Tax Freedom Day

July is the time when many Americans celebrate their freedom, reflecting back on the time when this nation won its independence. But this is a tax newsletter, so we felt it appropriate to celebrate Tax Freedom Day (TFD), even though it occurred nearly two months ago on April 30th.As tax professionals, many of you are already familiar with Tax Freedom Day: the day on which Americans citizens have earned enough income to fund the total national tax burden. Every year the Tax Foundation, a Washington D.C. based tax research organization, calculates Tax Freedom Day. 2007′s TFD fell 2 days later than it did in 2006, and 12 days later than it did in 2003.

The History of Tax Freedom Day

In 1948, Florida businessman Dallas Hostetler developed and copyrighted the concept of Tax Freedom Day. For 23 years Hostetler calculated TFD until he retired in 1971 and conferred the copyright to the Tax Foundation. The Tax Foundation has calculated TFD since and in 1990 the Tax Foundation extended their calculations to include Tax Freedom Days specific to each state. This year Oklahoma was the first to pay its tax burden on April 12th, while Connecticut was the last, making their state TFD May 20th.The Foundation reports that while calculations are not comparable due to different methods for collecting and tabulating financial information, 8 countries annually calculate their own Tax Freedom Day, including Australia, Estonia, and Poland.The Tax Foundation has gone back to calculate TFD from 1900, long before Hostetler began his calculations. In 1900 Freedom Day fell on January 22nd and represented a mere 5.9% of the typical tax payer’s income. That jumped to nearly 12% in 1920 when TFD fell on February 13th and then again to 24% in 1950 when it fell on April 1st.

What the Calculations Mean

Some criticize the Foundation’s calculations, saying that what they claim to be the day the “average American” has earned enough to pay his/her tax burden is greatly exaggerated-a calculation largely comprised of the taxes associated with citizens in high income brackets. However, the Foundation defends its approach, saying TFD represents the economy’s overall tax burden rather than the “average American’s” tax burden.In addition to the TFD, the Foundation includes calculations that represent the days required for the “average American” to pay their tax burden compared to other, more personal expenses. This year that same “average American” will spend 79 days of their work year paying federal taxes-that’s 17 days more than what they will work to pay for household expenses and 27 days more than what they would work to pay for health and medical care. They will also spend 41 days working to pay their state and local taxes-11 days more than what it would take to pay for food and 19 more than what it would take to pay for recreation.ReferencesThe Tax FoundationWikipedia, Freedom Day