Tax Freedom Day 2003 Arrives in Virginia on April 15th

with No Comments

Tax Freedom Day arrives in Virginia on Tuesday, April 15th this year. That’s when we stop working for government and start working for ourselves. For the average worker, all of the earnings of the first 105 days pay taxes to the federal, state, and local governments. Starting April 16th, we Virginians are free — at last — to take care of our own family’s needs.

April 19th is Tax Freedom Day for the nation as a whole. The federal tax burden has been reduced by 11 days’ pay over the last three years since the high at the end of the Clinton administration. During the Clinton years (1992-2000) the tax burden grew sharply by 12 days despite Clinton’s promise that “the era of big government is over.” In contrast, state and local tax burdens have remained virtually unchanged since 1990.

Taxes still take 30% of a worker’s gross income — 20 for federal taxes and 10 for state and local. Americans pay more for government programs than they spend on food, clothing, and shelter combined. Only since the Clinton administration has the percentage of household spending been higher for taxes than for these basic necessities.

Tax Freedom Day varies from state to state. Lucky workers in Alaska and New Mexico celebrate on March 30th and April 3rd. The residents of Connecticut and Massachusetts will again bear the nation’s heaviest tax burden with tax freedom day not arriving until May 9 and May 2nd.

Despite the decrease over the past few years, the size of the federal government is still at an unprecedented level. From the birth of the nation in 1776 until the early 1930s, government spending at the federal level never exceeded 3% of national income except during periods of war. In 1913, when the Sixteenth Amendment allowed the federal government to tax income directly on individuals, Tax Freedom Day arrived as early as January 30th!

The total effective tax rate did not permanently surpass 10% until FDR’s New Deal legislation in 1930. Total taxes passed 25% during the Great Society Programs during the 1960’s. The effective tax rate is currently at 30%. Put another way, in 1900, taxes took $1 of every $12 of earnings from American workers; in 1950, taxes took $1 of every $4; today they take $1 of every $3. If you add the costs of complying with government regulations, the cost to society is over 50%. Imagine the economic boom if the other half of workers’ labor were set free to boost productivity!

Federal taxes are the largest drag on the economic health of the country. Being the largest friction on productive commerce as marginal tax rates are raised, they threaten to both slow growth and decrease the amount of taxes collected at the same time. Contrary to popular assumption, there is a level of taxation beyond which tax increases result in fewer tax dollars being collected. For example, at a 100% tax rate, commerce would come to a complete halt and zero taxes are collected.

Many economists believe we are already well beyond that point for the most productive Americans, hence tax cuts for the rich will result in increased economic growth and more taxes being collected.

Federal taxes, unlike state and local taxes, are also unavoidable. While individuals and companies can seek economic asylum from the mismanagement of states such as California (currently ranked as the 4th highest tax burden state) they cannot as easily avoid federal taxes. This competition between states for the best balance of taxation and services has kept the state tax burdens under control.

The purposes of federal spending have also changed gradually. In 1962, defense spending was 49% of the budget, and health and social security totaled 14%. Today those proportions are reversed; with defense reduced to 16% and Medicare and Social Security taking 44% and growing rapidly.

Instead, the politicians play the game that has gone on for centuries in most countries around the world. France’s finance minister under Louis XIV said it best, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Without the tax withholding system, begun as a temporary device to fund World War II, the vast amounts of taxes could not be collected without a lot more hissing.

We joke about taxes to relieve our stress, but there are serious issues at stake. We need to watch the erosion of personal freedoms. We need to ask what limits our country can support without cooking the goose that laid the golden egg of our economy.

Photo used here under Flickr Creative Commons.

Follow David John Marotta:

President

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)