Tax Freedom Day is the day when our collective income as a nation is enough to pay our collective federal and state taxes for the year. Considered in that respect, all of the income we earn after that point may be considered "tax-free.”
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Tax Freedom Day is calculated in April of each year using projections from the federal budget, U.S. Census data, and information from the Bureau of Economic Analysis (BEA). This holiday of sorts was invented by a Florida businessman in 1948 who deeded the concept to the Tax Foundation in 1971.
The Tax Foundation has been regularly calculating Tax Freedom Day ever since. Data is available for prior years on the Tax Foundation’s website, going all the way back to 1900 when the big day was January 23rd.
These days it may feel like Tax Freedom Day takes place around November, but the situation is not quite that dire. Tax Freedom Day arrived on April 21st, 2014, three days later than in 2013 and eight days later than in 2012.
It is too early to say if we are creeping toward the latest ever Tax Freedom Day of May 1st, 2000. For most years since 1968, Tax Freedom Day has fallen in mid-to-late April. It broke into April for the first time during World War II (1943) and, aside from 2000, it has fallen in April every year since 1955.
Variations in state and local taxes, as well as federal tax progressivity, means that Tax Freedom Day comes earlier in different states. For 2014, the states where residents had to work the longest to escape taxes were Connecticut and New Jersey (May 9th), while residents of Louisiana escaped their tax burdens the earliest (March 30th).
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If you are curious where your state ranks, a color-coded map with the individual state Tax Freedom Days may be found on the Tax Foundation website at http://taxfoundation.org/article/tax-freedom-day-2014-april-21-three-days-later-last-year. A color-coded calendar is also available showing how long it takes to pay off all the individual tax components in order, starting with the highest two components – federal income tax (33 days) and social insurance taxes (27 days).
What about the federal deficit and its effect on your tax burden, since it represents taxes you will owe in the future? With the deficit burden included, the 2014 Tax Freedom Day actually fell on May 6th.
The 2014 calculations included approximately $3.0 trillion in federal taxes and $1.5 trillion in state taxes, equaling 30.2% of collective income. For reference, in 1900, Americans paid 5.9% of their income in taxes, and at the high point in 2000, America’s taxes consumed almost one-third of income. For some perspective, consider that in much of the industrialized world this value is in the 40% and 50% ranges.
Soon enough, we will see the Tax Freedom Day estimates for 2015 and find out if the trend of the last few years will continue. If you want to calculate your own personal Tax Freedom Day, you can use the online calculator at http://www.calcxml.com/calculators/tax-freedom-day to make a reasonably good estimate.
While you may find the changes in Tax Freedom Day disturbing, reasonable, or pointless, keep one thing in context. Tax Freedom Day is a calculation of taxes as a percentage of aggregate income – it does not say anything about whether those taxes are distributed equitably, or whether or not you receive your money’s worth of services in return for the taxes that you pay. That is up to you to decide since it is as much a political question as a financial one.
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