Tax Freedom Day, 2008

Last July 11, I wrote about Cost of Government Day, designated by Americans for Tax Reform as the day that the average American can begin keeping his earnings for himself and his family rather than turn it over to the government in the form of taxation or regulatory costs.

ATR started marking Cost of Government Day in response to Tax Freedom Day, which has long been noted by the Tax Foundation as the point at which individuals begin to earn money for themselves after having earned all the money they turn over to federal, state, and local governments in the form of taxation. Americans for Tax Reform thought this was telling only part of the story, hence Cost of Government Day.

This year the nationwide Tax Freedom Day is April 23, although the date varies from state to state, depending on the tax burden each state government imposes on its citizens.

Financial analyst David John Marotta writes a weekly column for the Charlottesville Daily Progress, which unfortunately has never appeared on the newspaper's web site -- even with the recent redesign of DailyProgress.com.

Fortunately, however, Marotta posts his columns on his own firm's web site, Marotta Asset Management, Inc. That is where I found his article about Tax Freedom Day 2008 after earlier reading it in Monday's Daily Progress.

Marotta explains:

This year we celebrate Tax Freedom Day on Wednesday, April 23. That's the day we stop working for the government and start working for ourselves. For average workers, all of our earnings for the first 113 days of the year go to pay federal, state and local taxes. Starting April 24, we are free--at last--to take care of our own family's needs.

The nonpartisan Tax Foundation based in Washington, D.C., measures the tax burden on Americans every year. According to its 2008 report, published in March, this year's federal Tax Freedom Day comes seven days later than it did in 2003.

He uncovers some interesting statistics, too, such as this:

On average, taxes take nearly 31% of a worker's gross income: 20% for federal taxes and 11% for state and local taxes. For every eight-hour day, 2 hours and 28 minutes of our labor is spent paying taxes. Without taxes, you could leave your job at 2:32 p.m.

Only since 1992 have Americans paid more for government programs than we spend on food, clothing and medical care combined. For the amount of money we pay in taxes, the federal government could provide universal health coverage and feed and clothe us as well.

And this:

The top 1% now pays 34% of the taxes in the United States. Do you know how to join the top 1% of taxpayers? Just sell a house in California. The top half of taxpayers pays almost 96% of the income taxes, meaning the bottom half pay just 4%. These two statistics have increased despite all the complaints that tax cuts favor the rich.

He also notes that, despite the boasts of government officials to the contrary, Virginia's tax burden is high and growing:

At the state level, Tax Freedom Day varies depending on location. California has moved up from the 7th to the 4th highest level of state taxes with its Tax Freedom Day now delayed until April 30. Virginia has risen from 17th to 12th in the race for the highest state tax rate, even though its liberation day arrives on April 25, only two days later than the national average.

The Virginia tax rate continues to climb higher each year, despite claims of no new personal taxes because of both bracket creep and the significant increase in state business taxes. This situation reflects a national trend. Business tax receipts have risen sharply over the past two years.

Marotta also offers a clear explanation of the Laffer Curve, which demonstrates why higher tax rates produce lower tax revenues:

Economist Arthur Laffer recognized that the law of diminishing returns applies to tax rates as well. According to Laffer, at a certain point, increased taxation actually yields the collection of fewer tax dollars. As we near a 100% tax rate, we approach driving commerce into the ground and collecting no taxes.

Many economists believe we are still beyond the point of diminishing returns. In other words, tax cuts would actually result in increased economic growth and more taxes being collected.

Presidents Kennedy and Reagan understood the Laffer curve well. In 1964 Kennedy reduced the top marginal tax rate from 91% to 70% and, to many people's surprise, tax revenues increased. Seventeen years later, the Reagan tax cuts reduced the top marginal rate from 70% to 50%. Again, revenues soared. Between 1980 and 1997, the share of federal income taxes paid by the top 1% rose from 19% to 33%. The share of taxes paid by the top 25% increased from 73% to 82%.

He might have also noted how the much-derided Bush taxes had the same effect. Economist Jerry Bowyer noted in April 2004, three years after the first round of Bush administration tax cuts and one year after the second round:

President Bush’s most recent tax cut proves that tax rates were, in fact, too high. This is demonstrated through the simple fact that the first half of fiscal year 2004 is showing higher tax revenues than the same period for fiscal year 2003. Between October 2003 and March 2004 (the first half of FY 2004), tax receipts were at more than $850 billion, which is $25.3 billion higher than receipts for the year-ago period.

This means that federal tax receipts went up rather than down after the Bush tax cuts of 2003. America has just passed the midpoint of fiscal 2003 and so far the data seems to be confirming the supply-side model. The Bush boom is big enough that it has already affected the budget.

If only those revenues had not been funneled into a multi-trillion dollar war. Then we'd really be riding high.

Marotta concludes his article with a quotation from John F. Kennedy that is as apt today as it was nearly 50 years ago:

Low taxes should not be a political issue that divides us. Every American should agree with the goal of keeping taxes as low as possible. In 2011 all of the federal tax cuts enacted since 2001 are scheduled to expire. If this happens, Tax Freedom Day will move an entire week later. In the words of John F. Kennedy, "An economy hampered by restrictive tax rates will never produce enough revenues to balance our budget--just as it will never produce enough jobs or profits."

How late will Tax Freedom Day be in 2010 or 2011 if Barack Obama or Hillary Rodham Clinton is elected president? Don't take a bet that says it will be earlier than April 23.