Flaws in Tax Freedom Day Methodology
Every year the Tax Foundation releases a report announcing the day that Americans have “earned enough money to pay this year’s tax obligations” according to an oversimplified and fundamentally flawed calculation and declares the day Tax Freedom Day. The report, including its state by state analysis, was released yesterday.
At its core, this effort deliberately misrepresents the relationship between taxes and freedom. It fundamentally devalues the public investments made in our country’s economic security and opportunity through taxes – public investments necessary to a free and vibrant society, such as educational opportunities, national security, health care, traversable infrastructure, and a robust and accessible system of justice. It also fails to honor the importance of these public investments to the private sector: the role of schools in educating the state’s workforce, of courts in fairly and efficiently adjudicating business disputes, and of roads and ports in getting goods to market, to name only a few.
As the Center on Budget and Policy Priorities writes here, the Tax Foundation continues to use a fundamentally flawed methodology to generate their annual Tax Freedom Day findings. First and foremost, the Congressional Budget Office has estimated that 4 out of 5 American households actually pay far less in taxes than the study’s “average” taxpayer. That is because the Tax Foundation calculates their “average” tax rate from the total revenue collections as a share of the economy.
Second, state-level Tax Freedom Days are problematic under this methodology because they are primarily driven by the wealth of a state’s residents. Because the federal tax system is progressive, the higher federal tax contributions in states with higher-income residents will push the Tax Freedom Day in these states later.
North Carolinians have repeatedly demonstrated their willingness to contribute to the institutions in our communities like public education, community colleges and universities, health care for the elderly and children, fair and impartial courtrooms, and well-maintained roads and highways. Simply declaring a “Tax Freedom Day” does not move us closer to the important discussion of the role of taxes in our society. And it certainly doesn’t help North Carolina continue the still unfinished work of modernizing how we collect revenue.