1 TAX FEATURES www.taxfoundation.org March–April 2002 Volume 46, Number 2 America Celebrates Tax Freedom Day® on April 27, 2002 Date Means U.S. Works 117 Days to Pay for Government, Two Days Less Than in 2001, and Four Days Less Than in 2000 Americans celebrated Tax Freedom Day® on Day on television and the web, often as a lead-in April 27, 2002. That is two days earlier than in to other tax stories which were often based on 2001 and four days earlier than in 2000 (see recent Tax Foundation reports on tax complexity Figure 1 on page 2). and state tax burdens (see sidebar on page 3). Foundation economists have spread the In the new report, Tax Foundation Spe- word in dozens of interviews for newspapers cial Report No. 112, “America Celebrates Tax and radio stations. CNN covered Tax Freedom Freedom Day,” economists Scott Moody and David Hoffman explain why the overall tax burden has been trending down the last two years, pushing Tax Freedom Day back into April, after a long string of later and later Tax Freedom Days. “Two factors are combining to make the average American tax burden lighter in 2002,” said Moody, “federal tax reductions and a slow- er economy.” Federal tax cuts in 2001 and 2002 low- ered this year’s average federal tax burden, and the recession in 2001 followed by slow growth in subsequent months arrested the growth of tax collections at all levels. Starting in 1992, when Tax Freedom Day fell on April 19, until 2000 when Tax Freedom Day hit May 1, the total tax burden grew mark- edly, requiring 12 extra days of work from American taxpayers. With state-local tax bur- dens virtually unchanged in the last decade, Tax Foundation Executive Director Scott Hodge presents the Founda- the increase was entirely due to the rapid tion’s recent calculation of Tax Freedom Day to the press. growth of federal tax collections. See Tax Freedom on page 2 In this issue: FRONT & CENTER Tax Freedom Day 1 State Tax Freedom Days 4 Chairman Thomas on Making Our Tax Code Globally Competitive 6 Fighting to Keep Our Tax Code The Cost of Tax Complexity 8 Competitive in the Global Economy The Sunset of the Tax Cut 9 TF Conference 10 Foundation Message 11 Bill Thomas (R-CA), Chairman, Committee on Ways and Means, U.S. House of Representatives Tax Foundation History 12 6-7 2 Tax Freedom from page 1 Figure 1: Tax Freedom Day, 1980–2002 Working for Each Type of Tax 124 days Americans face such a plethora of 122 days May 1 different taxes in their day-to-day lives 120 days that it is difficult to total them up. Fig- Apr 29 Apr 29 ure 2 presents a breakdown of the 118 days Apr 27 Apr 27 nation’s tax bill for 2002 by type of tax. Apr 26 Individual income taxes represent 116 days the largest component of Americans’ 114 days tax bills. In 2002, Americans will have Apr 24 Apr 21 Apr 23 112 days to work an average of 51 days to pay Apr 21 Apr 21 federal, state and local income taxes. 110 days Apr 20 Another 29 days will be spent working Apr 20 Days Worked to Pay Taxes Days Worked 108 days for payroll taxes, which fund social Apr 19 Apr 19 insurance programs such as Social Se- Apr 17 106 days curity and Medicare. Apr 16 Apr 16 Some taxes are less apparent to the 104 days Apr 15 taxpayer than income and payroll tax- es. Foremost among these “hidden tax- 102 days es” are sales and excise taxes. Ameri- 100 days cans will work 18 days to pay these 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 add-on taxes that raise the prices of Note: Leap day is omitted to make Tax Freedom Day comparable in all years. nearly all goods and services. Source: Tax Foundation. Another 11 days will be spent working to pay property taxes, mostly Figure 2: Number of Days Worked to Pay Taxes by Type of Tax levied by local governments. and Level of Government, 2002 Americans will then have to work an additional 8 days to pay their share of corporate income taxes, which are collected from companies but ultimate- Days Spent Laboring to ly paid by consumers, employees, and Pay Taxes in 2002 shareholders. 