Misuse of Tax Freedom Day by State

August 13, 2008

On Townhall.com yesterday, Michele Bachmann wrote a blog post that implied correlation between those states whose Tax Freedom Days were later in 2008 with the existence of Right to Work laws in a state. Such an analysis, unfortunately, misses the point.

Don’t get me wrong. There are legitimate arguments to be made against many labor market regulations. (There’s no such thing as a free lunch.) However, the Tax Freedom Day by state is largely driven by the large disparity in federal individual income taxes paid, which is the biggest tax the nation pays. Therefore, due to the high degree of progressivity in the federal income tax, states with higher incomes will have their average effective tax rates rise as tax growth (percent increase) exceeds income growth (percent increase). That means high income states, ceteris paribus, will have later Tax Freedom Days than other states.

Now state and local taxes do play some role here and those states that have high state and local taxes are likely to have greater amounts of regulation than other states, due to the intermediate political variable. However, using TFD by state, Bachmann is basically making the opposite point she wants to make as TFD by state is more correlated with income than any measure of state and local tax burdens levied by a state.

If Bachmann really wanted to test the correlation between high tax policies in a state and right to work, she would probably be best to merely look at tax rates, tax collections per capita, or a measure of the tax climate in a state.

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