Across the Nation

Tax Freedom Day: What Is It, and Why Does It Matter?

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Americans love to celebrate their freedom: freedom of speech, freedom from oppression, freedom of religion. But what about our freedom from taxes? Tax Freedom Day occurs on the date when the entire country has collectively earned enough money to pay the year’s total tax bill. Last year, we celebrated the day on April 21, three days later that of 2013. April 24 marks this year’s estimated Tax Freedom Day, another three days later than the year prior.

In 2014, Americans paid $4.5 trillion in taxes, and in 2015, Americans will pay an estimated $4.8 trillion—$3.3 in federal taxes and $1.5 trillion in state and municipal taxes. That’s nearly a third of the total American income. By reviewing how economists calculate the freedom day annually, and by studying the historical trend of the dates, taxpayers can better understand the big-picture relationship between household income, America’s income, and its taxes.

Across the Country

The date of each Tax Freedom Day is calculated by Tax Foundation economists. Established in 1937, this Washington, D.C.-based, nonpartisan organization is a tax policy research think tank that advises on tax policies at the municipal, state, and federal government levels. Economists gather information such as projected federal budgets and state and municipal projected taxes and use that information in their Tax Freedom Day calculations.

And in Your State, Too

There’s more than one Tax Freedom Day for American taxpayers. The first is one is shared by all at the national level, and its date is determined by using total federal and state taxes as well as the nation’s income. However, personal income and tax policies can vary dramatically by state, so there are state-specific dates celebrating tax freedom, too. (You can also determine your personal tax freedom.)

This year, high-tax and high-income states such as Connecticut, New Jersey, and New York will celebrate in May, while lower-tax, lower-income states such as Louisiana, Mississippi, and South Dakota enjoyed earlier dates in April.

A Pattern Emerges

The historical pattern of when this date falls annually reveals a fairly steady trend; it tends to occur later as each year passes. In 1900, for instance, it would have occurred on January 21. More than a century later, in 2013, it occurred on April 21. The year 2000, thanks to higher tax rates and a ballooning tech bubble, led to the latest national tax freedom date on record: May 1. This was followed by a short-lived trend reversal to April dates throughout the early 2000s.

While the pattern is pretty consistent, major events can push the date back dramatically in a short period. For example, World War I tax increases meant a date of January 24, 1917, would have been followed by February 8 in 1918 and February 22 in 1921.

Political and Economic Impact

Economic events play an important role not only in the tax freedom date, but also in where the tax burden lies for Americans. The Hoover/Roosevelt administrations of the Great Depression increased federal taxes significantly. At the beginning of the 1930s, state and municipal taxes were more than four times the federal taxes paid by taxpayers, but federal taxes crept up through the decade. By 1940, with a Tax Freedom Day of March 6, the tax burden was split evenly between federal and state/municipal taxes. Since then, federal taxes have overtaken state and municipal taxes.

What This Means for American Taxpayers

In 2015, taxpayers will spend more on taxes than on food, clothing, and housing combined, according to the Tax Foundation. This means that on average, more of Americans’ income supports federal, state, and municipal budgets than our own household budgets. History shows that this tax burden will likely increase, and that each year more of our workday earnings will go to taxes.

Sarita Harbour is a freelance writer specializing in personal finance, entrepreneurship, and green living. As a former financial adviser with over a decade of banking experience, she has been writing for American and Canadian digital audiences for the past three years. Her work is featured regularly on Capital One's Spark Business IQ, Forbes, and The Lending Tree, and also appears on sites such as Fox News, Yahoo! Homes, Bob Vila, Equifax Insights for Small Business, and Intuit Small Business. Sarita graduated from the University of Guelph where she studied Psychology and Computer Science, and she holds the Personal Financial Planning designation from the Institute of Canadian Bankers. Sarita is also a member of the Professional Writers Association of Canada. She lives with her family in an off-the-grid cabin outside of Yellowknife, NWT.