The "Tax Freedom Day" Trick

What do your taxes buy you? The average person benefits greatly from strong government. By gathering together into a community that is jointly managed (i.e. government) people can pool their resources and accomplish great things that cannot be accomplished by people who are on their own. Roads and bridges are examples of things that people cannot accomplish individually. Police, firefighters, public schools are other examples. Law and courts and a monetary system are still more. And then there are benefits like Social Security and the "safety net" of programs for people who lose jobs to food programs for those of us without enough to eat.

The reason we have almost everything that we value as a society, our education and (until recently anyway) jobs, the internet, buildings that don't easily burn down or blow away, drinkable water coming to our houses and sewage systems leaving them and (until fairly recently, anyway) a health care system that stops epidemics is our government. All of the businesses we see around us exist because of our government -- a corporation cannot even exist without the government that establishes it and the legal system that maintains it.

But there are some who would personally benefit more in the absence of government than in its presence. History has taught that there are some who would organize themselves to take what others have worked to build rather than do that work themselves. One need only look at the walls built around cities in the past to understand this. There have also been organized gangs and other criminal enterprises that take rather than build, and more recently we have seen that organized predatory enterprises also find ways to victimize and prey on people. Fraud, confidence and ponzi schemes, consumer scams and all manner of trickery prey on people who are left unprotected by their community. Government is what has always protected regular people from such predators.

Government -- the people banding together to guard and accomplish their interests -- serves to protect people from those who would just take rather than work with the rest of us to build.

So why did Ronald Reagan famously say "government is the problem" in his first inaugural address and he loudly and repeatedly attack the idea of taxes? The foundation and strength of government is the taxes it collect. Taxes are what provide government with its strength to do all of the good things described above. This is why anti-government ideologues reason that the way to cut government (and thereby bring in its alternative) is to cut taxes. They say that if they can just cut out the foundation of government, it will fall. Or, more famously, that they can "drown it in a bathtub."

One way that anti-government ideologues have worked to accomplish this is to turn people against their own government, tricking people into misunderstanding how taxes work and what government does for them. last week, in What Are Tax Brackets, I explained how one of these tricks works -- that you only pay bracket rates taxes on income that falls in that bracket, not on all income earned up to that bracket.

Another way they turn people against taxation and government is to misrepresent how much is collected and how it is used. Exaggerated statements like, "We pay half our income in taxes" are commonly heard, along with under-representation and misrepresentation of the benefits we receive from government.

"Tax Freedom Day" is one example of this technique. Tax Freedom Day is a product of The Tax Foundation, which is funded by the very same collection of right-wing donors that fund the Heritage Foundation, Cato Institute and so many other components of the anti-government "conservative movement."

Tax Freedom Day is widely publicized by corporate media, and usually described as being when "the average American" has earned enough income to pay their taxes. Tax Freedom Day for 2008 is April 23. To calculate Tax Freedom Day the The Tax Foundation adds up all the taxes paid to the government from all sources, but it only includes certain forms of income. It doesn't include capital gains income, for example, yet includes capital gains taxes on the tax side of the calculation. These misleading calculations of course result in a much higher tax amount than "the average America" really pays. So while they say that 30.8% of "our" income went to pay taxes in 2008, anyone reading this who looks at their own tax bill can see that their taxes are substantially lower than this figure.

So the next time you hear about Tax Freedom Day, keep in mind who is making this claim, and why.

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Comments

[gprante]

The capital gains criticism of Tax Freedom Day has been debunked; and if you look in 2008, the CBPP critique of Tax Freedom Day no longer includes the point you make regarding cap gains taxes and cap gains income.

The issue is that the income is actually included in NNP in the form of retained corporate earnings, which are equivalent to capital gains over the long-term. There can exists timing problems, but a timing problem exists even if you time up the cap gains realizations because corporate income taxes are counted and can be mistimed with the profits.

The main criticism made by CBPP is that the average tax burden can differ from the median tax burden. For you to believe that Tax Freedom Day is very misleading then means that you have to believe that the overall U.S. tax system is highly progressive. It is kind of a bizarre criticism that comes from many on the left because these are often the same people who argue that the tax system (as a whole) isn't that progressive when you count payroll taxes, sales taxes, etc.

Also, Tax Freedom Day shows that the country pays nowhere close to half of its income in taxes. So if you think people are systematically overstating how much they pay in taxes (say thinking that they pay half of their income), then people knowing the actual Tax Freedom Day would actually help remove that bias.

[enochsmoky]

A big reason that many people abhor taxes is that a large % go to federal, state and local public employees that are underworked and overpaid. This constant call to raise taxes takes the pressure off governments to objectively evaluate what employees are really needed and the level of compensation that should be paid to them. Pensions and benefits are rarely included when public employees are whining about being underpaid. The next big crisis is going to be unfunded public pensions. They were promised too much and the rest of the population is not going to fund a pensioner class when their own 401ks and jobs are in jeopardy. Why do you see so many public employees retire in their 50's? Something is wrong.

[WASanford]

I worked in the public sector for 35 years and there was not a time when I couldn't have quit and taken a higher paying job in the private sector. I didn't do that because it meant working in a system that did not recognize merit. In public service with enough experience I could take a written test, go through an interview process, and earn a promotion; doing that I was able to work myself close to the top of my profession.

You talk about public pensions as if the money in them just drops out of the sky. It doesn"t. You"re talking about money that was put there by the workers. That"s my money you want to steal and perhaps you can understand my being unappreciative of your sentiments!

Not one of you even knows what it means to earn a living and you"ve probably never in your lives worked up any kind of sweat. All you can do is look for someone whom you can steal from.

[LeftRight]

Obviously you've never actually done any research. The fact of the matter is that the public sector employees that you complain about being underworked and overpaid are, in fact, the EXACT opposite! I've NEVER known of a public sector employee who was not overworked and underpaid!

[drock973]

"History has taught that there are some who would organize themselves to take what others have worked to build rather than do that work themselves."

Yeah, they're called Democrats.

[LeftRight]

um... no, they're called "businessmen"

[Russycle]

Correct me if I'm wrong, but I'll assume Social Security is considered a tax when figuring Tax Freedom Day, but those same folks don't consider it a tax when they're whining about how the wealthy carry the majority of the tax burden.

[leftcoastindy]

Why are people who most care about getting 'overtaxed', the ones who know the least about how the sytem actually works? Do they enjoy complaining, or do they need to have something to blame on Dems?

[LeftRight]

They complain because they've been told for almost three decades now how taxes on the income that they make is unfair, and that the government is bad and will always waste such taxes, etc..... In other words, they don't educate themselves enough to understand.

I got into it with a woman the other day about the "tax and spend Democrats" meme. When I pointed out to her that under bush we've seen the national debt go from under 6 TRILLION DOLLARS to OVER 10 TRILLION DOLLARS she didn't seem too impressed. Then I asked her if she understood just how much money that was, and when she said that she didn't, I pointed out that at the rate of $1/second, assuming NO new debt and zero percent interest rates on the debt that it would take the US govt around 316,000 YEARS to pay off the debt, and that JUST the bush portion would take 126,752 YEARS to be paid off! I don't think that I turned her into a Democrat, but she DID look thoughtful as she left the gas station....