It can be hard to comprehend just how much time you’re spending each year working to pay off your tax bill. The Tax Foundation’s Tax Freedom Day is designed to help place your tax burden in perspective. Joseph Henchman, tax counsel and director of state projects for the Tax Foundation, discussed the issue with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: First of all, let’s explain: What is Tax Freedom Day?
Henchman: Tax Freedom Day, at its simplest, is a calendar representation of the nation’s tax burden. We take government figures for federal, state, and local tax collections and divide it by the nation’s income. We’ve been doing this calculation for quite a long time, and we get a lot of attention for it. So Tax Freedom Day is just how long Americans work to pay off their tax bill each year.
Kokai: Let’s say the people start work January 1 — probably they don’t — but if you start work January 1, you might think, “Oh, you know, within a couple of months or so, I’ve paid off my tax bill.” This year the Tax Freedom Day stretched more than just a couple of months, didn’t it?
Henchman: Yeah, right. It is April 12 this year. And, of course, it’s stylized. It’s if you started working January 1 and continued working until April 12, that’s how long it would take to pay off the nation’s federal, state, and local tax burden. And then we also do a separate day for including the deficit. The federal budget deficit is very large this year, so we wanted to see, if you included that, how long would that add onto it. And if you do that, that takes you to May 23.
Kokai: For people who are just hearing this as they’re in their car or at home, and it just caught their attention, if you worked all year long, you have to work into April to pay your taxes. And if you count the deficit, well into May?
Kokai: Amazing, amazing.
Kokai: How do you hope this information helps as people consider just how much they’re paying for federal government and state government as well?
Henchman: Sure. Well, as anybody looks at how much tax they’re paying, and what the government does, you need to be doing a cost-benefit analysis. Are the taxes we’re paying worth the services that we’re getting? And we’ll leave it to others to quantify the benefits. But this can help people quantify the costs, so that you know exactly what the tax burden is and how it relates to previous years. Tax Freedom Day this year was three days later than it was last year. The highest-ever Tax Freedom Day was back in the year 2000, so we’re a little bit lower than that, but the trend now is going up. We also provide a Tax Freedom Day by state, to allow residents of each state to compare the relative tax burdens. North Carolina’s Tax Freedom Day, for instance, was on April 6.
Kokai: And that actually put us about in the middle of the pack. Obviously, if the national day was April 12, April 6 is a little bit better than that national average, I guess.
Henchman: Right. And a big contributor to that is the federal income tax. The federal income tax is very progressive, so a lot of high-income earners pay more than low-income earners. So, for states that have very high incomes, such as Connecticut and New York, that pushes their Tax Freedom Day much later than other states.
Kokai: If we had higher earnings among our people, we’d probably fare even worse on this?
Henchman: Potentially. Because you’ve got to remember, it’s taxes divided by income, so there’s a numerator and a denominator. But, you know, regardless of where a state is in this, overall, Americans are paying more in taxes than they are in groceries, shelter, and clothing combined.
Kokai: When people are essentially spending from January 1 into April to pay their tax bill, how does that impact our ability to grow the economy? I mean, if people are spending that much time working for the government rather than for themselves, is this really causing a drag on our economy?
Henchman: Well, it depends. And honestly, I mean, we have a lot of other reports that we do that try to look into that question. This can really just help raise the information about where people are and where the country is, in tax burden. As I said, in terms of whether it’s a good deal or not, that’s something that people should talk about and debate, but it’s important to know what the costs are, and then — because only then — can you know whether the benefits are worth those costs.
Kokai: You touched on some of these issues just a bit ago, but I’d like to get back to them. Some people might say, “OK, well, in North Carolina our Tax Freedom Day was April 6, or nationally it’s April 12. How does that compare to the past?” You’ve said that this date has been creeping later and later in recent years.
Henchman: In recent years, yes. And one of the reasons we include the deficit-inclusive day, which this year is May 23, is because we’re doing a lot of spending that’s not being paid for through taxes. We’re borrowing that money, and we’re going to have to pay it back at some point in the future. So, yes, while you’ve earned enough to pay all the taxes by April 6 in North Carolina and April 12 nationally, that’s not enough to pay for all the spending that we’re doing. So that’s one of the reasons that we included that deficit-inclusive date, and we have in recent years. And if we took that date, May 23, I mean, that is, I think, the latest ever — aside from perhaps during World War II, when we did a lot of borrowing to help defeat the Axis powers.
Kokai: Which was probably a lot more important than a lot of the things that we’re doing now — that we’re spending on.
Henchman: Well, that’s precisely the question that we hope people raise when they hear our information. Because, you know — investigate. Find out what all that money is being spent on at the federal, state, and local levels. And then you can decide, is it worth it? Is all of this tax bill worth those programs?
Kokai: Now as you’ve mentioned — you’ve mentioned this a couple times now — the date that you put out there is not designed to say this is good or this is bad. This is just what the data show us. For those of us who would like to see the government sort of scale back a bit and see this Tax Freedom Day move up a little earlier in the year, what kinds of things would have to happen?
Henchman: Well, quite simply, the government will have to take less in in taxes. And for that deficit-inclusive day to move back, the federal government will have to spend less. As we saw in the 2000s, you can cut taxes and still increase spending, at least at the federal level. But that may not be what you’re talking about there.
There’s a lot of things to look at. I mean, we’ve got the individual income tax — that’s 36 days out of that January 1 to April 12 period. Social insurance — payroll taxes for Social Security and Medicare — that’s 22 days. Sales taxes: another 15 days. Corporate income taxes, because those are passed forward to all individuals — that’s 12 days. And then other taxes are about another four or five days. I forgot property taxes; that’s 12 days. Of course, that’s a big issue in a lot of states. But all told, that’s where the tax burden is going.
Kokai: Those numbers that you just pointed out are important for people to note because a lot of people think of the income tax. And you’ve mentioned that, of the total number of days, it was a significant number, but it was far from even being half of the days, wasn’t it?
Henchman: Right. And that’s true across the board — it’s not just income taxes, although that may be the one that we know the most about because we’re all filling out our tax forms every year. But there’s the property tax, which some of us write a check for, or maybe comes out of your mortgage payment. [There are] sales taxes every time you buy something. North Carolina, of course, has one of the highest sales taxes in the country. And then, as I mentioned, the corporate income tax and other taxes, too.
Kokai: We hit some of the highlights of this report, but there are a lot of details that people could find. If someone wants to see more about Tax Freedom Day or read any of the other reports that the Tax Foundation puts out, where should they go?
Henchman: Sure. Well, we have our website at TaxFoundation.org, where we have a whole bunch of information both on current issues and historical data. We’ve been around since 1937, so we want to definitely be a resource for people trying to learn more about their tax system, federally, and for the information about North Carolina’s tax system and how it compares on a national level.