Tax Freedom Day

Tax Freedom Day is a concept developed and trademarked by American businessman Dallas Hostetler, which aims to calculate first day of the year on which a nation as a whole has theoretically earned enough income to pay its taxes. Every dollar that is officially considered income by the government is counted, and every payment to the government that is officially considered a tax is counted. Taxes at all levels of government – local, state and federal – are included.

Not to be confused with Tax Day.

Purpose

According to Neil Veldhuis, Director of Fiscal Studies, Fraser Institute, the purpose of Tax Freedom Day is to provide citizens of tax-paying countries with a metric with which to estimate their "total tax bill". The premise is that by comparing the benefits received by citizens to the amount they pay in taxes, the value of paying taxes can be assessed.

History and methodology

The concept of Tax Freedom Day was developed in 1948 by Florida businessman Dallas Hostetler, who trademarked the phrase "Tax Freedom Day" and calculated it each year for the next two decades.[1] In 1971, Hostetler retired and transferred the trademark to the Tax Foundation.[2] The Tax Foundation has calculated Tax Freedom Day for the United States ever since, using it as a tool for illustrating the proportion of national income diverted to fund the annual cost of government programs. In 1990, the Tax Foundation began calculating the specific Tax Freedom Day for each individual state.

Tax Freedom Day only examines taxation and does not account for debt and inflation as a means for funding government.

  1. Debt comes with a guarantee of future repayment. Governments run at a deficit by promising creditors to service and repay debts by taxing future labor or generating revenue through other means such as sale or exploitation of state-owned assets.
  2. Inflation or currency debasement increases the supply of currency. This new currency could be used to pay for government, but the increased supply results in a decrease in value of each unit of currency. As the value of currency decreases, commodity prices increase as a result.

Leap years have one day more, February 29. This creates some bias in Tax Freedom Day charts. However, this bias is equal to roughly 1/366, which is about 0.27%.

United States
Tax Freedom Days in the U.S. since 1900:[3][4]
Year Tax Freedom Day Tax Burden
1900January 225.9%
1910January 195.0%
1920February 1312.0%
1930February 1211.7%
1940March 717.9%
1950March 3124.6%
1960April 1127.7%
1970April 1929.6%
1980April 2130.4%
1990April 2130.4%
2000May 133.0%
2010April 926.9%
2011April 1227.7%
2012April 1329.2%
2013April 1829.4%
2014April 2130.2%
2015April 2431.2%
2016April 2230.9%
2017April 2330.9%
2018April 1929.7%
2019April 1629.0%
See also: Taxation in the United States

In the United States, it is annually calculated by the Tax Foundation, a Washington, D.C.-based tax research organization. In the U.S., Tax Freedom Day in 2019 is April 16, for a total average effective tax rate of 29% of the nation's income. The latest that Tax Freedom Day has occurred was May 1 in 2000. In 1900, Tax Freedom Day arrived January 22, for an effective average total tax rate of 5.9 percent of the nation's income. According to the Tax Foundation, the most important factor driving changes in Tax Freedom Day from year to year is growth in incomes, as the progressive structure of the U.S. federal tax system causes taxes as a percentage of income to rise along with inflation.

The Tax Foundation also calculates Tax Freedom day inclusive of annual federal borrowing, which came 22 days later in 2019, on May 8. The 22 days represent the federal deficit.

Tax Freedom Day varies among the 50 U.S. states, as incomes and state and local taxes differ from state to state. In 2019, Alaska had the lowest total tax burden, earning enough to pay all their tax obligations by March 25. Washington, D.C. had the heaviest tax burden – Tax Freedom Day there arrived May 3.

Around the world

Many other organizations in countries throughout the world now produce their own "Tax Freedom Day" analysis. According to the Tax Foundation, Tax Freedom Day reports are currently being published in eight countries. Due to the different ways that nations collect and categorize public finance data, however, Tax Freedom Days are not comparable from one country to another.

