Tax Freedom Day

Tax Freedom Day is the first day of the year in which a nation as a whole has theoretically earned enough income to pay its taxes. Every dollar that is officially considered income by the government is counted, and every payment to the government that is officially considered a tax is counted. Taxes at all levels of government—local, state and federal—are included.

Purpose

According to Neil Veldhuis, Director of Fiscal Studies, Fraser Institute, the purpose of Tax Freedom Day is to provide citizens of tax-paying countries with a metric with which to estimate their "total tax bill". The premise is that by comparing the benefits received by citizens to the amount they pay in taxes, the value of paying taxes can be assessed.

History and methodology

The concept of Tax Freedom Day was developed in 1948 by Florida businessman Dallas Hostetler, who trademarked the phrase "Tax Freedom Day" and calculated it each year for the next two decades.[1] In 1971, Hostetler retired and transferred the trademark to the Tax Foundation.[2] The Tax Foundation has calculated Tax Freedom Day for the United States ever since, using it as a tool for illustrating the proportion of national income diverted to fund the annual cost of government programs. In 1990, the Tax Foundation began calculating the specific Tax Freedom Day for each individual state.

Tax Freedom Day only examines taxation, and does not account for debt and inflation as means for funding government.

  1. Debt is the tax on future labor. Governments secure debts by promising creditors to service and repay debts by taxing future labor.
  2. Inflation or currency debasement increases the supply of currency. This new currency could be used to pay for government, but the increased supply results in a decrease in value of each unit of currency. As the value of currency decreases, commodity prices increase as a result.

Leap year effects

Leap years have one day more, 29 February. This creates some bias in Tax Freedom Day charts. However, this bias is equal to roughly 1/366, which is about 0.27%.

United States

In the United States, it is annually calculated by the Tax Foundation, a Washington, D.C.-based tax research organization. In the U.S., Tax Freedom Day for 2015 is April 24, for a total average effective tax rate of 31 percent of the nation's income. The latest that Tax Freedom Day has occurred was May 1 in 2000. In 1900, Tax Freedom Day arrived January 22, for an effective average total tax rate of 5.9 percent of the nation's income. According to the Tax Foundation, the most important factor driving changes in Tax Freedom Day from year to year is growth in incomes, as the progressive structure of the U.S. federal tax system causes taxes as a percentage of income to rise along with inflation.

Tax Freedom Day varies among the 50 U.S. states, as incomes and state & local taxes differ from state to state. In 2015, Louisiana had the lowest total tax burden, earning enough to pay all their tax obligations by April 2. Connecticut had the heaviest tax burden—Tax Freedom Day there arrived May 13.

According to the Tax Foundation, the following is a list of Tax Freedom Days in the U.S. since 1900:[3]

Year TFD Percentage tax burden
1900 January 22 5.9%
1910 January 19 5.0%
1920 February 13 12.0%
1930 February 12 11.7%
1940 March 7 17.9%
1950 March 31 24.6%
1960 April 11 27.7%
1970 April 19 29.6%
1980 April 21 30.4%
1990 April 21 30.4%
2000 May 1 33.0%
2001 April 27 31.8%
2002 April 17 29.2%
2003 April 14 28.4%
2004 April 15 28.5%
2005 April 21 30.2%
2006 April 26 31.2%
2007 April 24 31.1%
2008 April 16 29.0%
2009 April 8 26.6%
2010 April 9 26.9%
2011 April 12 27.7%
2012 April 13 29.2%
2013 April 18 29.4%[4]
2014 April 21 30.2%[5]
2015 April 24 31%[6]

Tax Freedom Day around the world

Many other organizations in countries throughout the world now produce their own "Tax Freedom Day" analysis. According to the Tax Foundation, Tax Freedom Day reports are currently being published in eight countries. Due to the different ways that nations collect and categorize public finance data, however, Tax Freedom Days are not comparable from one country to another.

