Tax Burdens as Percentage of Personal Income
April 12, 2010
Data on one's tax burden as a percentage of income can be useful. For example, our Tax Freedom Day calculation does this using an average tax burden and income for someone living in the country or a particular state. It is a clear estimate of how many days the average person must work to pay for the cost of government.
But suppose someone wants to know how much a state and local government costs—or the tax level imposed on residents—for use in comparison to another state. At first glance, it seems only relevant to look at numbers on tax collections in absolute terms. But what does comparing collections as a percentage of income between states tell you? Well it tells you how much the government taxes and then throws in superfluous—for this modest comparison—information on the level of personal income of taxpayers. It can make a rich state that collects a lot of money seem as good as a poorer state that does not collect a lot. If one wants to base tax policy off of the percentage of income taxpayers pay rather than the amount of taxes taxpayers pay—or if one wants to argue for a progressive tax structure, collections data just aren't that helpful. Collections are not burdens.
In an article by Mary Forsberg at the New Jersey Policy Perspective—that I responded to last week—and repeated over the weekend in an especially acerbic editorial in the New Jersey Star-Ledger, New Jersey's level of taxation is made to look moderate by dividing state and local tax collections (not the burden by the way) by some average personal income. As I explained in my article, New Jersey has high taxes. The fact that New Jerseyans are richer than other states doesn't add anything but confusion when talking about the tax level in the state.