Tax Freedom Days for countries by date
CountryDay of year % burdenDate of yearUpdatedSourceReference
Switzerland12133%May 12015Deloitte
India7420%March 142000Centre for Civil Society
Australia10729%April 172019Centre for Independent Studies
United States11431%April 242015Tax Foundation
Estonia11431%April 242007Eesti Maksumaksjate Liit (Estonian Taxpayers Association)
Lithuania12835%May 152015Lithuanian Free Market Institute
Spain18150%June 302016Foundation for the Advancement of Liberty and Spanish Taxpayers' Union[5]
Uruguay13339%May 132010CPA Ferrere
Hungary14038%*May 202008Hungarian Central Statistic Institute
New Zealand12735%*May 72018Staples Rodway
South Africa14139%May 222014Free Market Foundation
Bulgaria12436%May 42018Radio Bulgaria
United Kingdom16244%June 122017Adam Smith Institute[6]
Brazil15341%May 312014Instituto Brasileiro de Planejamento Tributario
Slovakia15542%June 52017Nadácia F.A.Hayeka
Canada16445%June 142019Fraser Institute
Belarus13537%May 152016The Public Association «Discussion and Analytical Society Liberal Club»
Croatia16144%June 102010Adriatic Institute for Public Policy
Czech Republic14941%May 292017Liberální institut
Slovenia16437%June 132015Svetilnik
Belgium21854%July 172018Institut économique Molinari (IEM)
Greece16946%June 192012Φορολογικό Παρατηρητήριο, Κέντρο Φιλελεύθερων Μελετών – Μάρκος Δραγούμης
Poland15643%June 62018Centrum im. Adama Smitha
Germany19252%July 112015Bund der Steuerzahler
Israel19754%July 142013Jerusalem Institute for Market Studies
Turkey19453%July 142012Liberal Democratic Party
Norway21057%July 292007Skattebetalerforeningen
France20857%July 272018Institut économique Molinari (IEM)
Bosnia and Herzegovina16144%June 102017Centre for Policy and Governance «Centar za politike i upravljanje»
Austria21659%August 52019Austrian Economics Center
Italy15342%June 22018CGIA

European Union

A 2010 study published in L'Anglophone,[7] a Brussels newspaper, compared the tax burdens of "Average Joes" in each of the 27 EU member states and projected the Tax Freedom Day for workers earning a typical wage. Income taxes, social security contributions (by the employee and the employer) and projected VAT contributions were included in the calculations.

Regarding the discrepancy between their calculation of August 3 as the typical Belgian worker's Tax Freedom Day and that of PriceWaterhouseCoopers (PWC), L'Anglophone's authors wrote:[8] "[PWC's] figures count revenue from all taxes (including those on corporate profits, petrol, cigarettes, &c.) and thus present a more complete picture of the country’s total tax burden," adding that it is "an average applied to all Belgians – not all Belgian workers; in 2008, less than half of Belgium’s population (4.99 million working out of 10.67 million citizens) was legally working. Consequently, a huge share of Belgium’s tax burden is borne by the working population."

2010 Tax Freedom Days for the "Average Joe" in the European Union, as published in L'Anglophone
CountryDay of year % burdenDate of year
Austria19152%July 10
Belgium21559%August 3
Bulgaria14540%May 25
Cyprus7219%March 13
Czech Rep.16545%June 14
Denmark16846%June 17
Estonia15041%May 30
Finland16645%June 15
France20756%July 26
Germany20055%July 19
Greece16445%June 13
Hungary21859%August 6
Ireland11732%April 27
Italy16946%June 18
Latvia16144%June 10
Lithuania16745%May 20
Luxembourg13537%May 15
Malta9927%April 9
Netherlands18450%July 3
Poland16044%June 9
Portugal15041%May 30
Romania17849%June 27
Slovakia16746%June 16
Slovenia16445%June 13
Spain13637%May 16
Sweden18149%June 30
United Kingdom13436%May 13

