Tax Freedom Day and What It Means to You
Tax Freedom Day® is the first day each year that Americans work for themselves. In 2019 it arrived on April 16th. Every dollar earned before that pays for federal, state, and municipal government services. It's a way to visualize your tax burden.
How Tax Freedom Day Is Calculated
The Tax Foundation calculates Tax Freedom Day by using the total amount of taxes paid the previous year. It considers historical trends and the most recent economic data. It then makes a projection of the tax burden for the upcoming year. It usually publishes that forecast in early April of each year.
For 2019, the Foundation projected $3.4 trillion in federal taxes and $1.8 trillion in state and local taxes. It takes this total of $5.2 trillion and divides it by the total personal income earned by Americans each year. The ratio is 29%. That means that on average, Americans work almost third of their lives just to pay taxes.
For the final step, the Foundation multiplies that ratio by 365. That's 106 days, which fell on April 16, 2018.
Here's another way to visualize it. In January, you work to pay off federal income taxes. February goes toward paying Social Security, Medicare, and other payroll taxes, as well as state income taxes. In March, you pay state, local sales, and excise taxes, as well as property taxes. The first 16 days of April, you work to pay motor vehicle license taxes, as well as severance and estate taxes. You also pay off corporate income taxes that are passed onto you through higher prices.
The official Tax Freedom Day doesn't include government spending, only government revenue. The federal government is running a budget deficit that will be paid by future generations. If Americans worked to pay off all spending including borrowing, Tax Freedom Day would be May 8th.
Calculate Your Personal Tax Freedom Day
Tax Freedom Day represents the American people as a whole. So what's your personal Tax Freedom Day? Here's an easy way to calculate it for any previous year. You'll have all the information you need when you pay your taxes. First, add up your total state and federal tax obligations. Next, find your adjusted gross income. Divide the taxes by the income to get a percentage.
Now multiply that percentage by 365, the number of days in the year. You will get the number of days it takes to pay off your tax bill. Enter that number into this calculator. That's your personal Tax Freedom Day.
Are the Services You Receive Worth Your Time
Government budget spending is such a large number, it’s hard to wrap your head around. Converting budget spending into days worked makes it easier to relate to your everyday life.
Now that you know how much of your life is spent paying for government services, it raises an important question. Why do we have to pay taxes? But it's like any other purchase. The only difference is that it's for government services like defense, road maintenance, and education.
Americans pay more in taxes than they spend on food, clothing, and shelter combined. Most of your federal tax dollars are spent on Social Security, defense, and Medicare. Do you feel you are getting your money's worth? If not, make sure your elected officials know what you think. They won't change until they see it could cost them votes.
Why Tax Freedom Day Changes
Tax Freedom Day® 2018 was much earlier than in the years 2012 through 2018.
The Trump tax plan cut income tax rates in 2018. It doesn't take as long to pay for the reduced revenue. Unfortunately, government spending didn't fall along with revenue. As a result, it will increase the deficit and debt.
Tax Freedom Day 2019 was later than in the years prior to 2014.
Why is Tax Freedom Day later? More revenue was collected by the government than in 2009 when the recession threw so many people out of work. Slower economic growth meant that fewer taxes were collected. Many people who were unfortunate enough to lose jobs during the year found out they were put into a lower tax bracket. They paid fewer taxes or none at all.
As a result, Tax Freedom Day came earlier during the recession. As more Americans went back to work in the years following, tax receipts grew higher. That made Tax Freedom Day later.
Taxpayers got a break with the Bush tax rebates in 2008 and the Obama tax cuts in 2009 and 2010. Surveys show that most people believe they paid higher taxes under Obama than previously. In fact, the opposite is true; the average taxpayer shelled out less. Unfortunately, it was because of a lower income, thanks to the recession. There were tax cuts in 2009 due to the economic stimulus package. It included tax reductions to give consumers more money to spend and stimulate economic recovery.
The latest Tax Freedom Day on record occurred on May 3, 2000. This was when tax rates were higher. On average, families paid 33% of their total income in their state, local, and federal taxes.
Tax Freedom Day occurred earlier the following year, due to the 2001 recession. In 2013, the Bush tax cuts were passed, further reducing revenue. As a result, Tax Freedom Day has been earlier ever since.