Government Cost $4.5 Trillion in 2014 and We All Paid Part of It

January 8, 2015

Earlier this week Noah Smith on Bloomberg View criticized the concept of Tax Freedom Day calling it “hogwash.”

His main complaint is that Tax Freedom Day does not take into account the incidence of taxation. He claims that because the incidence of taxation may fall on other people besides you, you don’t really pay all of the tax. Additionally, he thinks because taxes pay for services, they shouldn’t be considered a burden. To him, Tax Freedom Day is meaningless.

While making his first point, he flubs the concept of tax incidence. He rightly states that because there are differences in supply and demand elasticities, tax burdens are shared between businesses and individuals. He concludes that this means people don’t really pay all of any given tax, businesses share the burden and correctly states that this is “one of the very first things they teach you about taxes in Econ 101.”

Unfortunately, he missed the next course. In Econ 201, they teach you that all taxes are born by people, none are born by businesses. Taxes imposed on businesses in any way are passed on to people through lower returns, lower wages, and higher prices. Tax burdens don’t simply disappear when a business pays. They are paid by shareholders, workers, and consumers.

More fundamentally, his first point demonstrates his misunderstanding of what Tax Freedom Day is.

Tax Freedom Day is not a measure of any one individual’s personal tax burden. People’s tax bills vary significantly based on the amount of money they make and the goods they purchase. Instead, it is an aggregate measure of the total taxes paid by all taxpayers at the federal, state, and local level. This includes individual income taxes, corporate income taxes, excise taxes, sales taxes, and property taxes at the federal, state, and local levels.

In other words, it does not tell us what I pay, rather, it tells us what we pay as a nation.

This brings us to Noah’s second point: most of the taxes we pay go to programs and services that benefit a great deal of people, so taxes are just a reflection of the benefits you receive and aren’t really a burden.

This, again, misses the point. It is very true that the federal, state, and local government provide important services for taxpayers. However, all government spending costs something, and whether the spending goes to transfer payments, military spending, roads, or bridges, we need to pay for it.

Sometimes it is hard to tell exactly how much we pay as a nation for the cost of government, given the plethora of taxes and fees that go towards funding it. That is why Tax Freedom Day is important: it gives us an easy-to-understand account of how much our government costs each year. In 2014, taxpayers paid $4.5 trillion in taxes to fund government.

We can quibble over how a specific tax may be split between buyer and seller, or between worker and employer, but at the end of the day it is you (the taxpayer) who pay taxes. We can also discuss the costs and benefits of different government spending programs. But both of these issues are entirely separate from Tax Freedom Day.

Tax Freedom Day may be a simple calculation, but it is important in understanding what America—as a whole—pays for the government spending it receives.

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