Criticism

In the book Filthy Lucre: Economics for People Who Hate Capitalism, philosopher Joseph Heath criticizes the idea that tax-paying is inherently different from consumption:

It would make just as much sense to declare an annual "mortgage freedom day", in order to let mortgage owners know what day they "stop working for the bank and start working for themselves". ...But who cares? Homeowners are not really "working for the bank"; they're merely financing their own consumption. After all, they're the ones living in the house, not the bank manager.[9]

Mathematical

For Canada, the Fraser Institute also includes a "Personal Tax Freedom Day Calculator" that estimates a customized Tax Freedom Day based on additional variables such as age of household head, sex of household head, marital status and number of children. However, the Fraser Institute's figures have been disputed. For example, a 2005 study by Osgoode Hall Law Professor Neil Brooks[10] argued the Fraser Institute's Tax Freedom Day analysis includes flawed accounting, including the exclusion of several important forms of income and overstating tax figures, moving the date nearly two months later.[11]

In America, while Tax Freedom Day presents an "average American" tax burden, it is not a tax burden typical for an American. That is, the tax burdens of most Americans are substantially overstated by Tax Freedom Day. The larger tax bills associated with higher incomes increases the average tax burden above that of most Americans.

The Tax Foundation defends its methodology by pointing out that Tax Freedom Day is the U.S. economy's overall average tax burden—not the tax burden of the "average" American, which is how it is often misinterpreted by members of the media.[12] Tax Foundation materials do not use the phrase "tax burden of the average American", although members of the media often make this mistake.[13]

Another criticism is that the calculation includes capital gains taxes but not capital gains income, thus overstating the tax burden. For example, in the late 1990s the US Tax Freedom Day moved later, reaching its latest date ever in 2000, but this was largely due to capital gains taxes on the bull market of that era rather than an increase in tax rates. In other words, variations in capital gains income and their associated taxes cause changes in the amount of taxes, but not in the income used in the calculation of Tax Freedom Day.

The Tax Foundation argues that the Tax Freedom Day calculation does not include capital gains as income because it uses income and tax data directly from the Bureau of Economic Analysis (BEA). BEA has never counted capital gains as income since they don't represent current production available to pay taxes, and so the Tax Foundation excludes them as well. Additionally, the Tax Foundation argues that the exclusion of capital gains income is irrelevant in most years since including capital gains would only shift Tax Freedom Day by 1 percent in either direction in most years.[14] A 1 percent change would represent 3.65 days. From 1968 to 2009 the date has never left the 21-day range of April 13 to May 3.

See also

Notes
  1. Madsen Pirie, Think Tank: A Story of the Adam Smith Institute, Biteback Publishing, 2012, p. 168
  2. U.S. Patent and Trademark Office, "Tax Freedom Day"
  3. The Tax Foundation – Tax Freedom Day and Tax Burden, 1900–2010
  4. "Tax Freedom Day 2019 is April 16th". April 10, 2019.
  5. Berechet, Cristina (May 24, 2016). "Tax Freedom Day 2016" (PDF). Foundation for the Advancement of Liberty. Foundation for the Advancement of Liberty & Spanish Taxpayer's Union.
  6. "Tax Freedom Day". Adam Smith Institute. Retrieved April 11, 2018.
  7. Wages and Taxes for the Average Joe in the EU 27
  8. Belgian Workers’ Wages are Highest-Taxed in Western Europe
  9. Heath, Joseph. Filthy Lucre. p. 90.
  10. Professor Neil Brooks, Osgoode Hall, 2005, archived from the original on December 16, 2005, retrieved December 11, 2005
  11. Tax Freedom Day – A Flawed, Incoherent, and Pernicious Concept (PDF), June 5, 2005, retrieved August 16, 2016
  12. "Tax Foundation".
  13. "The Tax Foundation – America Celebrates Tax Freedom Day". Archived from the original on April 23, 2006. Retrieved April 27, 2006.
  14. "Tax Foundation".
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