Thirty percent of Gross Domestic Product will be extracted as tribute by Federal, state and local governments this year. This burden merely scratches the surface of the full-costs associated with administering American government.
Opponents of ratification of the U.S. Constitution by the Pennsylvania Convention in 1787 wrote that, “By virtue of their power of taxation, Congress may command the whole, or any part of the property of the people.” Their insight was prescient.
A chief characteristic of slavery is uncompensated labor. Any person not entitled to the entire product of his or her labor is to some extent enslaved. Given this circumstance, there are very few genuinely free working persons in the United States today. While chattel slavery in the United States was abolished by the 13 th Amendment, today’s tax slavery has, in the aggregate, created a nation that in many respects is “half slave, half free.”
Karl Marx popularized the notion of wage slavery. He criticized capitalism as an exploitive institution wherein owners of the means of production (the capitalists) oppressed workers by paying them wages below the value of what they produced. Despite the sound discrediting of this theory, it is ironic that modern day class warriors favor redistributive taxation as the remedy for these perceived injustices.
Of course, individual tax circumstances vary greatly. Some persons pay huge tax bills, while others pay very little or nothing. For example, in 2004, the top ten percent of income earners (annual income above $99,112) made 44.4 percent of total income but paid over two-thirds of all Federal income taxes, while the bottom 50 percent (annual income below $30,112) made 13.4 percent of income and paid 3.3 percent.
The only genuinely free are those who receive net income from government ( i.e ., some retirees, welfare recipients, and very low-income working families). Even other tax-advantaged working families may pay very little. To wit, over 43 million Federal tax returns are estimated to show zero liability in 2006 while an additional 15 million households will file no return at all. These represent over 120 million Americans, about 40 percent of the total population, who pay no Federal income taxes at all.
The large share of Americans paying no Federal income taxes illustrates three serious problems with the tax system. First, it demonstrates the folly of employing targeted tax cuts favored by many politicians. Second, it complicates the tax code and moves it away from a fairer and more efficient system with lower rates widely applied. Finally, it creates a demand for government expansion by a large segment of the population whose payment of an additional tax dollar raised is low or zero.
On the other hand, in many middle-income marriages where husband and wife both work, one spouse in effect may be a total slave of government. Moreover, tax burdens vary markedly from one tax jurisdiction to another. For instance, taxpayers in Connecticut , New York , the District of Columbia , New Jersey , Rhode Island , and Vermont pay more of their income in taxes than residents of other states. This occurs not only because different states and municipalities impose different taxes on their residents, but also because the residents pay dissimilar Federal taxes. Higher per capita incomes and the progressiveness of the tax code combine to especially burden taxpayers in the states mentioned.
In short, it is not possible to measure in any meaningful way the tax burden of the “average American.” And in any event, most of us are painfully acquainted with our individual tax burdens.
Historical aggregate tax data nevertheless are a useful statistical source that may reveal not only where we as individuals stand in relation to overa l l national experience, but also how the current generation of tax slaves is faring in relation to earlier ones.
“Tax Freedom Day”
Each year the Tax Foundation, a nonprofit organization charged with raising the public’s “tax consciousness” since 1937, estimates how many days of the year Americans spend working to pay their taxes.
“Tax Freedom Day” is the day of the year that Americans are “free” of the burden of domestic taxation, assuming that every penny of income earned before that date was used to pay taxes. (Official government data on income and taxes are used for the calculation.) Chart 1 shows how Tax Freedom Day has changed. Since 1900, when it occurred January 22, the day has tended to move further and further into the calendar year, and this year, it will arrive on the 120 th day of 2007-Monday, April 30 – the fourth consecutive year it has advanced. This does not mean that the “average American” will spend four full months working to pay off her taxes this year. Tax Freedom Day is calculated by estimating the share of aggregate national income that is paid to all levels of Government-Federal, state, and local-and applying this percentage to the number of days in the year.
Chart 1: Tax Freedom Day
The burden of Government reached a peak in 2000 at 34.0 percent of income, but fell sharply by over two-weeks worth of work to 29.5 percent in 2003. The steep drop was precipitated by a combination of a package of Federal tax cuts between 2001 and 2003, a slowing economy and the plunge in the stock market, which caused capital gains collections to nose-dive. The two week increase in tax burdens since has been driven by broad based income gains which have pushed more Americans into higher tax brackets, a sharp increase in property tax collections due to soaring property values and a surge in corporate tax receipts as business profitability has swelled during this expansion.
Tax Freedom Day is a useful statistic for measuring the aggregate tax burden of all Americans, and it underscores that today Americans spend a large part of their time working for the government-longer than they will work to pay for food, clothing, and housing combined (See Table 1).
|Tax Burden vs. Other Consumer Spending|
Milton Friedman famously quipped, “I would rather have government spend one trillion dollars with a deficit of a half a trillion than have government spend two trillion dollars with no deficit.” In other words, budget deficits are forms of hidden taxation. The true cost of government is what it spends because every dollar of government spending must be paid for by taxes either today or in the future. The Bush tax cuts have therefore not reduced the burden of government as much as advertised because they have not been accompanied by reductions in spending. After four years of surpluses, the Federal budget has recorded a deficit, averaging $293 billion, every year since 2002.
Therefore, we calculate a measure of government freedom, called “Friedman Day,” which estimates the day when Americans will have earned enough money to pay for spending at all levels of government.
Friedman Day is plotted alongside Tax Freedom Day in Chart 2. It is evident that Friedman Day has marched steadily upward, with the exception of the 1990s when incomes were surging at unprecedented levels. Last year, Friedman Day fell on May 16, 136 days into the year, which was over two weeks later than Tax Freedom Day. Despite the Federal budget surpluses of the late 1990s, Tax Freedom Day has not come before Friedman Day since 1951 because budget deficits at the state and local level exceeded the Federal surplus during those years.
