Of Public Interest

Volume 3, Number 7
May, 2001

May 3 is Tax Freedom Day in 2001. It has never come later. The exact date is determined each year by the Tax Foundation <www.taxfoundation.org>, a think tank located in Washington, D.C. The idea behind Tax Freedom Day is that we work part of the year to support our governments and the rest of the year to support ourselves. Tax Freedom Day is when we stop working to support governments and start working to support ourselves.

To be sure, Tax Freedom Day is a statistical artifact. It is an average that fits some people better than others. Total taxes are 33.8 percent of total income throughout the nation, and May 3rd is 33.8 percent of the way through the year. Even in terms of statistical averages, the exact arrival of Tax Freedom Day depends on the state where you live. It comes April 16th for someone living in Alaska, but someone living in Connecticut must wait until May 25th.

We should also note that Tax Freedom Day is a measure of the average tax burden throughout the land. It understates the economic cost of taxation because that cost works primarily through the marginal rate of tax. This is the rate of tax that people pay for earning additional income. Marginal rates of tax can go well beyond 50 percent even if the average rate is 33.8 percent. The federal income tax has a top marginal rate of 39.6 percent. State income and other taxes can easily boost marginal rates over 50 percent.

Above the entrance to the headquarters of the Internal Revenue Service is chiseled a quotation from Oliver Wendell Holmes: "Taxation is the price we pay for civilization." It is easy to see why the IRS would display this quotation. A surface reading might seem to suggest that we should gladly accept whatever taxes are imposed on us. A deeper reading, though, reveals ambiguity about taxation. After all, our nation was founded on the proposition that taxes can become too high. We can acknowledge with Holmes that proper taxation may well be a price we pay for civilization, while at the same time recognizing with our forebears that taxation becomes destructive if it is too high.

How do we assess our current situation? Why does Tax Freedom Day move in only one direction? While there are short periods where Tax Freedom Day comes a day or two earlier and also periods where there is little change, the long-term trend is clearly one where Tax Freedom Day comes ever later. The last year Tax Freedom Day arrived in March was 1954, when it arrived on the 30th. By the time Nixon took office in 1969, Tax Freedom Day was April 21st. Between Nixon and Clinton, Tax Freedom Day hovered around April 20th. It came on April 20th when President Clinton arrived in Washington, but was forced to retreat two weeks during his eight years in office.

The so-called tax reductions proposed by President Bush will not cause Tax Freedom Day to arrive earlier. They would only slow the march of Tax Freedom Day toward Independence Day. Tax Freedom Day would arrive on May 5th if President Bush’s tax program were enacted, whereas otherwise it would arrive on May 10th.

We should remember that in contemporary Washingtonian English, a tax cut does not mean a true cut in your taxes. It means only that your tax increases will be less than what the Treasury Department had planned for them to be. Any proposal to decrease future increases in taxes is called a tax cut. Any proposal to reduce proposed increases in spending is called a spending cut. Yet taxes are never truly cut, nor is spending. Debates over so-called cuts are simply debates over how much to pare back proposed increases in taxes and spending.

There is a ratchet-effect at work, whereby taxes continually inch upward. Debates in Washington are over how fast taxes will rise. Genuine tax reductions are never on the table. This reflects a political bias toward spending money over returning it to taxpayers. Consider this simple illustration. There are five people who must decide by majority vote whether to cut each of their taxes by $100. Suppose the tax cut would eliminate a public program that was worth only $360. The tax cut would seem to make good sense. However, if that $360 were concentrated among three people, tax reduction would fail. This is, of course, a simple, hypothetical illustration. It does, however, make a well-recognized point about a democratic bias toward higher rather than lower taxation.

Tax Freedom Day is not a perfect indicator of the costs imposed by taxation. It is, however, a useful indicator. Even the serfs of the Middle Ages attained tax freedom by the first of April. Should we be happy with being treated even more harshly than those serfs?

A Publication of:
Public Interest Institute at Iowa Wesleyan College
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E-Mail: public.interest.institute@limitedgovernment.org Web Site: www.limitedgovernment.org