A taxing argument

Something feels a little off today. It's the deadline for filing tax returns in the United States, but it's not April 15th. Not that taxes have been due on April 15th fo eternity -- for the first half of the 20th century (well, that part of said first half after the income tax was first imposed), it was March 15, only becoming April 15th after Congress changed it in 1955. According to the IRS, whenever April 15th falls on a weekend or Federal holiday, you have until midnight of the next business day, a fact which pushed taxes to April 17th just last year. No, it's the April 17th-is-a-Tuesday part which makes it feel off, due to the fact that Washington D.C. now has a holiday on April 16, and again according to the IRS, if D.C. wants to nap, we're all going to take a snooze. Wait, that's not exactly how they put it (and in all seriousness, it's actually a good reason for a holiday).

Tax day has a tendency to bring out SC's inner libertarian, especially since the mortgage deduction didn't apply to him this year (oh, how bitterly he's missing Chez SC right about now). And that brings us to a phrase with a surprisingly contested meaning, "Tax Freedom Day".

The basic concept is simple enough -- if you consider the part of your earnings that you get to keep every year after taxes to be what you've earned after you've made enough to pay your taxes, then simply multiplying your effective tax rate (what you actually pay, not your marginal rate, which only applies to a portion of your income) by 365 tells you how many days you had to work to pay your taxes. One could quibble with certain issues there -- salaried employees don't generally get paid for weekends, there are a variable number of holidays depending on where you live -- but the calculation wouldn't change overly much even if you did correct for these things.

There are good reasons why you wouldn't want to publish your personal tax freedom day given the above methodology, though, which is that it's a handy way for people to figure out roughly what you earn. With the exception of people whose salaries are required by law to be published, this is generally Not Anyone Else's Business (except for the IRS). So the Tax Foundation, which holds the copyright on this idea, publishes an aggregate figure for the U.S. as a whole, as well as state-by-state. And every year in rebuttal, an organization called the Center for Budget and Policy Priorities publishes an argument that the figure is misleading ((the first two pages of the Google link will suffice to get you the last decade's worth of press releases). The argument seems to revolve around the meaning of the word "average". On one side, the Tax Foundation computes total tax receipts divided by total income; on the other side, the CBPP argues that the average person falls in the middle quintile of taxpayers, and since those people don't pay anywhere close to the effective tax rates implied by the Tax Foundation figures, the notion of tax freedom is highly misleading. You can read last year's version of the argument here (the Tax Foundation side) and here (the CBPP side).

Arguments about the right choice of statistic to mean "average" have been going on forever. The Tax Foundation clearly would prefer that you think of the arithmetic mean; the CBPP would prefer that you use the median. There are enormous policy consequences that follow from your choice in this regard, as the former is useful for arguing that taxes are too high, and the latter for arguing that they're either too low, or at any rate, not onerous (the question of what the money is being spent on is certainly related, but separable for our purposes). SC is sure of one thing, though, which he'll bet both sides can agree on: when the mean and median taxpayers get in line at the post office today, they'll both be grumbling.

Comments

[Dad SC]

April 16, 2007 was also Patriots Day in Massachusetts (no, not Tom Brady and Bill Belichek, but the Adams family of Massachusetts, Washington and Franklin, etc). It was also the day of the Boston Marathon. According to my Massachusetts friends, those are other reasons why Tax Day was the 17th this year.

[franklinmarshall]

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