Tax Analysts Blog

Why Tax Freedom Day Matters

Posted on Apr 20, 2016

The Tax Foundation recently released its annual Tax Freedom Day report. Tax Freedom Day is the day when the nation has earned enough money to pay its federal, state, and local tax bills for the year. In 2016, that day is April 24.

This year Americans will pay $3.3 trillion in federal taxes and $1.6 trillion in state and local taxes, for a total bill of almost $5 trillion. That is about 31 percent of the nation's income. The foundation usually frames the importance of Tax Freedom Day as representing how long Americans have to work to pay the country's tax burden.

I know many learned, sophisticated public finance professionals who dismiss the report as a gimmick. "What does it matter?" they ask. Americans want a certain level of government services without having to pay for them. This dismissiveness is usually combined with a healthy dose of skepticism about the foundation's motives. More than one person has told me the report is a public relations stunt designed to bring attention, and eventually money, to the foundation.

The Center on Budget and Policy Priorities has more substantive criticism of Tax Freedom Day. Its main complaint is that the foundation's application of the average effective tax rate U.S. filers pay as a population to annual GDP is misleading because nearly all U.S. filers pay less than the average effective tax rate. That is, for most Americans, Tax Freedom Day comes much sooner. The criticism is to some extent fair. After all, large segments of the country reach their freedom day in January! But the foundation has been upfront about its approach.

The CBPP also notes that the foundation looks exclusively at tax burdens and does not address the underlying public services being provided. The center also takes issue with the idea that working to pay taxes is somehow enslavement, pointing out -- correctly -- that people work for a lot of things. They work for personal gain, but also for public services. Those public services benefit society, which in turn benefits the people working to pay the taxes. The argument goes that if you're working to pay taxes that benefit schools, it's hardly an infringement of freedom.

I confess that I used to be much more skeptical of the Tax Freedom Day report. But now I think it does the body politic a great favor. In a democracy, we should know how much we're paying for government. And while we can quibble with its method, the Tax Freedom Day report focuses our attention on the costs of government. It tells us that as a nation, we are working until late April to pay the bills. Actually, if you include the debt, we're working until sometime in May. Right now, the Tax Freedom Day report is the only indicator of what government costs that is presented in a way that most people understand. That's why it matters.

Most people have a difficult time connecting the costs and benefits of government. That is certainly true of the federal government, less so at the local level. But we should be discussing and debating the relative size of government and how much it costs. If taxes are the price to pay for civilization, maybe we would want a little less. Of course, maybe we would want more.

For me this issue resurrects one of the great failings in American political discourse. If you believe the government has a positive role to play in society, you should make that case to the public, while also explaining that the government you're proposing costs money and will have to be paid for. For those folks, the response to the foundation's report should be "yes, we are working until April because we want this level of government." But then you need to be prepared when the answer is "nope, I'm not getting quite what I want from my government." It's a discussion worth having, and the Tax Freedom Day report should be the catalyst for it.

A version of this post first appeared in State Tax Notes.

 

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