You’ve Filed, but Don’t Exhale Yet

Most people believe that today, April 15, is the most important tax day of the year. But perhaps an even more significant date for Californians is April 29. That’s Tax Freedom Day -- that felicitous point at which our year-to-date earnings finally equal our annual federal, state and local tax bills.

Only then will we Californians stop working for government and start working for ourselves -- and it comes 10 days later than that of the nation as a whole.

Nationwide, the federal tax burden has been reduced by 11 days’ pay over the last three years, since the high at the end of the Clinton administration, when it took till April 30 to earn our freedom. Despite President Clinton’s promise to end “the era of big government,” the tax burden grew by 12 days during the Clinton years, according to the Tax Foundation, which monitors fiscal policy.

In contrast, most state and local tax burdens have remained virtually unchanged since 1990. Under Gov. Gray Davis, however, California has gone from the 10th-highest tax state to the fourth-highest, behind only the traditional heavy tax states of Connecticut, Massachusetts and New York. In contrast, workers in Alaska and New Mexico get their freedom earlier, with Tax Freedom Day coming on March 30 and April 3, respectively, this year.

Despite the decrease over the last three years, the size of the federal government is still at an unprecedented level. From the birth of the nation until the early 1930s, government spending at the federal level never exceeded 3% of national income except during periods of war. In 1913, when the 16th Amendment allowed the federal government to tax income directly on individuals, Tax Freedom Day arrived on Jan. 30.

Total taxes did not permanently surpass 10% until Franklin Delano Roosevelt’s New Deal legislation in 1930. Total taxes passed 25% during the Great Society programs of the 1960s. The tax rate is now 30%. Put another way, in 1900, taxes took $1 of every $12 of earnings from American workers; in 1950, taxes took $1 of every $4; today they take $1 of every $3. If you add the societal costs of complying with government regulations on such things as auto air bags, the cost is over 50%. Imagine the economic boom if the other half of worker’s labor were set free to boost productivity!

Taxes are the largest drag on the economic health of the country. They threaten to slow growth and, thus, ironically, decrease the amount of taxes collected at the same time.

Contrary to popular assumption, there is a level of taxation beyond which tax increases result in fewer dollars being collected. Why should I work when the benefits of work accrue not to me or my family but to some bureaucracy in Sacramento or Washington? Imagine, for instance, a 100% tax rate; commerce would come to a halt and zero taxes would be collected.

Many economists believe we already are well beyond the level at which high taxes drive down productivity for the most-productive Americans; hence tax cuts for above-average earners, who pay most taxes, will result in increased economic growth and more taxes being collected.

Although individuals and companies can seek economic asylum from the mismanagement of states such as California by relocating, they cannot as easily avoid federal taxes. This competition between states for the best balance of taxation and services has kept the state tax burdens under control.

The purposes of federal spending have changed over the years. In 1962, during the Cold War, defense spending was 49% of the budget; health and Social Security totaled 14%. Today those proportions are reversed, with defense reduced to 16% and Medicare, health and Social Security taking 44% and growing rapidly.

The finance minister of France’s Louis XIV said it best: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

Our current payroll withholding system means most people don’t realize how much money they’re paying in taxes. Without it, there would be a lot more hissing in the United States today. Look at Line 42 on your Form 1040 just filed -- the line that shows how much tax you owed in 2002 -- and imagine writing a check to the Internal Revenue Service for that entire amount.

We need to look more closely at these numbers and ask what limits our country can support.