Tax Freedom Days for countries by date
Country Day of year % burden Date of year Updated Source Reference
India 74 20% 14 March 2000 Centre for Civil Society
Albania 84 23.1% 25 March 2011 AL-Tax Center
Australia 99 27.1% 10 April 2014 Centre for Independent Studies
United States 114 31% 24 April 2015 Tax Foundation
Estonia 114 31.1% 24 April 2007 Eesti Maksumaksjate Liit (Estonian Taxpayers Association)
Lithuania 128 35.0% 8 May 2014 Lithuanian Free Market Institute
Spain 130 35.6% 10 May 2013 Think Tank Civismo
Uruguay 133 38.6% 13 May 2010 CPA Ferrere
Hungary 140 38%* 20 May 2008 Hungarian Central Statistic Institute
New Zealand 141 39% 21 May 2008 Staples Rodway
South Africa 141 38.6% 22 May 2014 Free Market Foundation
Bulgaria 147 40% 27 May 2009 Novinite
United Kingdom 148 40.5% 28 May 2014 Adam Smith Institute
Brazil 151 41.37% 31 May 2014 Instituto Brasileiro de Planejamento Tributario
Slovakia 152 41.71% 1 June 2013 Nadácia F.A.Hayeka
Canada 157 42.6% 6 June 2009 Fraser Institute May 2, 2010
Belarus 157 42.9% 7 June 2014 The Public Association «Discussion and Analytical Society Liberal Club»
Croatia 161 43.7% 10 June 2010 Adriatic Institute for Public Policy
Czech Republic 161 44.1% 11 June 2007 Liberální institut
Belgium 165 44.9% 14 June 2013 PricewaterhouseCoopers
Greece 169 46.3% 19 June 2012 Φορολογικό Παρατηρητήριο, Κέντρο Φιλελεύθερων Μελετών - Μάρκος Δραγούμης
Poland 173 47.4% 22 June 2013 Centrum im. Adama Smitha
Slovenia 176 48.3% 25 June 2011 Business daily Finance
Germany 190 51.7% 8 July 2008 Bund der Steuerzahler
Israel 197 54% 14 July 2013 Jerusalem Institute for Market Studies
Turkey 194 53% 14 July 2012 Liberal Democratic Party
France 197 53.6% 16 July 2007 Contribuables associés
Norway 210 56.7% 29 July 2007 Skattebetalerforeningen

Tax Freedom Day for workers in the European Union

A 2010 study published in L'Anglophone,[7] a Brussels newspaper, compared the tax burdens of "Average Joes" in each of the 27 EU member states and projected the Tax Freedom Day for workers earning a typical wage. Income taxes, social security contributions (by the employee and the employer) and projected VAT contributions were included in the calculations.

Regarding the discrepancy between their calculation of August 3 as the typical Belgian worker's Tax Freedom Day and that of PriceWaterhouseCoopers (PWC), L'Anglophone's authors wrote:[8] "[PWC's] figures count revenue from all taxes (including those on corporate profits, petrol, cigarettes, &c.) and thus present a more complete picture of the country’s total tax burden," adding that it is "an average applied to all Belgians – not all Belgian workers; in 2008, less than half of Belgium’s population (4.99 million working out of 10.67 million citizens) was legally working. Consequently, a huge share of Belgium’s tax burden is borne by the working population."

2010 Tax Freedom Days for the "Average Joe" in the European Union, as published in L'Anglophone
Country Day of year % burden Date of year
Austria 191 52.2% 10 July
Belgium 215 58.5% 3 August
Bulgaria 145 39.5% 25 May
Cyprus 72 19.4% 13 March
Czech Rep. 165 44.9% 14 June
Denmark 168 45.7% 17 June
Estonia 150 40.7% 30 May
Finland 166 45.2% 15 June
France 207 56.4% 26 July
Germany 200 54.6% 19 July
Greece 164 44.6% 13 June
Hungary 218 59.4% 6 August
Ireland 117 31.9% 27 April
Italy 169 46.0% 18 June
Latvia 161 43.7% 10 June
Lithuania 167 45.4% 16 June
Luxembourg 135 36.8% 15 May
Malta 99 26.8% 9 April
Netherlands 184 50.2% 03 Jul
Poland 160 43.6% 9 June
Portugal 150 40.9% 30 May
Romania 178 48.6% 27 June
Slovakia 167 45.5% 16 June
Slovenia 164 44.7% 13 June
Spain 136 37.0% 16 May
Sweden 181 49.4% 30 June
United Kingdom 134 36.3% 13 May

