Don't Let the Tax Foundation Figures
Persuade You Otherwise:
Taxes on Households in the Middle of the
Income Spectrum
are Neither Exceptionally High nor Rising
In a press conference today stating that "Tax Freedom Day" is May 10 this year, the Tax Foundation sought to defend itself against criticism of its methodology by claiming its report does not purport to represent the average family's tax burden. Responding to a critique by the Center on Budget and Policy Priorities that the Tax Foundation figures greatly exaggerate the taxes paid by families in the middle of the income spectrum, the Tax Foundation stated "CBPP has asserted that Tax Freedom Day misleads the public by using the 'average family's' tax burden. This is simply incorrect. Tax Freedom Day establishes an overall benchmark showing the average tax burden for the nation as a whole."
This distinction is important. As CBO and Joint Committee on Taxation data demonstrate, the Tax Foundation's average federal tax burden significantly exceeds the percentage of income not only that families in the middle fifth of the income spectrum pay but also that families in the next-to-the-top fifth pay. Portraying the Foundation's figures as tax burdens that average or typical middle-class families pay thus is misleading.
But the "Tax Freedom Day" report the Tax Foundation issued today does present Tax Freedom Day as the average American's tax burden, thus continuing an unfortunate Tax Foundation tradition of exaggerating the tax burdens of middle-class families. The second sentence of the Tax Foundation's press release reads: "The Tax Foundation projects that Americans on average would have to work 129 days to pay off their total tax bill this year..." The lead paragraph of the accompanying Tax Foundation report makes essentially the same statement. In addition, the Tax Foundation press release declares that the Foundation's report finds "that, since 1994, the tax burden borne by the average American has risen rapidly" and directs readers to a chart showing that Tax Freedom Day has come later in May each year since 1994. In attempting to defend itself against criticism, the Tax Foundation has essentially misrepresented its own report.
That the Tax Foundation's report is widely understood as picturing the average American's tax burden is shown by looking at page one of today's Wall Street Journal. The Journal, to which the Tax Foundation often leaks its Tax Freedom Day report in advance, reports that "the Tax Foundation, a Washington non-profit research group, estimates the average taxpayer will have to work a record two hours and 10 minutes out of each eight hour workday this year merely to make enough to pay all federal, state, and local taxes."
The use of the Tax Foundation figures to make it appear as though the tax burdens of middle-class Americans are rising is particularly inappropriate and misleading in years like those from 1990 to the present. Under the Tax Foundation's methodology, increases in taxes paid solely by high-income taxpayers raise the average tax burden and make it appear as though middle-class families are being required to work later in the year to pay their taxes. This approach produces particularly sharp distortions when taxes are raised primarily on affluent taxpayers, as they were under the 1990 and 1993 deficit reduction laws, and when large increases in the stock market cause wealthy investors to reap very large capital gains profits and pay more capital gains taxes on them, as is currently occurring.
In fact, due to the enactment of tax cuts such as the child tax credit in the 1997 Taxpayer Relief Act, as well as tax cuts enacted in the past year or two in many states, the percentage of income that families in the middle of the income scale pay in taxes is expected to edge down modestly in 1998. The Tax Foundation's peculiar methodology, however, portrays these tax burdens as rising. Over the past twenty years, the percentage of income middle class families pay in taxes has been essentially stable at both the federal and state levels.
The Tax Foundation also defends its Tax Freedom Day measure for providing a consistent measure over time, since the Foundation uses the same methodology every year. But consistency in using a methodology that is highly flawed — and failing to make needed corrections in the methodology — is not a virtue.
Foundation State by State Data Also are Flawed
Finally, the serious flaws that mar the Tax Foundation's estimates of tax burdens nationally also render its state-by-state estimates invalid. About two-thirds of the tax burdens in the Tax Foundation calculations are federal tax burdens, which are substantially overstated in all of the Foundation's national and state-by-state calculations. As the Center's critique of the Tax Foundation's methods explains, the Tax Foundation's methodology for computing state and local tax burdens also is badly flawed and overstates those burdens. Because the degree of distortion varies by state, both the Foundation's estimates of when Tax Freedom Day falls in each state and its estimates of how the states compare to each other in this regard are not valid. The Tax Foundation's report exaggerates the tax burdens of middle-class families in all states, with the degree of exaggeration varying by state.
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