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Happy Tax Freedom Day

By Kay Bell · Bankrate.com
Thursday, April 18, 2013
Posted: 1 pm ET

Every year, the Washington, D.C.-based Tax Foundation calculates what it calls Tax Freedom Day.

That's the day, according to the tax research group, that Americans have finally earned enough money to pay their annual tax obligations at the federal, state and local levels.

April 18 is this year's Tax Freedom Day, five days later than in 2012.

There are several reasons, say Tax Foundation number crunchers, for the extra time needed to cover federal tax obligations.

Higher federal tax rates are now in place as part of the "fiscal cliff" legislation enacted in January's American Taxpayer Relief Act of 2012.

New taxes kick in this year as part of the continued rollout of health care reform.

And the economy is continuing to improve, meaning more workers are getting jobs and paying taxes on that income.

"The total tax bill at all levels comes to approximately $4.2 trillion, or 29.4 percent of their total income," said William McBride, a Tax Foundation economist, in announcing the date. "That means Americans will pay more in taxes in 2013 than they will spend on food, clothing and housing combined."

State tax days, too

Since 1990, the group also has calculated each state's individual Tax Freedom Day.

Differing state tax policies mean that states with higher income rates celebrate Tax Freedom Day later.

It doesn't arrive in New Jersey until May 4, in New York until May 6 and in Connecticut until May 13.

At the other end of the state tax spectrum, Tax Freedom Day has come and gone in several locales. Tennessee celebrated its taxes-paid day April 2. It arrived for Mississippi and Louisiana residents even earlier, on March 29.

Changing America, changing tax days

Not surprisingly, Tax Freedom Day's arrival has fluctuated significantly over the years.

The latest-ever nationwide Tax Freedom Day was May 1, 2000. Compare that to a century earlier, when Americans' earnings covered all their taxes Jan. 22, 1900.

Of course, a lot has changed in 113 years. America has grown, meaning citizens need and want more from their governments at all levels.

That, says the Center on Budget and Policy Priorities, or CBPP, is why Tax Freedom Day figures should be taken with a grain of salt.

Under the United States' progressive tax system, only upper-income households pay federal tax at rates that are equal to or above federal revenues as a share of the economy, say Chuck Marr and Chye-Ching Huang in a CBPP analysis of Tax Freedom Day.

Marr and Huang point to estimates from the Urban-Brookings Tax Policy Center showing that low- and middle-income households (about 80 percent of all households) will pay a smaller share of their income in federal taxes this year than the average tax rate used by the Tax Foundation in its Tax Day calculations.

The CBPP also takes issue with the concept that people spend part of the year working for the government and part of it working for themselves, becoming free of tax responsibilities only when they get to work for themselves.

"In reality, taxes pay for services that benefit us every day and are central to our idea of freedom," say Marr and Huang. "Few Americans would likely feel more 'free' if Tax Freedom Day came earlier in the year because the federal government stopped providing for national security, ensuring homeland security, conducting food safety inspections or testing prescription drugs."

For entertainment purposes only

Tax Freedom Day, both nationally and at the state levels, is an interesting and, yes, entertaining way to look at our overall tax burdens, but it also brings to mind that great comment generally attributed to Mark Twain about figures not lying, but … .

Not that I'm impugning the work of Tax Foundation specialists. But like their more liberal Center on Budget and Policy Priorities counterparts, each group has a point of view and goal they hope to achieve with their methodologies and calculations.

The same can be said by those on Capitol Hill and statehouses who make the tax laws with which we must live. Recognizing that motivation and keeping it in mind is a good thing to do the next time someone promises anything about tax policy.

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You also can follow me on Twitter @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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