Happy Tax Freedom Day!

April 12, 2011

Today, April 12, is the day that the Tax Foundation estimates Americans on whole have earned enough to pay all federal, state and local taxes for the year. This year’s Tax Freedom Day® is three days later than last year’s, mostly due to increasing tax revenues as the economy recovers. Still, this year’s Tax Freedom Day is almost 2 weeks earlier than it was in 2007, mostly due to the recession. When the economy entered recession tax revenues at the federal and state levels began to fall as workers were laid off or earned less, consumers spent less, and businesses became less profitable.

Tax Freedom Day shows that Americans on whole pay about 27.7% of their income in taxes. However, this calculation does not include the deficit. When the federal government spends more than it raises in taxes in a given year, and the result is a deficit. The tax-take of all governments is estimated to be $3.6 trillion for 2011. To erase the federal deficit for 2011, the feds would have to bring in an additional $1.48 trillion in taxes, pushing Tax Freedom Day 41 days later, to May 23.

Tax Freedom Day represents the national average for taxes as a percent of income. Some individuals pay more, some less. We also calculate a state-by-state Tax Freedom Day to get a more localized look. State Tax Freedom Days differ from the national average for a couple of reasons. First, different states have different levels of state and local taxation. Secondly, the burden of federal taxes does not have an even geographical distribution. For instance, some states tend to be higher income than others, and higher income people pay more federal income taxes as a percent of income. The first state to celebrate Tax Freedom Day this year was Mississippi on March 26th. The latest will be Connecticut on May 2.

Where will Tax Freedom Day go in the future? In the longer term, it is hard to tell. The debate rages in Washington about how to address the immense long-term budget imbalance facing the US. Various reforms have been proposed, and each would have an effect on Tax Freedom Day depending on what combination of tax and spending reforms are implemented.

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