Opinion Editorial | |
| Wednesday, August 18, 1999 | |
Tax Slavery Day is Coming! |
A few months ago, the Tax Foundation announced that Tax Freedom Day fell on May 11 this year. This is the day, the foundation says, when Americans stop working for government and start working for themselves. The growth of Tax Freedom Day from April 30 in 1993 shows that Americans will work 11 extra days this year just to pay the higher taxes that have been imposed during the Clinton Administration. These higher taxes include not only those legislated by Bill Clinton, but those resulting from workers being pushed into higher tax brackets by economic growth and inflation without receiving tax relief.
While Tax Freedom Day may be a clever way of communicating to Americans the impact of rising taxes on their lives, I have always thought it really would be more effective if done in reverse. We should be talking about Tax Slavery Day as the day when we stop working for ourselves and start working full time for government. Using the Tax Foundation's methodology, Tax Slavery Day falls on Sunday, August 22 this year. Up until then we work for ourselves, after that government gets everything.
One reason why I like Tax Slavery Day better than Tax Freedom Day is because it more accurately conveys the impact of taxation on incentives. Tax Freedom Day implies that our tax system is like a head tax, in which we are free of tax on all we earn once we have paid the government's bill. But that is not at all how the system works. Because we have steeply progressive income tax rates, the more we work the more taxes we pay.
Moreover, from an economic point of view, the most important thing about taxes is not how much they take out of our total income, but how much they take out of each additional dollar we earn. Economists call this the marginal tax rate. At the federal level, this rate can go as high as 39.6 percent, although for some people the effective rate can be much higher due to phase-outs of various tax credits and exemptions. One of the best explanations of how high marginal tax rates affect incentives was given by President Calvin Coolidge in a 1924 speech.
Said Coolidge, "If we had a tax whereby on the first working day the government took 5 percent of your wages, on the second day 10 percent, on the third day 20 percent, on the fourth day 30 percent, on the fifth day 50 percent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week?"
In a nutshell, this is what progressive tax rates do to all workers over the course of the year. For the first month or two, the federal income tax allows most workers to keep all that they make, due to the personal exemption and standard deduction. After that, it starts to take 15 percent of everything. In a few more months, it starts to take 28 percent. And for those who are highly skilled or have working spouses, the rates climb to 31 percent, 36 percent and, finally, 39.6 percent.
It is hard to say how many workers react to their declining net income over the course of the year by stopping work. But for many with high incomes and flexible work schedules, it doesn't really pay for them to work past Labor Day. The cost to them in terms of foregone income is small, since Uncle Sam in effect subsidizes their vacation at a 39.6 percent rate.
As a result, the government is actually one of the biggest losers when the tax system discourages work through high marginal tax rates.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 18, 1999.
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