We economists love a good object lesson for the vague principles and theories we discuss. That’s why the Tax Foundation’s “Tax Freedom Day” is so useful — it provides a clear, concrete example of how tax policy (which is boring) affects every American’s paycheck (which is very not boring).
Tax Freedom Day is the date upon which American workers will finish working to pay down taxes at all levels of government. This year, according to the Tax Foundation, that date is April 16, or 105 days into the year.
In other words, Americans are working for the tax collector for three and a half months, before ever pocketing a dime for themselves.
Of course, we don’t see it this way in our daily lives: Our taxes are mostly hidden from us. Payroll deductions mean we never even see a big portion of our income that will eventually go toward income taxes. Our mortgage companies embed our property tax payments into our mortgage payments. And corporate taxes are simply rolled into lower wages, fewer jobs, and higher prices.
Yet the principle behind Tax Freedom Day is profoundly true: When our taxes go up, we spend more time working for the government and not for ourselves and our families.
As the Tax Foundation reports, “In 2019, Americans will pay $3.42 trillion in federal taxes and $1.86 trillion in state and local taxes, for a total tax bill of $5.29 trillion, or 29 percent of national income.”
Tax Freedom Day differs from state to state. In Texas, our Tax Freedom Day fell on April 5. New Yorkers won’t finish paying their taxes until May 3.
Why the gap? Because institutions matter.
The Texas Model of limited government provides an institutional framework supporting more prosperity; New York’s institutional framework allows for a more interventionist government. More government spending means more taxes. More taxes mean more government. More government means spending more of our time working to pay off our tax burden, and less time spent working toward the betterment of our families and things we enjoy, meaning less freedom.
New Yorkers (and Californians, and New Jersians, and residents of the District of Columbia) might argue that they benefit from their larger government. It delivers more services and provides a better safety net — in short, that they’re getting something in return for those extra days of servitude to the state.
The data don’t reflect that.
California (Tax Freedom Day of April 20), for example, has the nation’s highest Supplemental Poverty Measure (SPM). The SPM (which adjusts for regional cost-of-living differences and government transfer payments) puts California’s 20 percent poverty rate at the highest nationwide, whereas Texas’ rate of 14.7 percent is near the U.S. average of 14.1 percent.
New York (Tax Freedom Day May 3) also has a higher-than-average SPM of 16 percent.
On the other hand, the Texas Model embraces the principle of reengaging institutions such as family, community, and free markets — institutions that are often undermined by an over-burdensome state, yet do a far better job at addressing a community’s needs.
And it works.
The Fraser Institute ranks the states according to economic freedom. Not surprisingly, high-tax states like New York and California rank low on the economic freedom scale, while low-tax states like Texas and Florida rank high.
More than 230 scholarly articles by independent researchers have used the Fraser Institute’s report to examine what economic freedom means at the state level, with the vast majority of this research finding that areas economically free from excessive government intervention overwhelmingly experience positive outcomes, including more economic prosperity.
It’s important to note that nationwide, Americans are still enjoying the benefits of the Tax Cuts and Jobs Act of 2017. A new report from the Joint Committee on Taxation shows that the Trump tax cuts “provided tax liability reductions on average across all income categories” — in other words, Americans at all income levels benefited.
As a teaching tool, Tax Freedom Day is invaluable. By affixing a date to our tax obligations from excessive government spending, the Tax Foundation reminds us that we’re not working for ourselves when we’re working for the government.
Vance Ginn, Ph.D., is the senior economist and director of the Center for Economic Freedom at the Texas Public Policy Foundation. Follow Vance on Twitter at @VanceGinn