysis, and every payment to the government that is officially considered a tax is counted. at all levels of government are included, whether levied by Uncle Sam or state and local governments. We assume that the nation starts working on January 1, earning the same amount each day and spending nothing. When the nation has finally earned enough to pay all the taxes that will be due for that year, Tax Freedom Day has arrived. Determining the national Tax Freedom Day involves calculating an overall average tax rate for the nation. This is done by dividing the nation s total tax payments by the nation s income as projected by the Tax Foundation for The following formula presents this calculation for 2008:, state & local taxes = Total income $3,910 billion = 30.8% $12,696 billion 30.8% x 365 days = 113 days = April 23 The source for income and tax data is the National Income and Product Accounts published by the Bureau of Economic Analysis in the Department of Commerce. For a more detailed description of Tax Freedom Day s methodology and some questions relating to the timing of tax burdens and income, please see Tax Freedom Day: How It s Calculated and Addressing Some Methodological Issues.