Commentary

Tax Freedom Day Today

Although paying taxes is never fun, there is some good news this year. Americans stopped paying for government before they had to file their taxes. The Tax Foundation figures that “Tax Freedom Day” (TFD) arrived today, April 13. But enjoy your freedom while you can. Today’s tsunami of government spending ensures a much higher tax burden in the future.

April 13 is more than two weeks earlier than the recent record of April 30 set in 2007. In fact, TFD hasn’t been so low in more than 40 years. The last time we finished paying our taxes — local, state, and federal — sooner was 1967, when TFD fell on April 12. The more recent record was set in 2003, after the Bush tax cuts, at April 16.

This is good news, but it has come with a big price tag. First, the drop reflects this year’s so-called stimulus bill, which included badly designed tax relief. The legislation relied on credits, deductions, and offsets, intended to micro-manage individual behavior rather than increase incentives to work and invest. This tax package was better than last year’s rebate, but only barely. Better to let people spend their own money than not, but the “stimulus” tax provisions did so in a wasteful and inefficient fashion.

Whatever the short-term benefits of this spending explosion, the costs will be bigger and persist far longer. ”

Second, the lower tax burden is temporary. Warns the Foundation: “For 2011, both the HR 1 tax cuts and the earlier Bush tax cuts of 2001 and 2003 are set to expire.” Unless both houses of Congress and the president agree to extend the Bush tax reductions, Americans will pay far higher taxes starting in 2011. Unfortunately, such an extension can be blocked by any of these three.

Third, the drop in relative taxes paid reflected the impact of the recession that began in late 2007. Tax receipts shrank faster than did the economy, leaving taxpayers relatively better off compared to the government. But federal spending simultaneously exploded. Deficit financing replaced tax collections and much more.

Nor does the average TFD reflect the burden on citizens in high tax states. Connecticut is the worst: Tax Freedom Day will not come there until April 30. New Jersey is number 2 at April 29. New York comes in at number three with April 25. TFD in California is April 20, the fourth latest in the nation.

However, this year more than most, TFD, average or not, does not adequately reflect the burden borne by taxpayers. Spending, whether financed by taxes or borrowing, is the best measure of government’s fiscal impact. This year more than a third of government outlays are borrowed funds. Total government expenditures are at record levels. You have to go back to the last two years of World War II to beat this year’s spending burden.

Reports the Tax Foundation:

Because of the federal government’s ability to deficit-finance its operations, Tax Freedom Day moves somewhat independently from an alternative calculation that adds the federal budget deficit to total taxes collected. In 2009, an unprecedented budget deficit over $1.5 trillion produces a date of May 29, fully forty-five days later than Tax Freedom Day.

If the bailouts and “stimulus” bill were likely to rescue the U.S. economy, then this year’s spending level could be dismissed as an unfortunate anomaly. But the prolific bailouts have been unfocused and unconditional. Nor is there any end to the bailout candidates: Wall Street firms, banks, auto companies, auto suppliers, insurers, and more. All told, Congress, the Treasury Department, and the Federal Reserve have spent, lent, and guaranteed some $12.8 trillion, approaching America’s annual GDP. The nearly $800 billion approved earlier this year to jump-start the economy was larded with pork, social spending, and other old panaceas from the liberal wish list which have diverted good money to bad uses. Moreover, three quarters of the “stimulus” outlays will occur in 2010 or beyond, when the recovery is expected to be underway. Only $185 billion of $787 billion will be used this year.

Whatever the short-term benefits of this spending explosion, the costs will be bigger and persist far longer. The Congressional Budget Office came to the astounding conclusion:

In contrast to its positive near-term macroeconomic effects, the legislation will reduce output slightly in the long run, CBO estimates. The principal channel for that effect, which would also arise from other proposals to provide short-term economic stimulus by increasing government spending or reducing revenues, is that the law will result in an increase in government debt. To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt will tend to reduce the stock of productive private capital. In economic parlance, the debt will “crowd out” private investment.

CBO figures that the legislation is likely to slightly raise the GDP through 2012, have no impact for a couple years, and then reduce economic output starting in 2015. The most optimistic case envisions small increases through 2014 instead of 2012. But the reduction in GDP will be permanent, and will mostly manifest itself in lower salaries — for workers who will be taxed much more to pay off the government’s increased debt. The agency’s conclusion has special credibility since CBO is subject to retaliation by the Democratic congressional majority for criticizing the party’s economic centerpiece.

Runaway spending ensures that this year’s TFD will be dwarfed by future TFDs. Some day someone will have to pay off the debts being run up today. The Obama administration’s budget figures are bad enough, but they almost certainly rest upon unrealistic economic expectations. The CBO again offers a sobering analysis: “CBO’s estimates of deficits under the President’s budget exceed those anticipated by the administration by $2.3 trillion over the 2010-2019 period.”

The agency’s bottom line is even more astonishing. CBO reports that “the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010-2019 period,” leading to a deficit of $1.8 trillion in 2009 (compared to the Tax Foundation’s $1.5 trillion assumption) and $1.4 trillion next year. Moreover, “The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019.” Congress trimmed a bit from the president’s proposals when it approved the budget in early April, but actual federal spending almost always ends up far higher than initially projected.

Indeed, none of these numbers include fiscal disasters yet to come. The Federal Housing Administration is talking about needing a bailout. State and local pension funds are in crisis, prompting Phillip Silitschanu, an analyst at the Aite Group, to predict a bailout: Washington “could provide federal loans, or demand cutbacks as a condition of stimulus money, or there could be a federalization of some of these pensions.” The G-20 has proposed an extra $1.1 trillion for the International Monetary Fund, World Bank, and other development and trade institutions, the largest share of which would come from America. And the Congressional Oversight Panel for the Troubled Asset Relief Program approved last fall warns that the financial crisis “is far from over” and “appears to be taking root in the larger economy,” which could prompt even more attempts to bail out failing firms and stimulate the economy.

Then there is the more than $100 trillion in unfunded Medicare and Social Security outlays. If these programs are not changed, the red ink flood will grow exponentially. Add up all these numbers and imagine the taxes that will be due in the years to come.

Even at today’s “low” tax burden, observes the Tax Foundation, “Americans will pay more in taxes than they will spend on food, clothing and housing combined.” When the rest of the government’s bills come due and taxes rise accordingly most Americans won’t have any money left for necessities let alone discretionary outlays after they pay their taxes.

In the midst of economic crisis, it is tempting to celebrate the Tax Foundation’s report on TFD as a little bit of good news — sort of the tax quiet before the spending storm. Alas, the bad news is really bad. The best case is a big increase in spending, smaller GDP, and much higher tax burden. The worst case is financial crisis and collapse.

Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author of Foreign Follies: America’s New Global Empire (Xulon Press).