Criticism

In the book Filthy Lucre: Economics for People Who Hate Capitalism, philosopher Joseph Heath criticizes the idea that tax-paying is inherently different from consumption:

It would make just as much sense to declare an annual "mortgage freedom day", in order to let mortgage owners know what day they "stop working for the bank and start working for themselves". ...But who cares? Homeowners are not really "working for the bank"; they're merely financing their own consumption. After all, they're the ones living in the house, not the bank manager.[9]

Mathematical

For Canada the Fraser Institute also includes a “Personal Tax Freedom Day Calculator” that estimates a customized Tax Freedom Day based on additional variables such as age of household head, sex of household head, marital status and number of children. However, the Fraser Institute's figures have been disputed. For example, a 2005 study by Osgoode Hall Law Professor Neil Brooks[10] argues the Fraser Institute's Tax Freedom Day analysis includes flawed accounting, including the exclusion of several important forms of income and overstating tax figures, moving the date nearly two months later.[11]

In America, while Tax Freedom Day presents an "average American" tax burden, it is not a tax burden typical for an American. That is, the tax burdens of most Americans are substantially overstated by Tax Freedom Day. The larger tax bills associated with higher incomes increases the average tax burden above that of most Americans.

The Tax Foundation defends its methodology by pointing out that Tax Freedom Day is the U.S. economy's overall average tax burden—not the tax burden of the "average" American, which is how it is often misinterpreted by members of the media. Tax Foundation materials do not use the phrase "tax burden of the average American", although members of the media often make this mistake.[12]

Another criticism is that the calculation includes capital gains taxes but not capital gains income, thus overstating the tax burden. For example, in the late 1990s the US Tax Freedom Day moved later, reaching its latest date ever in 2000, but this was largely due to capital gains taxes on the bull market of that era rather than an increase in tax rates. In other words, variations in capital gains income and their associated taxes cause changes in the amount of taxes, but not in the income used in the calculation of Tax Freedom Day.

The Tax Foundation argues that the Tax Freedom Day calculation does not include capital gains as income because it uses income and tax data directly from the Bureau of Economic Analysis (BEA). BEA has never counted capital gains as income since they don't represent current production available to pay taxes, and so the Tax Foundation excludes them as well. Additionally, the Tax Foundation argues that the exclusion of capital gains income is irrelevant in most years since including capital gains would only shift Tax Freedom Day by 1 percent in either direction in most years. A 1 percent change would represent 3.65 days. From 1968 to 2009 the date has never left the 21-day range of April 13 to May 3.

See also

Notes

  1. ↑ Madsen Pirie, Think Tank: A Story of the Adam Smith Institute, Biteback Publishing, 2012, p. 168
  2. ↑ U.S. Patent and Trademark Office, "Tax Freedom Day"
  3. ↑ The Tax Foundation - Tax Freedom Day and Tax Burden, 1900–2010
  4. ↑ http://taxfoundation.org/article/tax-freedom-day-2013-april-18-five-days-later-last-year
  5. ↑ http://taxfoundation.org/article/tax-freedom-day-2014-april-21-three-days-later-last-year
  6. ↑ Pomerleau, Kyle (2015-03-30). "Tax Freedom Day® 2015 is April 24th". Tax Foundation. Retrieved 2015-04-14.
  7. ↑ Wages and Taxes for the Average Joe in the EU 27
  8. ↑ Belgian Workers’ Wages are Highest-Taxed in Western Europe
  9. ↑ Heath, Joseph. Filthy Lucre. p. 90.
  10. ↑ Professor Neil Brooks, Osgoode Hall, 2005, retrieved 11 December 2005
  11. ↑ Tax Freedom Day - A Flawed, Incoherent, and Pernicious Concept, 5 June 2005, retrieved 17 September 2014
  12. ↑ The Tax Foundation - America Celebrates Tax Freedom Day

External links