Tax Freedom Day: Repeating flawed analysis doesn’t make it right


It’s becoming something of a ritual. Every year, the Tax Foundation comes out with its Tax Freedom Day report, and every year the experts at the Center on Budget and Policy Priorities come out with a rebuttal on why the analysis is misleading.

Tax Freedom Day is described as the day when Americans have earned enough money to pay their share of federal, state and local taxes. The report exaggerates the cost of government for the typical taxpayer. And it completely misses the point that taxes support key infrastructure — in education and other areas — that keep our state and country strong.

The Tax Foundation report puts Minnesota’s “Tax Freedom Day” at April 13. To illustrate one key flaw in its analysis, we can do little better than recycle the example we used in our 2008 post, which demonstrates the difference between the “average” and “typical” taxpayer.

“Sven and Ole, each of whom earn $50,000, are having lunch at the local coffee shop. Bill Gates walks in, and Sven yells, “We’re rich!” Based on their average income, they’re all millionaires now. But the median income – where half of the people have a higher income and half are lower – is still $50,000, and is the more “typical” income of the three men at the coffee shop.”

So how does this relate to Tax Freedom Day? As part of the Tax Freedom Day calculation, the Tax Foundation divided all federal taxes collected by total national income, getting an average. Because the very wealthy are very wealthy, and pay a higher rate of taxes, that skews the numbers. For instance, the Tax Foundation said that the average U.S. taxpayer paid 21 percent of income in federal taxes. Yet according to the Center’s analysis, the typical American (those in the middle 20 percent) paid 14.2 percent of income in federal taxes. (And according to the Congressional Budget Office, more than 80 percent of Americans paid less than the 21 percent average.) The average figures greatly overstate what the typical or middle-income American household pays in federal taxes.

Check out the Center’s report for the full critique. But one final point is worth highlighting. The “Tax Freedom Day” framework presumes that taxes are something from which we need to be freed. The Tax Foundation artificially divides the year into those days Americans work for themselves and those days they work for government. As the Center points out, this logic ignores the fact that government provides important services that make people’s lives better and help the economy work: roads, schools, public safety, supports for the elderly and people with disabilities, medical research and more. The Center concludes:

There are important debates to be had about the appropriate size of government. But these debates are not furthered by the Tax Foundation’s implications that Americans derive no benefit whatsoever from the goods and services government provides.