'Tax Freedom Day' debate feeds into tax-cut tussle

Just as last-minute taxpayers were filing their returns two weeks ago, the Tax Foundation proclaimed Tax Freedom Day to be this Thursday, May 3.

It is the longest Americans have ever had to work to pay their total taxes - federal, state, and local - for the year, the Washington research group holds. And it is a day longer than in 2000.

Probably made some filers feel worse.

To many Republicans, the federal government is too big and the Tax Foundation report proves it. The $1.6 trillion tax cut pushed by President Bush would discourage more government spending. But to most Democrats and a few Republican legislators, the tax cut is too big. The money could be put to better use - say, huskier anti-poverty programs, debt reduction, or education.

The Republican-controlled House easily approved Bush's 10-year tax cut relatively intact. The Senate, divided evenly between Republicans and Democrats, passed a $1.2 trillion plan.

And last week, President Bush, faced with this divide, signalled a willingness to compromise on the size of the cut. He was reported willing to consider $1.4 trillion.

Still, the Tax Foundation says the "average American taxpayer is shouldering a heavier tax burden than he ever has before."

But is that really true?

No, according to the Center on Budget and Policy Priorities (CBPP), a Washington think tank. It calls the Tax Foundation report "misleading," and asserts that taxes on middle-income families have declined in recent years. In fact, the tax burden for typical American families is at "a historically low level," says Joel Friedman, an economist at CBPP. And such tax authorities as the Joint Tax Committee of Congress, the Congressional Budget Office, and the Treasury Department agree, he adds.

This dispute hangs on how you define "average."

Tax Foundation economist J. Paul Moody employs the mathematical average. He divides the per-capita burden of taxes by per-capita income. This method includes all taxpayers, both high-income families subject to high tax rates and low-income families who probably pay little if any federal income taxes, but are likely subject to payroll taxation for Social Security.

The result of this calculation is converted to the portion of the year that Americans need to work to pay their tax bills.

To Mr. Friedman, this technique substantially exaggerates the taxes that middle-income families pay.

That's particularly so when high-income people enjoy large increases in capital-gains income or in executive compensation. Between 1989 and 1998, the top 1 percent of families earned 40 percent of all the gains in after-tax income. By comparison, the bottom 90 percent got only 5 percent of the gains. Further, Congress hiked marginal income-tax rates on the well-to-do in 1993. The result was a huge jump in revenues from the well-off - but not from typical taxpayers.

Families in the middle-income spectrum - between $30,000 and $50,000 - will pay just 5.9 percent of their income to Uncle Sam this year, according to the Joint Tax Committee.

By defining the "average" taxpayer as middle-income, Tax Freedom Day moves back to April 12, Friedman asserts.

To Mr. Moody, his Tax Freedom Day result is an "objective" measure of the tax burden based on the mathematical average, and not a "subjective" result from selecting a specific segment of taxpayers.

To Friedman, the foundation calculation "can't be taken as average in terms of being typical."

With the Bush tax cut awaiting the disposal of Congress, Tax Freedom Day got "a lot of attention" this year, says Moody.

Friedman holds that the CBPP's analysis this year and in earlier years of Tax Foundation numbers have succeeded to some degree in taking them out of policy discussions of taxes, showing them as giving a "distorted picture" of the typical tax burden.

In a sense, both sides of this dispute are right.

At the federal level, the total tax take has risen to a new high - almost 21 percent of gross domestic product, up from 18 to 20 percent over the past few decades.

The effort in the 1990s to end the budget deficit, together with prosperity for the prosperous, raised tax revenues. But 3 out of 4 families now pay less than 10 percent of their incomes in federal income taxes.

If Congress and the White House agree to a $1.4 trillion cut, it would trim the federal tax burden by about 1.3 percent of GDP.

Details of the tax cut still have to be negotiated. Will it cut taxes of the rich as much as outlined in the Bush plan? Will the estate tax be eliminated, or just modified so only the really rich get hit? Many other details must be worked out.

Maybe a deal will be worked out by the July 4 holiday.

(c) Copyright 2001. The Christian Science Monitor

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