Tax Freedom Day Highlights Government Encroachment
2006-04
On Wednesday, April 26, 2006, the 116th day of this year, the average American was finally free from government taxes. All income gained prior to this date goes to pay for federal and state taxes.
Tax Freedom Day is when Americans can start working for themselves, using the money they earn to pay the bills and buy food and clothing. Tax Freedom Day is a way to illustrate taxing trends on both national and state levels.
How Tax Freedom Day Is Calculated
The Tax Foundation created a formula to determine when Tax Freedom Day occurs, calculating the overall effective tax rate for the nation. Tax Foundation analysts divide the per capita federal, state and local taxes by per capita income. For 2006 that is $12,122 in taxes divided by $38,376 in per capita income. This results in 31.6% of total income taken in taxes. Multiply 31.6% by 365 days and that gives the number of days, starting on Jan. 1, it will take to pay off your taxes. The next day is Tax Freedom Day.
Tax Freedom Day fluctuates based on several factors, the first being the number of taxes levied. The more taxes increase, the later Tax Freedom Day occurs, as Americans work longer to pay those taxes. In addition, as the economy continues to grow, the government collects a larger percentage of those gains. Since the federal tax system is more progressive than those of the states, the increase in personal income fills the federal coffers faster.
While the nation celebrates Tax Freedom Day on April 26, Washington residents must wait until May 4. The state’s mushrooming tax burden makes Washington the 4th highest taxed state in the Union.
Washington residents work 124 days to pay off taxes, as 33.7% of income goes to the government. Of those 124 days, 84 of them are spent working to pay federal taxes, which account for 22.8% of income, while 40 days are spent working to pay off the state and local tax burdens, which amounts to 10.9% of income.
Washington ranks 4th in federal taxes due and 13th in state and local taxes, but because federal taxes account for such a higher percentage of total taxes, Washington is still ranked 4th in total tax burden. As a result, Washington residents on average pay $9,053 in federal taxes and $4,334 in state and local taxes. All of this amounts to a total of $13,387 in taxes levied against Washington citizens, who make $39,705 annually on a per capita basis.
The United States has historically been a low-tax country and until the turn of the 20th Century, tax rates rarely exceeded 10%. With the Great Depression and World War II pressing the American economy, effective tax rates rocketed from around 10% to 25% by 1945. Since that time, tax rates have not dipped below 20%, but instead have climbed to above 30%.
The first chart on the next page shows the progression of Tax Freedom Day Since 1980. Tax Freedom Day occurred on April 23 in 1980 and then dipped down to April 17 by 1984. After hitting a plateau during the late 1980’s and early 1990’s, Tax Freedom Day steadily increased from 1993 to 2000. In 2000, it reached an all-time high of 123 days, when it fell on May 3. After this point, Tax Freedom Day declined due in part to the recession and bottomed out in 2003 and 2004 at April 16. It has increased the past two years to April 23 in 2005 and now April 26.
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Today the average American spends 31.6% of his or her income solely on taxes. 21% of those taxes go to the federal government, while 10.6% finds its way to state and local governments. Citizens of the United States spend more of their money paying taxes than providing food, clothing and housing, combined. Taxes consume 116 days worth of work, while food, clothing and shelter take only 106 days to supply.
The majority of the taxes go towards the Individual Income Tax and Social Insurance Tax. These two taxes account for 63% of taxes paid by Americans, with the vast majority going to the federal government.
Americans spend almost 1/3 of their money paying taxes imposed by the government. Taxes routed to the federal government are the single largest payment taken from workers’ paychecks.
The following chart gives an idea of how much of what we earn goes towards taxes and other expenses.
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Tax Freedom Day on a State level
States around the nation celebrate Tax Freedom Day at different times depending on their tax obligations to federal and state governments. Tax Freedom Day comes to Connecticut the latest, May 12, due to its large tax burden. Next is New York (May 9), followed by New Jersey (May 6), Washington (May 4) and Minnesota (May 3).
On the other side, citizens in the following states spend the least amount of time paying off their taxes: Alabama (April 11), Alaska (April 12), Mississippi (April 13), Oklahoma (April 14), and Tennessee (April 14).
Tax Freedom Day is a marker to track the ebb and flow of tax burdens nationally and on a state level. It provides us with a practical understanding of how much we earn, how much we keep, and how much pays the burden of the government. We have been working for the government for the past four months; we have paid our dues, now it is time to start reaping the rewards of our labors. Starting May 5, we can start working for ourselves.