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“Tax Freedom Day”: Flaws in the Tax Foundation’s Calculations

April 13, 2001

FOR INFORMATION CONTACT:
Jon Peacock or Mark Wehrly
608/284-0580 (ext 307 or 308)
“Tax Freedom Day”: Flaws in the Tax Foundation’s Calculations

Every year the Tax Foundation (TF), a Washington think-tank, announces “Tax Freedom Day”—how long people work each year just to support local, state and federal governments.

However, the foundation’s methodology is flawed, and the results are presented in a misleading fashion.A recent Center on Budget and Policy Priorities analysis (http://www.cbpp.org/4-11-01tax.htm) reveals a number of significant problems with the Foundation’s figures:

• The Tax Foundation counts capital gains taxes as part of the tax burden, yet it does not include capital gains income in their definition of income.This makes average tax rates look higher than they really are, especially in recent times when capital gains taxes have been a significant contributor to tax growth.
• The foundation’s methodology yields an average or “mean” tax burden that tends to be far higher than the tax burden of the median or typical family.According to the CBPP analysis, “taxes on families in the middle of the income spectrum are substantially lower than the taxes the Foundation claims Americans pay on average.”
• The foundation counts as taxes items that are not taxes, such as optional Medicare premiums, governmental income from fees and rentals of government property, and intragovernmental transfers that are solely bookkeeping devices and not taxes.

Jon Peacock, Director of the Wisconsin Budget Project -- which is part of the Wisconsin Council on Children and Families -- noted that another problem with the Tax Foundation’s computations is that they do not give credit to states for money that is returned to taxpayers, such as Wisconsin’s $700 million sales tax rebate.

All of these flaws in the calculation of state tax burdens distort the figures in the same direction – they all make taxes look higher than they really are. Most importantly, according to Peacock “the Tax Foundation’s report is designed to lead the public to believe that the average American’s taxes have been steadily increasing; yet both the Congressional Budget Office and the Joint Committee on taxation agree that taxes on middle-income families have been declining in recent years.”

“Apart from the methodological issues, it is important to remember that the key question is: are we getting our money’s worth for our taxes?”Peacock said.He added, “that’s a subjective question and a difficult one to answer, but we can tackle it more intelligently if we use fair and accurate data on the tax burdens of average families.”