Celebrating Tax Freedom

April 11, 2005 — -- Millions of Americans are no doubt scrambling to submit their tax returns as the annual April 15 tax filing deadline looms. But how many of them are aware that it won't be until two days after the deadline that they'll have worked enough hours to pay off their yearly tax bill?

Tax Freedom Day, the date when average Americans have earned enough money to pay their 2005 federal, state and local taxes, falls on April 17 this year, as calculated annually by the Tax Foundation, a nonprofit tax policy research organization. This year's Tax Freedom Day arrives two days later than in 2004, which, due to recent tax cuts, was the earliest arrival in 37 years.

The date had been arriving earlier each year since 2000, when the economy bubble that boosted tax collections to higher levels had pushed it all the way to May 3. Economists with the Tax Foundation said the later arrival this year indicates the tax burden has resumed its more typical upward movement after falling the past two years.

"As economic growth pushes people into higher tax brackets, tax collections grow faster than incomes," Tax Foundation President Scott Hodge said in a statement announcing the report's release.

Overall, 29.1 percent of Americans' 2005 incomes will go to taxes, which amounts to working from Jan. 1 to April 17 for the government, according to the report. That's up from 28.6 percent last year.

For some Americans, the concept of working 3½ months of the year -- spending nearly a third of their incomes -- just for taxes is a little tough to swallow.

Nelson Jacob, 63, a semiretired university professor living in College Station, Texas, said he wonders whether U.S. tax money is misspent, pointing to the soaring national debt as evidence.

"As a citizen you hear politicians use taxes as a political talking point, and they play with ideas about tax relief as a political domino. But it doesn't seem like they're really concerned with the basic needs of the American people," he said.

Jacob and his wife plan to move to Brazil over the summer, where he expects to live a more managable lifestyle on the money from his federal civil service retirement income and an IRA.

"For your basic living expenses, it's much more affordable," he said.

Tax Spending Exceeds Housing, Food

Breaking it down, the Tax Foundation's report estimates Americans will work 70 days to afford federal taxes and an additional 37 days for state and local taxes. We'll work 65 days to pay for housing and household expenses, 52 days for health and medical funding, 31 days for food, 22 days for recreation and 13 days to pay for clothing and accessories. In a telling note, Americans need only spend two days at work to achieve our average yearly savings.

It's doubtful that many Americans have April 17 circled on their calendars, and don't expect keg tapping and parties to ensue. After all, it's not exactly a holiday, and it's not like the next 8½ months will be tax-free. Most American workers pay local and federal taxes through their monthly paychecks, so the date itself has a somewhat mythical existence.

Obviously, in a country of citizens with hugely disparate incomes, the fact that the date is an average for all Americans signifies that the actual amount of work needed to finance taxes varies widely. But financial advisers point out that the Tax Freedom Day can be a symbolic reminder for personal investing and budgeting.

"You can't really look at it as Tax Freedom Day, because it will be different for everybody, but your personal tax freedom day is important," said Alan J. Dlugash, an accountant and financial planner with the New York firm Marks Paneth & Shron. "The take-home pay is really the money you actually see, so it's really a reminder that your after-tax income is what really matters."

Dlugash said that he advises clients to not even think about their pre-tax earnings when budgeting or considering investment options. He suggests that all budgeting be done as compared to a percentage of after-tax earnings, so as not to overextend personal money and incur debt.

Northeast Has Highest Taxes

The report breaks down tax burdens by state, noting that Connecticut, with a freedom date of May 3, leads the country as the state with the heaviest tax burden, followed closely by New York, with a date of April 29. Four of the top five latest dates are Northeastern states, with New Jersey, Massachusetts and Wyoming rounding out the top five.

Alaska clocks in with the earliest freedom day, April 2, and citizens of Alabama, Tennessee, South Dakota, North Dakota, Mississippi and Oklahoma all worked enough to pay their taxes by April 7.

The breakdowns of federal, state and local taxes are based on income and tax date from the Department of Commerce's Bureau of Economic Analysis and involve measuring statistics on the country's net national product, personal income and gross domestic product.

The Bush tax cuts alleviated some of the heavy tax burdens of the late 1990s, but it's likely Tax Freedom will continue to arrive later in the year if the economy grows and personal incomes rise.

"It's likely to continue creeping up, because people's incomes are creeping into higher brackets," Dlugash said.

Current political debates could have huge future implications on this trend, as the Bush administration pushes to reform Social Security and revamp the U.S. tax code. And if current law remains in effect, the recent tax cuts are scheduled to expire in 2008 and 2010.

Any one of these issues has the potential to potential to move the annual Tax Freedom Day. Tax Foundation economists predicted that, assuming the status quo remains in effect and the course of the economy unchanged, the date will fall later in April.

For tax and finance professionals, the Tax Freedom Day will continue to serve as a barometer of the level of burden taxes place on their clients. It's a symbolic reminder that 30 percent of our annual earnings are earmarked for government spending.

"The truth of the matter is that the date is probably going to get later and later as the government spends more money," Dlugash said. "The date is really an indication of the amount of money the government is spending."