Tax Freedom Day

The Tax Foundation says today is the date on which taxpayers will have earned enough money to cover government obligations (federal, state, and local) for 2013.

Tax Freedom Day means that all of the productivity of Americans for more than 3½ months is required to support the government’s activities. What’s more, with rising taxes and higher income, Tax Freedom Day is 5 days later than in 2012. Depending on the state you’re in, your Tax Freedom Day may be earlier or later. Residents in Louisiana and Mississippi had theirs on March 29; for residents in Connecticut, their day is May 13.

Professor John Cochrane, professor of finance at the University of Chicago Booth School of Business, argues in a Wall Street Journal article that America needs an alternative maximum tax (AMaxT).

At what point does paying a sizable chunk of income for taxes become too much for individuals and start to hurt the economy? While he doesn’t have a magic number, he suggests that 50% of income might be the tipping point. His reasoning: If the government takes more than half of what someone earns, the economy will suffer because people will work less, which will result in less revenue.

When he says “taxes” he’s referring to the entire government take in the form of federal income taxes; Social Security and Medicare taxes; property taxes; sales taxes; state and local income taxes; real estate transfer taxes; estate taxes; and for business owners, the employer share of Social Security and Medicare taxes; state unemployment insurance; licensing fees; and other government fees (that are really taxes).

He also says that corporate taxes, which are really paid by people (investors; consumers) should be credited in some way to individual taxpayers if there is an alternative maximum tax.

He concludes: “So the AMaxT is most important for the backstop promise it makes to young people and entrepreneurs. Yes, start a company, go to school, work hard, invest, hire people. We guarantee you that no matter what happens, no matter how loud the zombies chant, no matter what clever “revenue enhancers” they come up with, you will get to keep some reasonable fraction of what you earn. Go for it.”

Readers in my age group may remember that when the marginal personal income tax rates ran to 70%, there was a 50% “max tax” on earned income (starting in 1972). (Remember Form 4726?) This cap on the federal income tax rate for earnings (wages; net earnings from self-employment) ended when the top marginal rate fell in 1981, so the need for the max tax ended.

Karl Marx said “There is only one way to kill capitalism—by taxes, taxes, and more taxes.” Are government officials trying to kill capitalism? Your guess is as good as mine.

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