July 14, 2009

Trending Tax Freedom Day

Prior to the Great Depression, in 1929, the day of the year that the average American worker stopped working for the government and started working for himself was February 12th. That means that if every dollar the average worker had made went to the government to pay his or her taxes, by February 12th, he or she would be done paying taxes and would keep all the money he or she earned for the remainder of the year.

The nominal peak of tax freedom day occurred under Bill Clinton, in 1999 at about May 3rd. The tax freedom date had fluctuated under President Bush but generally declined in a non-linear path. For the last two years the date has dropped dramatically to about April 13th - the lowest level since 1967.

So how, do you ask, can Americans think that they are over-taxed and that in the midst of a federal budget deficit crisis, conservatives be asking for tax breaks? Good question.

The answer is one word: nominal

All of the above numbers represent tax dollars that are actually paid. It does not account for the real tax freedom day, which is severely altered by government deficits. The money the average American pays to the government is larger than what is really seen on your W-2 form.

Take a look at this graph provided by Tax Foundation.

What is striking from the graph is the effect that recessions have - nominal tax freedom day tends to decline, while real tax freedom day typically rises. Of course if the government is going to run deficits to create it's stimulus then the real rates would indeed spike - you just wouldn't see them because either you will pay for them at some time in the future when you are socked with higher taxes, or else your children and grandchildren will get stuck with it.

There is no free stimulus lunch, EVER. So the next question is, why not raise taxes to cover the deficit so the nominal tax freedom day reflects the real day as closely as possible?

The answer is again one word: politics.

It would be political suicide on a massive scale if the American public were to immediately see the impact of the gargantuan spending bill the Democrats are running up. They are banking on the effects not being visible prior to the next set of elections in 2010 and 2012. Look at 2009 on the graph. If that tax bill came to you today, the difference on your W-2 would be astonishing. You'd be at Tea Parties every weekend.

The other side of the equation is the lingering effects of not the deficit but the national debt. Factoring decades of snowballing national debt into the equation, Tax Freedom Day based on the formulas used by Tax Foundation is likely somewhere near the end of the year. In other words, we are get closer to the point of no tax freedom day, ever.

President Obama is trying to sell the American public on the idea of a free lunch. There is no such thing!

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