The Tax Foundation released on April 12 its "Tax Freedom Day" report, an annual projection of the Tax Foundation's estimate of the number of days a hypothetical person would have to work if that person earned the average income (as defined by the Tax Foundation, excluding capital gains and with other adjustments) and paid the average taxes (state, local and federal, again as defined by the Tax Foundation) before taking any time to work to pay for any other needs. That description sounds very speculative. In fact, other than the actual numbers from the Department of Commerce's Bureau of Economic Analysis that are used as the starting point for the adjustments the Tax Foundation makes, all of the determinations in the Tax Foundation's report are speculative projections for the current year based on prior year numbers and the Tax Foundation's proprietary method.
If you go to the Tax Foundation's website, however, you would not easily discover that the report is speculative. There is a release about the report on the website, here. The release includes a number of precise numbers and impressive graphs that give an impression of certitude. Nowhere, in fact, in the release does it state that the numbers presented are merely projections based on data for other years and "massaged" through the Tax Foundation's proprietary model. You have to read the report itself to understand that. See here. On page 14 of 17 pages, the report describes its methodology as "illustrating" the tax burden, and finally on page 15 the report admits that the precise tax freedom days presented are in fact merely estimates that must be revised once real data is available for the year covered.
"Because the calculation of Tax Freedom Day requires the use of forecasts, and because NIPA data is frequently revised, prior years' estimates are updated in this report."
Even then, the Tax Foundation does not explain the revisions it makes.
The Center on Budget and Policy Priorities (CBPP) has done a good job of debunking the Tax Foundation "tax freedom day" rhetoric. Nicholas Johnson, Iris J. Law and Joseph Llobrera prepared a report, summarized at this link and pdf of the full report available here, that carefully reviews the problems with the Tax Foundation's past reports on state and local tax burdens. They point out a number of flaws in the report:
- The results are projections derived from old data and using a proprietary methodology that has not been subject to outside review;
- The Tax Foundation provides little notice to readers that its numbers are speculative;
- Past reports have been far off the mark compared to actual data: in 2002, for example the report claimed that state tax burdens had risen in 38 states, but later data showed only 8 states with higher burdens that year;
- Capital gains are left out of income, but taxes on capital gains are included in the tax amount, magnifying the error;
- "Its use of average taxes substantially overstates the federal tax burden of the vast majority of families" with the result that the tax freedom day calculations for the states "substantially exaggerate the tax burdens of middle-class families."
Perhaps most damning, as far as assessing the merit in the states' ranking numbers, the CBPP report notes that the Tax Foundation allocates taxes (including corporate taxes) to consumers based on where they purchase the taxed products, rather than residence. The result is especially distortive for any state legislator who hopes to use the report in planning state tax policies. Their example is worth quoting in full.
"[T]he Tax Foundation uses a procedure to allocate corporate, severance, and tourism taxes based on the location of the consumers who purchase products that businesses sell (adjusted for taxes that tourists pay). This is likely to lead to further misimpressions about the role of a state's tax policies on the tax burdens its residents are said to face. For example, when Alaska collects taxes from oil companies based on the amount of oil they produce in the state, the Tax Foundation does not count those taxes as part of Alaska's revenue. Rather, they add those taxes to the tax burden in the states where oil is consumed. Maine residents consume a significant amount of fuel and so get allocated a large share of these Alaska taxes. Yet state legislators in Maine cannot have much impact on the level of taxes that Alaska and other oil-producing states levy on oil."
So if the data points are speculative and based on such proprietary modelling that they cannot be tested and duplicated by other researchers, why should anyone pay any attention to the Tax Foundation's Tax Freedom Day report? They shouldn't. But in all likelihood, anti-tax blogs and the media will continue to publicize the report each year and further mislead ordinary Americans by reporting the dates for various states' tax freedom as though they are definite, derived from current year data, and duplicable by any other researcher. For a sampling of the coverage of this issue in this and prior years, see here and here and here. Not unexpectedly, there's hardly any explanation of either the speculative nature of the model or the fact that the income and tax averages on which the concept is based are not reflective of ordinary Americans' lives.
It's understandable why the concept is used, because Tax Freedom Day is a catchy idea, and it makes people think they are paying too much in taxes. Let's be glad, then, that there are organizations like CBPP around to set the record straight.
Addendum April 25, 2006: The Tax Foundation's Scott Hodges responded to my blog item in the comments section, below, and I responded to his comments in the following comments section. I mentioned in my comment that media stories do translate "tax freedom day" down to individual taxpayers, even though the Tax Foundation claims it does not intend such use of its statistic. Recently, CNN Money.com carried an article suggesting the statistic could be translated to individual taxpayers (see this link, which describes tax freedom day as "the day when you've earned enough to pay your federal, state and local taxes for the year and can start to pocket the rest of your pay to, say, support yourself"). The Wall Street Journal carried a similar story. The effect of such stories, which substantially overstate the number of days of work that go to paying taxes for ordinary Americans because the statistic averages in the income of people like Bill Gates with the rest of us, is to cause taxpayers to think they work harder to pay their share of taxes than they actually do.
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