Monday, April 30, 2007

Tax Freedom Day

(HT:  FMF)

Here's an article courtesy of Marotta Asset Management that gives some interesting thoughts on taxes:

Tax Freedom Day arrives
on Monday, April 30th this year. That's when we stop working for the
government and start working for ourselves. For the average worker, all
of the earnings of the first 119 days go to pay taxes to the federal,
state, and local governments. Starting May 1st, we are free -- at last
-- to take care of our own family's needs.

The 2007 report,
published this month by the non-partisan Tax Foundation based in
Washington, D.C., measures the tax burden on Americans. According to
the report, the 2007 federal tax freedom day comes more 12 days later
than it did in 2003, though it is still five days under its all-time
high in the year 2000.

However, the overall
Tax Freedom Day falls two days later than it did last year, even with
the absence of tax increases. Gross Domestic Product has been strong,
growing by at least 6.3% per year for the last three years. More wealth
for Americans means an increase in Uncle Sam's share.

Due to our progressive
tax system, Uncle Sam actually collects more taxes as inflation rises
due to 'bracket creep.' If your pay is adjusted each year to keep up
with inflation, the dollar figure you make increases but your net
purchasing power remains unchanged. However, inflation may actually
drive you into a higher tax bracket despite the fact that your buying
power has not increased!

On average, taxes still
take nearly 33% of a worker's gross income – 22% for federal taxes and
11% for state and local taxes. Only since 1992 have Americans paid more
for government programs than they spend on food, clothing, and medical
care combined. For the amount of money we pay in taxes, government
should already be able to provide universal health coverage and feed
and clothe us as well.

For every eight hour
day we work, 2 hours and 35 minutes of our work goes to paying taxes.
Without taxes, you could leave work at 2:25pm.

At the state level, tax
freedom day varies from state to state. California has the 7th highest
taxes with its Tax Freedom Day delayed until May 7th. Virginia places
17th in the race for the highest tax state rate even though its Tax
Freedom Day arrives on April 30th, exactly the national average.

The Virginia tax rate
continues to climb higher each year despite claims of no new personal
taxes because of both bracket creep and the significant increase in
state business taxes. This has been a national trend. Business tax
receipts have risen more than 20% over the past year.

Most non-economists
vastly underestimate the negative impact of tax rates on the U.S.
economy. Taxes encourage every American to do things themselves,
outside of the taxable economy, even if specializing and working
together would have produced higher productivity. If you add the costs
of complying with the complex web of regulations, the government costs
Americans over 50% of our wealth.

Imagine three builders
who, by themselves, could each build a house in a year. Three builders
could build three houses working separately. Now image that because of
their specializations they could build six houses by working together.
It may seem incredible that these builders would not take the
opportunity to double their productivity, but with any tax rate higher
than 50% they have no incentive to choose the more productive
partnership. Just imagine the economic boom if the other half of
worker's labor were set free!

Imagine a highly paid
and highly skilled doctor whose marginal tax rate is over 50%.
Everything that she pays someone else to do costs her twice as much
because she pays for that service with after-tax dollars. It may be
very inefficient to society for her to waste her time mowing her own
lawn, changing her own oil or painting her own house, but specifically
because she is in a high tax bracket, she can save more money than the
average American by doing those chores herself. Another way to look at
it is that without taxes, she could afford to pay those who provided
her services twice as much.

Economist Arthur Laffer
recognized that the law of diminishing returns applies to tax rates as
well. According to Laffer, there comes a point beyond which increased
taxation actually yields fewer tax dollars being collected. For
example, a 100% tax rate would drive commerce into the ground,
resulting in zero taxes being collected.

Many economists believe
we are already well beyond that point for the most Americans. In other
words, tax cuts would actually result in increased economic growth and
more taxes being collected.

Presidents Kennedy and
Reagan understood the Laffer Curve well. In 1964, Kennedy reduced the
top tax rate from 91% to 70% and, to the surprise of many, tax revenues
increased! Seventeen years later, the Reagan tax cuts reduced the top
marginal rate from 70% to 50%. Revenues soared again. Between 1980 and
1997 the share of federal income taxes paid by the top 1% rose from 19%
to 33%. The share of taxes paid by the top 25% increased from 73% to

Economists understand
that the optimum rate of taxation is zero. The second most optimum rate
of taxation is as low as possible. In contrast, many Americans seem to
have the attitude that tax rates should be increasingly punitive.

The top 1% pays 35% of
the taxes in the United States. The top half pays almost 97% of income
taxes. These two statistics have increased despite all the complaints
that tax cuts have favored the rich.

Low taxes should not be
a political issue that divides us. Every American should agree with the
goal of keeping taxes as low as possible. In 2011, all of the federal
tax cuts enacted since 2001 are scheduled to expire. In the words of
John F. Kennedy, "An economy hampered by restrictive tax rates will
never produce enough revenues to balance our budget - just as it will
never produce enough jobs or profits."

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1 comment:

One Salient Oversight said...

Supply siders... pseudoeconomics if you ask me.