Each year, right before Americans grudgingly pay their taxes, a Washington group called the Tax Foundation tries to capitalize on the national mood with a report dating the arrival of Tax Freedom Day®, the symbolic day in the calendar year when American taxpayers can finally start saving the money they earn. According to this year’s report, on April 27 — the 117th day of the year — “Americans will finally have earned enough money to pay off their total tax bill for the year.”
And every year, the Center on Budget and Policy Priorities and other liberal critics accurately point out that the methodology used in the calculations is totally misleading. This year, alas, is no different.
The Washington press corps has finally grown wise to the tricky statistics being used (or sick of the whole debate), but regional newspapers across the country are already starting to uncritically regurgitate Tax Foundation spin yet again.
Here’s a report filed by the Washington correspondent for Salt Lake City’s Deseret News, for example:
“The Tax Foundation says the average American works 117 days to pay all federal, state and local taxes.”
And here’s the Detroit News in an editorial:
“The Tax Foundation — a nonpartisan think tank in Washington, D.C. — calculates Tax Freedom Day every year. This year, the national Tax Freedom Day is April 27. Last year it was April 29. In 2000, it was May 1.”
What few articles explain, however, is what the statistic means. The Tax Foundation is tricky about its language — in the release on its Web site, it refers to “how long Americans work for government” and a staff economist discusses changes in “the average American tax burden,” implying that Tax Freedom Day is representative of the experience of middle income Americans.
Here’s what’s actually going on: The Tax Foundation adds up total tax receipts and divides them by an estimate of national income. Since the federal tax system is progressive, with higher rates for those with higher incomes, such a statistic is an incredibly crude representation of the tax burden facing the “average” American family, as the Center on Budget and Policy Priorities points out in its annual critique. Specifically, it significantly overestimates the federal tax burden facing families in the middle of the income distribution.
The whole approach has been called invalid by no less an authority than the chairman of the Federal Reserve. CBPP notes that Alan Greenspan rejected it during congressional testimony earlier this year, saying “you can’t use tax receipts over nominal GDP as a tax rate.” The same critique applies to the similar national income figure (called Net National Product) used by the Tax Foundation. Greenspan pointed out one problem in particular: Capital gains taxes are included in the total tax figure, but capital gains income is not included in GDP (or Net National Product).
What’s even more absurd is that while the Tax Foundation is calculating “average” tax burdens that blur distinctions in the rates paid by different income groups, it separately denounces the increasing proportion of income taxes paid by upper-income taxpayers, which means, correspondingly, that those farther down the scale are paying increasingly less as a proportion of the total. The group even points out that the bottom 50 percent of taxpayers paid only 4 percent of federal individual income taxes in 1999 — a fact that is obscured by the methodology of its other report.
So, as state-specific Tax Freedom Days start coming fast and furious, look for this exercise in cynical Washington politics to come to a newspaper near you.
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