Tax collections this year are expected to fall so much that Tax Freedom Day - the day on which the average American will have worked enough to pay his taxes for the year - will arrive Monday, two weeks earlier than in 2007.
In fact, the nonpartisan Tax Foundation estimates that the nation’s total tax bill, as a percentage of national income, will slip to its lowest level since 1967. Revenue is expected to dwindle, the organization says, because of a combination of the economic recession and the new, temporary tax cuts enacted in Washington as part of the stimulus plan.
Tax Freedom Day is the point at which the national income earned is enough to satisfy the nation’s annual tax bill, including taxes levied by federal, state and local governments. For this year, the Tax Foundation puts Tax Freedom Day on Monday, April 13, the 103rd day of the year.
Some economists say the measure is misleading, and overstates the amount of time needed by many Americans to pay his or her tax bill.
The early arrival of Tax Freedom Day is not a cause for much celebration. “Americans will pay more in taxes than they will spend on food, clothing and housing combined” this year, said Josh Barro, the Tax Foundation economist who prepared the analysis.
In addition, the longest and probably deepest recession since World War II has produced job losses exceeding 5 million since it began in December 2007. Those unemployed workers are not paying Social Security or Medicare payroll taxes, and their federal and state income-tax obligations, if any, are in many cases a fraction of their earlier levels.
The recession has also eviscerated corporate profits, lowering business income taxes to federal and state governments by more than 50 percent compared with their 2006 levels, the Tax Foundation estimates.
The total tax bill this year is estimated to be 28.2 percent of national income. That’s down 5.4 percentage points from the record 33.6 percent registered in 2000.
In fiscal 2000, however, the federal government had a budget surplus of $236 billion, which was equal to 2.4 percent of gross domestic product. For fiscal 2009, which ends Sept. 30, the Congressional Budget Office (CBO) recently estimated the budget deficit would reach $1.8 trillion, or 13.1 percent of GDP. That’s more than double the previous postwar record of 6 percent in 1983.
To account for the federal government’s ability to finance some of its operations by running deficits, the Tax Foundation offers an alternative calculation that adds the federal budget deficit to total taxes.
“If the projected deficit for 2009 were counted as a tax, Tax Freedom Day would arrive on May 29 instead of April 13 - the latest date ever for this deficit-inclusive measure,” Mr. Barro said. Not even during World War II, when the budget deficit exceeded 30 percent of GDP one year, did Tax Freedom Day adjusted for the deficit occur so late, according to the group’s data, which go back to 1900.
Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities, said the notion of Tax Freedom Day is problematic because “over the years, many journalists and policymakers have misinterpreted the Tax Foundation’s report as reflecting the tax burdens faced by typical middle-income workers.” Mr. Greenstein cited “CBO data [that] suggest that 80 percent of U.S. households pay federal taxes at a lower rate than the Tax Foundation’s estimated ‘average’ federal tax burden.”
The Tax Foundation’s Scott A. Hodge reported in September, “According to the most recent IRS statistics for 2006, some 45.6 million tax filers - one-third of all filers - have no [federal income] tax liability after taking their credits and deductions. For good or ill, this is a dramatic 57 percent increase since 2000 in the number of Americans who pay no personal income taxes.”
Moreover, with this year’s introduction of the $800-per-couple Making Work Pay tax credit, a two-parent, two-child family would need to earn more than $50,000 this year before paying their first dollar in federal income tax. In 2007, according to the U.S. Census Bureau, the median household income was $50,233, and the median income for married-couple households was $62,359. Half the households earn more than the median, and half earn less.
Though the income-tax obligation has been slashed for many middle-class families, they must still pay payroll taxes, property taxes if they are homeowners, sales taxes and excise taxes.