April 15, 1999

Tax Foundation Figures Produce Misleading and Inaccurate Impressions of Middle Class Tax Burden
by Iris J. Lav, Isaac Shapiro, and Robert Greenstein

Click here for the revised version of this report.

Additional tax-related reports

On April 15, the Tax Foundation issued a report stating that on average, Americans must work until May 11 to pay taxes. Each year since 1993, the Tax Foundation has claimed that the average American's tax burden has reached a new record high, and that "Tax Freedom Day" occurs later in the year.

The Tax Foundation's claim of ever-increasing tax burdens is in direct contradiction to evidence from the two leading sources of tax information for Congress — the Congressional Budget Office and the Joint Committee on Taxation. These authoritative sources find that taxes on typical middle-income families are substantially lower than the taxes the Tax Foundation claims Americans pay on average. Moreover, CBO and the Joint Committee on Taxation find that taxes on middle-income families have been declining in recent years, not rising as the Tax Foundation reports would lead the public to believe.

Figure 1
04-15-99tax-f1.jpg (24392 bytes)

Joint Committee on Taxation data are changes in federal taxes for families with income between $30,000 and $40,000. The Congressional Budget Office data are for families in the middle quintile of the income distribution, with average income of $39,000 in 1999. The JCT and CBO data on federal taxes are combined with Commerce Department data on state and local taxes to estimate total taxes. State and local taxes from the National Income and Product Accounts are taxes as a percent of Net National Product. Tax Foundation data are from "Tax Freedom Day" reports, which use average taxes for all taxpayers.

Why is there this contradiction between the Tax Foundation and these two much more authoritative sources of tax data? It is because the picture the Tax Foundation presents — that the tax burden is high and has been rising — is inaccurate when applied to typical or average middle-class families. The Tax Foundation computes what it describes as the percentage of income that Americans, on average, pay in taxes and converts this to the portion of the year that Americans have to work to pay their tax bills. This methodology draws a misleading picture; it substantially exaggerates the amount of taxes that average middle class families pay. (See box on p. 3 for a discussion of the Tax Foundation's use of averages and terms such as "on average" and "Americans.")

Under the methods the Tax Foundation uses, an increase in taxes solely on high-income taxpayers increases the taxes that the average taxpayer pays and thereby advances "Tax Freedom Day" to later in the year. This methodology can produce particularly sharp distortions when taxes are raised primarily on affluent taxpayers, as they were under the 1990 and 1993 deficit reduction laws, and when, as at present, large increases in the stock market cause wealthy investors to reap huge capital gains profits and pay more capital gains taxes on them.

The Tax Foundation's methodology errs in other important ways as well. Of particular concern, the Tax Foundation fails to count some of the income on which the taxes that it counts are levied. It counts capital gains tax payments as taxes but fails to count as income the capital gains income on which these taxes are levied. In addition, the Tax Foundation counts as taxes various items that clearly are not taxes, such as the optional premiums that elderly and disabled people elect to pay for physicians coverage under Medicare. The methodological errors that the Tax Foundation commits all distort its figures in the same direction — they all make taxes look higher than they actually are.

In assessing the Foundation's report, the following points merit consideration.

1. The federal tax burden the Tax Foundation says families pay on average is about 28 percent larger than the federal tax burden that CBO estimates the typical family bears and about 51 percent larger than the federal tax burden the Joint Tax Committee estimates the typical family bears. In its Tax Freedom Day report, the Tax Foundation estimated that families on average pay 24.3 percent of their income in federal taxes, including income tax, payroll tax, and other taxes. By contrast, the Congressional Budget Office estimates that families in the middle of the income scale pay 18.9 percent of income in federal taxes in 1999, while the Joint Committee on Taxation's estimate is 16.1 percent. The Tax Foundation's estimates are more than one-fourth to one-half higher than the estimates of these more authoritative institutions.

The federal tax burden posited by the Tax Foundation is not only higher than what CBO and Joint Tax Committee estimate middle-income families pay, but is also higher than what CBO estimates families in the next-to-the-top fifth of the population pay. CBO estimates that families in the next-to-the-top fifth will pay 22.2 of income in federal taxes in 1999. The Tax Foundation claims that Americans on average pay more than 24 percent.

Misleading Word-play?

Both the Center on Budget and Policy Priorities and a number of prominent economists such as William G. Gale of the Brookings Institution have for some years criticized the Tax Foundation's methods as providing a misleading picture of the taxes that middle-class families pay. As noted elsewhere in this report, the average tax burden figure the Tax Foundation derives — and on which Tax Freedom Day is based — is substantially higher than the tax burden that families in the middle of the income scale pay. This is in part because the Tax Foundation's method ascribes to middle-income families types of taxes and tax rates that apply primarily or solely to upper-income taxpayers.

The Tax Foundation has responded to this criticism by tweaking the wording of its reports. In 1996, it described Tax Freedom Day as "...the day the average American can expect to quit working for Uncle Sam...." By 1998, the Tax Foundation was saying, "On this day, Americans on average will have earned enough...." and using phrases such as "...the tax burden borne by Americans..." [Emphasis added.]

Despite this slight change in wording, the tone of the Tax Foundation's reports clearly invite the reader to believe he or she works until May 11 to pay taxes. The Tax Foundation material does nothing to help the reader understand that "Americans on average" would, under our progressive tax system, pay a substantially higher tax bill than a typical, middle-income family. Indeed, Congressional Budget Office data show that the percentage of income paid in federal taxes by "Americans on average," as the Tax Foundation computes it, exceeds the percentage of income paid in taxes not only by families in the middle of the income spectrum but even by families in the next-to-the-highest fifth of the income spectrum.

Still more telling, the Tax Foundation explicitly invites members of the public to understand its tax burden measure as applying to themselves. On the Tax Foundation's World Wide Web site, the home page message that links to the Tax Freedom Day Report invites visitors to find out "How long do you have to work this year just to pay your total tax bill (that is, when is Tax Freedom Day)?"* The reader clearly is intended to interpret the "Tax Freedom" date as if it applies to his or her own tax bill, and not as though it represents a higher tax burden than is paid by a substantial majority of taxpayers.

* http://www.taxfoundation.org on April 14, 1999.