Chart 2: Friedman Day
Friedman Day has arrived later because government has expanded far beyond its proper role of providing for the military defense of the nation, enforcing of contracts between individuals, and protection of citizens from crimes against themselves or their property. Swelling state, Federal, and local governments squeeze entrepreneurs, workers, and families in ways that limit opportunity, choice, and freedom – reducing wealth and constricting our lives. The nation’s founders never imagined the government would be operating Medicare, flood insurance, farm subsidies, Social Security, regulating drugs for efficacy, etc. And with government increasingly being steered by self-interested politicians, interest groups and bureaucrats away from the destinations that truly serve the common good, one can only expect Friedman Day to come later and later.
Federal spending accounts for 86 days of work. Table 2 shows how much time Americans spend working to pay for various Federal government functions. Not surprising, Americans work the most to pay for Social Security and national defense (17 days each), but readers may be surprised that Americans spend only one day working to pay for foreign aid, and one day each to fund the traditional functions of government – administration of justice and the administration of government itself.
|Tax Burden for Selected Federal Outlays|
|Federal Outlay||Days of Federal Work|
|Health (sans Medicare)||8.2|
|Net Interest on Debt||7.3|
|Administration of Justice||1.3|
|Administration of Government||0.6|
Raising the revenues to pay for government is not costless. The calculations for Tax and Friedman Day do not include the costs imposed by the way in which taxes are levied and collected over and above the amount of incomes diverted to government use.
One of these costs of taxation involves collection and compliance. The most readily quantifiable cost is simply the payroll and expenses of the tax collectors. Far greater, but less quantifiable is the cost of the taxpayers’ efforts to compute and report their tax liabilities to the appropriate authority. Although estimates of these costs vary widely, the Tax Foundation figures that in 2005, Americans logged some 6.0 million hours complying with the Federal income tax code at a cost of $265 billion or 22 cents for every dollar that the income tax system collected. Thus, compliance costs alone add an additional week to Tax Freedom Day – and would push it to May 7. It is noteworthy that these compliance costs, unlike the actual taxes, are highly regressive, in that these costs make up a much larger share of the income of the poor than the rich.
A second cost is called the “deadweight loss” of taxation-i.e., transactions that do not take place because taxes render them uneconomic. These costs involve both legal efforts to avoid taxes (such as enjoying more leisure time over working, taking health benefits over salary increases, changing consumption patterns such as owning a home instead of renting) and illegal means of evading taxes (such as concealing earnings, operating in illicit markets). The cost of this lost economic activity is substantial – standard estimates are that the economy loses 20 cents of activity for every dollar of revenue raised, on average. Accounting for the deadweight loss of taxation at all levels would push Tax Freedom day out by an additional 23 days – to May 30 and Friedman Day would extend to June 16.
Thus, if government spending is to be maintained at its current level, the tax system should be designed to minimize the additional costs that taxes impose. Sadly, the myriad tools for achieving this are well known (such as a single tax on land), but the goal of a simplified tax code will never be achieved so long as government officials insist on social engineering through the tax code and as long as government itself remains up for bid.
The Fetters are Heavier Yet
Complete measures of the burden of government might reasonably be expected to include the cost of promises it has made to its citizens in the future. Just as it would be misleading for a business to show as an asset a computer purchased this year on credit, and to not record the expense until the payment was made next year (this year’s earnings would look better), it is misleading for our Government to include as revenues monies collected to pay for current Medicare and Social Security recipients, but to make no accounting for the promises it has made to pay future beneficiaries (despite the computational difficulty in doing so).
Conservative estimates of the unfunded liabilities of Social Security and Medicare stand at $39 trillion in 2007 (and growing fast). Assuming that government finances these liabilities with real debt, rolling the debt over forever, would result in an annual expenditure of $1.9 trillion per year, using the 4.8 percent current yield on the 30-year Treasury bond as a cost of capital. Explicit accounting for the problems with Social Security and Medicare would add an additional 58 days of bondage – extending Tax Freedom Day to July 27 and Friedman Day to August 13.
But Don’t They Get It Back?
Our analysis admits the possibility that Americans are three-fifths slaves – and this calculation excludes the heavy toll exacted by the direct and deadweight costs of government regulation. However, some economists’ main objection to the characterization of taxpayers as “tax slaves” has been that “Government gives it back” as public goods and services, income transfers, and the like. But not all Americans receive equal benefits from the government, literally or otherwise. Taxpayers in the lowest income quintile receive $31,200 more in government spending per year than they pay in taxes while those in the top quintile pay $48,000 more in taxes each year than they receive in spending. But for any one person, spending by government does not tell us how much you personally value what government gave you. For example, a couple sending their child to a government run school may think it is worth but a few thousand dollars. But if it cost the government $12,000 to provide, then the couple “receives” that $12,000 of spending.
At base, this all misses a bigger point. Once the taxes are paid it is the government, not the taxpayer whose labor has been taken, that determines who gets what. As in all slave regimes, it is the master who selects the deserving among the enslaved. That some slaves are well provided for does not alter their status as slaves who cannot do as they please with the fruits of their labor.
The White House Office of Management and Budget explains that these “promises” are not included in the annual Federal budget because these and other specific programs which make promises may be modified or even ended at any time by the Congress and the President, and changes in the laws governing these programs are a regular part of the legislative cycle. Currently, they are Federal responsibilities and will have a claim on budgetary resources unless the law is changed. Similarly, the taxes earmarked to finance these benefits would be essential to consider to gauge the real size of future claims.