Tax Deadline Day vs. Tax Freedom Day

Today -- the day many income tax returns are due -- I note some excellent recent postings on the website or the blog of the Tax Foundation.

On April 17th, the Tax Foundation summarized the results of its most recent (2007) national tax survey in a posting entitled "What Does America Think About Taxes? The 2007 Annual Survey of U.S. Attitudes on Taxes and Wealth", by Andrew Chamberlain (Special Report No. 154):

[T]he domestic issues of tax complexity, fairness and burdens continue to weigh heavily on the minds of the American people. For the third consecutive year, we find that a majority of U.S. adults say the federal income taxes they pay are "too high," that the federal tax code is complex, and that the U.S. tax system is in need of major changes or a complete overhaul.

That entire report is available here (333 KB, PDF).

On the blog of the Tax Foundation, Brian Phillips posted an entry entitled "Things to Think About on Tax Day" (April 16, 2007), where he notes these significant findings derived from the 2007 Tax Survey:

• Over 42 million filers will pay nothing in federal income taxes - up from 29 million in 2000.
• Sixty percent of the country is a net consumer of government spending. That is, they receive more in spending than they pay in taxes.
• Though the average household receives over $31,000 in government spending, nine out of ten people say they would pay less than $10,000 for the government services they receive. * * *

He then comments: "Taken together, since less and less of the country is being asked to shoulder the burden for America's priorities, there is a huge disconnect between what we're spending and the value Americans place on the services we receive. Nowhere is this more clear than the rising demand and subsequent costs for entitlement spending."

"So who exactly is paying all the taxes?"

This question is answered, regarding federal income taxes, in an excellent article entitled "Who Pays What on Tax Day", by Scott A. Hodge and Brian Phillips, published originally in the San Diego Union-Tribune and reposted by the Tax Foundation on April 15, 2007.

The truth is that the vast majority of federal income taxes are paid by high-income earners.

According to the most recent IRS data available, the top 10 percent of households - with incomes roughly $100,000 or greater - pay roughly 70 percent of all federal income taxes. That share is up from just below 50 percent in 1980. If you include the top quarter of all taxpayers, the share balloons to 85 percent.

Interestingly, the cause of these surging payments by high earners has as much to do with demographics as with tax policy. In 1967, most households in the statistical middle fit the traditional notion of the "middle class" - married couples with children living on the income from one breadwinner.

By contrast, today's statistical middle - people earning between $25,000 and $45,000 - are mostly young and single. People marry later, and they divorce earlier. Forty years ago, middle-income households looked like the family in "Ozzie and Harriet"; today, it is the cast of "Friends."

And among today's married couples, few are living on one income. Between 1980 and 2003, the number of dual-income working-age couples grew rapidly, and the extra income catapults these households into the highest income groups. * * *

But taxpayers must pay more than just federal income taxes. The burden of payroll taxes is under-appreciated. See: "Payroll Taxes Hit Most Americans Harder than Income Taxes", posted on April 16, 2007 by Gerald Prante.

In the rush to file their federal income tax forms for tax year 2006, Americans may not look closely enough at their W-2s and may not realize the true economic incidence of payroll taxes; they may not realize that they probably paid more in federal payroll taxes than in federal income taxes last year.

Most economists agree that virtually all of the payroll tax burden is borne by workers, even that portion that is legally paid by the employer.

And so when we count that as a tax on the worker, we begin to realize that this 15.3 percent tax rate can be higher than the income tax rate that these individuals are paying; most of them lie below the Social Security cap ($97,500) and fall in the 10 and 15 percent taxable income brackets (with possibly some income being taxed at the 25 percent rate).

Only for high-income earners or those who earn most of their income in non-wage form will their income tax burden exceed their payroll tax burden. * * *

For more on how different types of households are hit harder by different types of taxes, check out the full working paper on which these numbers are based.

And then, there are state & local taxes to pay too. The Tax Foundation notes the increasing burden of such taxes in a posting on April 17, 2007, entitled "Nation's State-Local Tax Burden at Record High".

The nationwide burden of state and local taxes has hit an all-time high of 11 percent of income in 2007, with Vermont's taxpayers bearing the heaviest load, according to the Tax Foundation’s annual study of state and local taxes. * * *

View the full report. Read the news release. View all states’ state-local tax burdens by state or by year.

So, with all these taxes paid by many Americans, when can we celebrate "Tax Freedom Day" this year?

The Tax Foundation addresses that too, in its recent posting entitled "America Celebrates Tax Freedom Day®":

Tax Freedom Day^® will fall on April 30 in 2007, according to the Tax Foundation's annual calculation using the latest government data on income and taxes. (Click here to read the full study).

"Tax freedom will come two days later in 2007 than it did in 2006," said Tax Foundation President Scott A. Hodge, "and fully 12 days later than in 2003, when tax cuts caused Tax Freedom Day to arrive comparatively early, on April 18."

Mark April 30, 2007, on your calendar, and do something special -- for yourself & your family.

* * *

Update: 04/18/07:

Bridget M. Whitley, an attorney in Harrisburg, PA, sent an email to me referencing an article she read that affirmed the need for, and the fairness of, a progressive tax system that taxes wealth. See: "Progressive Taxation: Some Hidden Truths", by George Lakoff & Bruce Budner (last modified 04/17/07), available on the website of the Rockridge Institute, a self-described "progressive thinktank".

Several main progressive values support the idea of progressive taxation. One is the belief that the common wealth should be used for the common good. Another is responsibility, the responsibility that citizens have to pay for the benefits we receive from our common wealth. And still another is fairness. These values intertwine on the question of progressive taxation. * * *

The wealthy have made greater use of the common good — they have been empowered by it in creating their wealth—and thus they have a greater moral obligation to sustain it. They are merely paying their debt to society in arrears and investing in future empowerment. * * *

If you agree with such an approach in a tax system, the question then arises: Who is "wealthy"? That issue likely will be the subject of a forthcoming Congressional debate as the "alternative minimum tax" provisions of the Internal Revenue Code apply to more & more Americans who would never describe themselves as "wealthy", particularly considering their support of other family relations -- like children, disabled relatives, or elderly parents.