Question: What Is Tax Freedom Day?
Answer: Tax Freedom Day is the first day in each year that Americans are not working just to pay taxes. In 2014, it arrived on April 21. That's the latest in five years:
- April 18, 2013
- April 17, 2012
- April 12, 2011
However, it's also about two weeks earlier than in 2007.
Why does Tax Freedom day keep moving? It's a calculation based on national and state government tax receipts. The more taxes, the longer it takes to pay it off. Tax Freedom day keeps moving out because more revenue is being collected by the government now that the recession is over. During the recession, Americans paid less taxes because they earned less. Now that we are earning a bit more (on average) tax receipts are higher, and Tax Freedom Day is later.
Tax Freedom Day was also earlier in 2011 because of the Obama tax cuts in 2009 and 2010, which included an extension of the Bush tax rebates. These tax reductions were designed to give you more money to spend, and stimulate economic recovery. Despite these reductions, Americans paid more in taxes than they spent on food, clothing and shelter combined.
However, we pay less in taxes now than in 2002, when the Bush tax cuts were passed. In fact, the latest Tax Freedom Day on record occurred on May 1, 2000. This was right before the 2001 recession, and tax rates were higher -- on average, families paid 33% of total income in state, local and Federal taxes. However, lower tax revenue was a large contributor to the U.S. debt.
How Is Tax Freedom Day Calculated?
Tax Freedom Day is calculated by dividing the total taxes (Federal, State) collected by the all the personal income earned in a year. The Tax Foundation uses the historical trend and the most recent economic data to make a projection of the tax burden for each year.
What's your personal Tax Freedom Day? Here's an easy way to calculate it. You'll have all the information you need when you pay your taxes. First, add up your total State and Federal tax obligation. Next, use your adjusted gross income. Divide the taxes into the income to get a percentage.
Now multiply that percentage by 365, the number of days in the year. You will get the number of days it takes to pay off your tax bill. Enter that number into this calculator. That's your personal Tax Freedom Day.
How It Breaks Out
In January, you work to pay off federal income taxes. February goes toward paying Social Security, Medicare and other payroll taxes, as well as state income taxes. In March, you pay state and local sales and excise taxes, as well as property taxes. The first 21 days of April, you work to pay corporate income taxes (through higher prices), motor vehicle license taxes, as well as severance and estate taxes.
However, the official Tax Freedom Day doesn't include government spending, only government revenue. That's because the Federal government is running a budget deficit of $901 billion, which will be paid by future generations. If Americans were working to pay off all spending this year, Tax Freedom Day would be May 14. (Source: Tax Foundation, Tax Freedom Day; Yahoo Finance, Tax Freedom Day)