There’s nothing certain about Tax Freedom Day

There are some things that show up in the news on a fairly regular basis that really shouldn't be taken seriously. Things like Groundhog Day. Or Sarah Palin.

Soon, media of all sorts – from the mainstream to the far left and far right – will be bombarding us with the news we always hear as April approaches about Tax Freedom Day. And, forgive me for being repetitive, but just like anything spoken by John Edwards and Glenn Beck, it's best to simply ignore everything you are about to hear in news stories about this "special" day.

According to a news release that landed in my e-mail today from The Tax Foundation, South Dakotans celebrated Tax Freedom Day on Monday, March 29.

According to the Tax Foundation, Tax Freedom Day marks the time that "Americans will have worked long enough to have earned enough money to pay this year's tax obligations at the federal, state and local levels." It further explained that South Dakotans worked 88 days in 2010 to pay all of their tax obligations, and the date of Tax Freedom Day for all Americans will be Friday, April 9.

The Tax Foundation does note that there has been a shift toward a lower tax burden in this country since 2007. That shift has been driven by three factors: (1) The recession has reduced tax collections even faster than it has reduced income; (2) President Obama and the Congress have enacted large but temporary income tax cuts for 2009 and 2010, just as President Bush did in 2008; and (3) Two significant taxes were repealed for 2010 as part of previous legislation, the estate tax and the so-called PEP and Pease provisions of the income tax.

The foundation adds, with a seeming note of despair, "Despite all these tax reductions, Americans will pay more taxes in 2010 than they will spend on food, clothing and shelter combined."

There's one thing you need to remember about Tax Freedom Day. The Tax Foundation "seems" to have its facts straight, in the same way that a barker on the midway at the Sioux Empire Fair back when I was 10-years-old seemed very genuine, when he convinced me to plunk down $5 at his shooting range because he guaranteed that I would win a Swiss Army Knife if I scored a bull's-eye. How was I to know that thing that he handed me – that resembled a small caliber rifle – likely was loaded with nothing but, oh, say, air?

But I digress. Childhood scars to one's psyche suffered at the county fair can be the topic of a future column. Back to Tax Freedom Day.

Just like the Sioux Empire Fair's Juvenile Entertainment Spokesperson – okay, he was a carnie – the Tax Foundation is being just a bit inaccurate with its announcements. "Step right up! We're straight shooters," they seem to cry out to all of us in their press releases.

Straight shooters? Um, no.

"Tax Freedom Day answers the basic question, 'What price is the nation paying for government?' An official government figure for total tax collections is divided by the nation's total income," cries out the Tax Foundation spokesperson from his carnival booth, er, I mean, press release. "The answer this year is that taxes will amount to 26.89 percent of our income, and the stretch of 99 days from January 1 to April 9 is 26.89 percent of the year. Income and tax data are then parsed out to the states, yielding 50 state-specific Tax Freedom Days."

There's just one problem. The real world doesn't work that way.

The Center on Budget and Policy Priorities (CBPP) noted last year, at about this time, when the media was going gaga over Tax Freedom Day, that  "(Congressional Budget Office) data suggest that 80 percent of U.S. households pay federal tax at a lower rate than the Tax Foundation's estimated 'average' federal tax burden," because "Tax Freedom Day" does not account for the U.S.'s progressive tax structure."

On March 31, 2009, CBPP criticized both the Tax Foundation's use of data and journalists who have wrongly suggested "Tax Freedom Day" reflects the average American's tax burden. It noted that this foundation is plagued by two major problems. First, its estimates of state and local tax burdens suffer from a number of serious methodological flaws. Second, over the years, many journalists and policymakers have misinterpreted the Tax Foundation's report as reflecting the tax burdens faced by typical middle-income workers.

In fact, the Tax Foundation's calculation of the "average" tax burden merely measures tax revenues as a share of the economy; it is similar to estimates of total revenues as a share of Gross Domestic Product (GDP). In a progressive tax system like that of the United States, only upper-income households pay tax at rates equal to or exceeding the overall level of revenues as a share of the economy.

Authoritative figures from the non-partisan Congressional Budget Office show that middle- and even upper-middle-income Americans pay a considerably smaller share of their income in taxes than the Tax Foundation report implies. The CBO data suggest that 80 percent of U.S. households pay federal tax at a lower rate than the Tax Foundation's estimated "average" federal tax burden.

The following example shows how the Tax Foundation's methodology can overstate the tax burdens of the typical family. Suppose four families with incomes of $50,000 each pay $2,500 in taxes ¬– 5 percent of their income – while one wealthy family with income of $300,000 pays $90,000 in taxes – 30 percent of its income. Total income among these five families is $500,000, and the total amount paid in taxes is $100,000. Thus, 20 percent of the total income of the five families goes to pay taxes. But the 20 percent figure is highly misleading as an indicator of the typical tax burden for families in this group.

As the saying goes, there are two things in life of which we can be certain: death and taxes. And there are several other things we encounter time after time that best not receive our attention. I personally plan to steer clear of the Tea Party movement.

And, I've decided not to invest any more of my time playing the shell game known as Tax Freedom Day.

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