Economy Lab

'Tax freedom day' may come sooner than you think

Special to The Globe and Mail

Dusk sets in over the U.S. Capitol building in Washington, January 24, 2012. (JONATHAN ERNST)

Could Americans who care about their “Tax Freedom Day” be more free than they think?



Yes, says a critique of Tax Freedom Day, a date calculated each year in the U.S. by the Tax Foundation. (The group, while nonpartisan, can safely be said to prefer lower levels of taxation to higher ones.)





Tax Freedom Day, says the foundation, is the day “the nation has finally earned enough to pay all the taxes that will be due for that year.” In 2012, it falls on April 17th, four days later than last year.

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The problem, however, is how Tax Freedom Day gets extrapolated in media coverage to be called the day “the average American” has earned enough to pay his or her tax bill. That’s the view of the Center on Budget and Policy Priorities, a left-of-center think tank that “helps ensure that policymakers consider the needs of low-income families and individuals.”



“Those who report on ‘Tax Freedom Day’ as if it represented the day until which the typical American must work to pay his or her taxes are misinterpreting these figures and inadvertently fostering misimpressions about the taxes that most Americans pay,” the CBPP says.



The CBPP notes the Tax Foundation measures total U.S. federal tax revenues as a share of the economy; the resulting percentage, the CBPP says, is higher than the tax rate paid by a vast majority of Americans. That’s because of the outsized effect of the wealthy’s taxes on the number.



To illustrate the issue, CBPP goes back to 2007, the most recent year of data from the Congressional Budget Office on household income and tax rates.



The Tax Foundation’s numbers suggested a federal effective tax rate of 21.6 per cent. But taxpayers in the bottom four quintiles -- 80 per cent of taxpayers, in other words -- paid less than that. Households in the fourth quintile of income -- the 61st through 80th percentiles -- paid 17.4 per cent of their income in federal taxes.



The Tax Foundation’s 2012 estimate of 18.8 per cent is considerably lower. The CBPP says it expects 2012 household tax data would show decreases in all the quintiles, so “the federal effective tax rate for each of the lower four quintiles would still be lower than the average federal effective tax rate for all taxpayers as calculated by the Tax Foundation.”



How does the error come into play, practically? The CPBB cites a CNNMoney story from last year that said, “Americans will spend an average of 28 per cent of their income to pay federal, state and local taxes this year, the Tax Foundation said Wednesday. That means you will need to work 102 days -- more than three months -- just to earn enough to pay your tax bill. So on April 12 you will be free of your 2011 tax burden.”



For its part, the Tax Foundation carefully avoids the misleading language of “average” or “typical” American. Its 2012 report says “Americans will work 107 days into the year” to earn the money to pay “the nation’s total tax burden.”



At the same time, however, the Tax Foundation answers one of its “frequently asked questions” -- “Does Tax Freedom Day measure the ‘average’ American tax burden?” -- with “Yes.”



“The mathematical average of any group is found by adding up all the values and dividing by the number of values … Including high-income taxpayers tends to increase the average tax burden -- just as including low-income taxpayers decreases it. To be an objective mathematical average, Tax Freedom Day must include all taxpayers.”



In Canada, the Fraser Institute calculates a Tax Freedom Day ( June 6th in 2011) using a different, more rigorous methodology than the Tax Foundation, says Niels Veldhuis, the institute’s vice-president of research.



The Fraser Institute uses its own Canadian Tax Simulator, which is based on Statistics Canada’s Social Policy Simulation Database and Model. Fraser Institute measures its Tax Freedom Day for three different family types across 10 different income groups. And a calculator on the group’s website allows a user to input their information and get a very specific answer.



At the same time, however, the Fraser Institute calculates an overall Tax Freedom Day, based on an “average Canadian family” earning $93,831 in income and paying a total of $39,960 in taxes across all levels of government.



That average represents a higher tax rate than the one for those in the lowest tax brackets, and a lower rate than those in the highest tax brackets. And that means, too, that the Fraser Institute’s stated Tax Freedom Day is much later than the true date for lower-income Canadians and much earlier than the true date for upper-income Canadians, Mr. Veldhuis acknowledges.



“The notion that you’re an average family is false, because there’s no perfect average family,” says Mr. Veldhuis.

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