117 Days Taxes and Other Expenses Figure 3 uses the number of days worked as a yardstick to measure the price of government against the price of other important categories of con- Individual Social Sales Property Corporate Other sumer spending. The graph reveals that Income Insurance & Excise Taxes Income Business Americans will work longer to pay for Taxes Taxes Taxes Taxes Taxes government (117 days) than they will 51 Days 29 Days 18 Days 11 Days 8 Days 0* Days for food, clothing, and shelter com- bined (106 days). Only in the last decade have taxes exceeded spending on these basic necessities, and federal taxes alone cost Federal Federal Federal Americans more (80 days) than any of Federal Federal Federal the other major budget item. 40 Days 29 Days 4 Days 0 Days 7 Days 0 Days Tax Complexity No regulatory cost is included in State & State & State & State & State & State & the calculation of Tax Freedom Day, but Local Local Local Local Local Local the report does comment on the in- 11 Days 0* Days 14 Days 11 Days 1 Days 0* Days creasing complexity of the federal in- come tax code, and concludes that Americans’ time and effort spent com- * Less than half a day. Note: Due to rounding, components may not always add up to totals. plying with just the 2002 federal in- Source: Estimates based on National Income and Product Account definitions. 3 come tax code is worth $194 billion. Figure 3: How Long Americans Work to Pay Taxes Compared America needs to work six days to earn to Other Major Spending Categories, 2002 that sum. Saving: The Origin and Popularity of Clothing and 5 days Tax Freedom Day Accessories: 15 days The concept of Tax Freedom Day Transportation: Federal Taxes: was invented in 1948 by Florida busi- 29 days 80 days nessman Dallas Hostetler. He copyright- Recreation: ed the name and calculated Tax Free- 21 days dom Day himself for many years. Upon retirement in 1972, he assigned the intellectual property rights to the Tax Food: 30 days State/Local Foundation which has promoted the Taxes: concept ever since. 37 days The idea has spread around the world, with independent research groups in India, Great Britain, Canada, Medical Care: and several other nations calculating 42 days their national Tax Freedom Day. Every Housing and nation counts income and taxes differ- Household ently, however, so valid international All Other: 46 days Operation: comparisons are difficult. 61 days How the Date is Computed Source: Tax Foundation calculations using Department of Commerce consumption data. Tax Freedom Day, announced by the Tax Foundation each year for 30 of the National Income Product Ac- years, is used to illustrate the portion of counts (NIPA). Computed annually by Publication Summary the American budget that goes to pay the Commerce Department’s Bureau of General: Special Report No. 112; ISSN for taxes. Once Tax Foundation econo- Economic Analysis (BEA), NIPA data is 1068-0306; 20pp.; $10 or $50/yr. for at mists project the nation’s effective tax the best measure of income available, least 6 Special Reports on varied fiscal issues rate, 32.1 percent this year, it is applied and the entire historical series is fre- Title: America Celebrates Tax Freedom to a calendar year to provide a graphic quently revised. Therefore, the new Day® illustration of how long Americans report on Tax Freedom Day is the only Authors: J. Scott Moody and David work for government. valid source for historical or current Hoffman The income figure used is Net data used to calculate Tax Freedom Day, Date: April 2002 National Product (NNP), a component either at the national or state level. Subject: Calculation of the total effec- tive tax rate for the United States, and for each of the 50 states plus the District Tax Foundation Research Fills the Airwaves of Columbia Tables: Tax Freedom Day & Total Ef- On April 25th, CNN used Tax Foun- legislation, and of course Tax Free- fective Tax Rate by Level of Govern- dation data for a television story dom Day. They included KXEL in ment, 1900–2002; Tax Freedom Day about which states tax the least, Iowa; KXLY in Spokane; KRLD in by State and Rank, 1990–2002; Tax and throughout this “Tax Freedom” Dallas; KYW in Philadelphia; KTSA in Freedom Day by State and Rank, season, radio news and talk shows San Antonio; WLAC and WTN in 2002; Days Spent Working to Pay All Taxes in Each State, Total Taxes as a are carrying on the celebration of Nashville; KCRS in Midland; WCBK Percentage of Income, Per Capita and Tax Freedom Day. in Battle Creek; KKSU in Manhattan, Rank, 2002; Days Spent Working to Tax Foundation economists KS; WPZZ in Indianapolis; KKR in Pay Federal Taxes in Each State, Fed- were on the air to millions of peo- Omaha; KTAR in Phoenix; KPAM in eral Taxes as a Percentage of Income, ple during the tax season, doing Portland, OR; KMOX in St. Louis; Per Capita and Rank, 2002; Days Spent Working to Pay State/Local radio interviews on major syndicat- WOKV in Jacksonville; KTJJ in Farm- Taxes in Each State, Per Capita and ed shows like The Mike Gallagher ington, MO; KQV in Pittsburgh; KOA Rank, 2002; Number of Days Ameri- Show in New York, National Public and KRDO in Denver; WIZM in La- cans Have to Work to Earn an Amount Radio, and Judicial Watch Radio.