The Tax Foundation calculates a date it calls “Tax Freedom Day.” This date is sometimes called the day of the year that taxpayers stop working for the government, and start working for themselves.
More specifically, the Tax Foundation states that the period from January 1 to Tax Freedom Day “represents how long Americans as a whole have to work in order to pay the nation’s tax burden.” To get to that date, the Tax Foundation estimates total federal, state, and local income taxes and divides the total by national income estimated for the year.
This year (2018) the Tax Foundation calculated the date as April 19. This is almost one-third of the whole year.
In its latest report, the Tax Foundation also stated that Tax Freedom Day arrived three days earlier than last year, citing new legislation with significantly lower personal and corporate income taxes.
The methods leading to the calculation for Tax Freedom Day have long drawn criticism, particularly from left-leaning groups supportive of government’s role in the economy. Among other complaints, their arguments highlight how people are not just ‘working for the government’ before Tax Freedom Day, given that the government provides services to citizens and taxpayers as well.
In turn, the critics of Tax Freedom Day have generated their own critics, including those concerned that much of what government pays for and produces represents transfers to well-organized groups, not services for all.
I’m not going to get deeply into this debate here, but just want to highlight two elements of the debate that matter for our mission at Truth in Accounting.
Consider payroll taxes like those funding (in theory) Social Security and Medicare. Our government’s unfunded position in these programs runs in the tens of trillions of dollars above and beyond the publicly reported national debt. Where do you think those unfunded liabilities lie in the federal government’s balance sheet?
There are lies of commission, and there are lies of omission.
The federal government does not include unfunded Social Security and Medicare obligations in its balance sheet. Official explanations for this practice cite the fact that the government controls the law, and can change it if it has to.
Put aside, for now, questions whether this is consistent with statements from Social Security that you can ‘take control of your future’ by opening a My Social Security Account.
What this implies is that people paying into the program see their money commingled with other federal resources to pay current Social Security benefits as well as other government programs. One might argue they also receive a “Social Security” service, but how reliable is that promise if the government refuses to record a liability, given it can change the law at any time?
More fundamentally, the real Tax Freedom Day may be a lot further into the year than April 19.
That’s because the Tax Foundation does not include growth in federal debt (a claim on future taxpayers) in its current Tax Freedom Day calculation.
There’s more than one way to skin a cat, as they say, but you can make a pretty good case that the nation’s true taxpayer burden (at least the federal slice of the pie) is better represented by the change in the federal net position. Last year, we calculated that change (leading to our ‘true’ national debt estimate of $101 trillion) at $5.8 trillion. This increase arrived on top of federal tax revenue, and was roughly in line with the average annual increase in that net position since 2009.
This year, in light of the higher deficit estimated by the CBO given tax law changes, we believe a similar increase in the (negative) net federal financial position is a reasonable expectation.
And as a result, we believe one could make a case that Tax Freedom Day arrives significantly later than April 19 this year. Adding $5.8 trillion to the Tax Foundation’s estimate of $5.2 trillion takes you to August 27, 2018, for “Tax Freedom Day.”