Tax Myths

April 22, 1997|By Carl T. Rowan

WASHINGTON -- As Americans were finishing up their income tax returns last week, they may have heard or seen some eye-popping figures from the Tax Foundation.

It projected that "Tax Freedom Day" -- the day when the average American will have earned enough money to pay all taxes -- had been extended to "another new record" this year: May 9. And it said that on average Americans will spend 2 hours and 49 minutes of each working day laboring to pay taxes.

A great many taxpayers probably heard these numbers and cursed the IRS. I heard them and thought, "There they go again."

The Tax Foundation has been figuring out Tax Freedom Day for a quarter-century now. This year, however, I was better prepared for its claims, thanks to an assessment by the Center on Budget and Policy Priorities, a Washington-based research organization. It advises taking the foundation figures with several grains of salt.

In the first place, although the Tax Foundation carefully notes that all taxes -- state, federal and local -- are included in its projection, by releasing its report on April 15 it misleads people into thinking that federal personal income taxes are the main issue.

Types of taxes

In fact, these constitute less than one-third of the taxes counted by the foundation. Slightly more than one-third are other federal taxes such as payroll, excise and corporate taxes; the other one-third are state and local taxes.

Secondly, notes the center, the calculations are based on average income and taxes rather than medians. This skews figures because the taxes paid by millionaires are lumped in with those paid by secretaries, firefighters, teachers and laborers.

You can see the difference between "average" and "median" in this example offered by the center. Suppose four families with $25,000 incomes each pay $5,000 (20 percent of income) in local, state and federal taxes, and one wealthy family with a $500,000 income pays $180,000 (36 percent) in taxes.

The average income of all five families is $120,000 and their average tax rate is 33 percent. But four of the five have incomes of just $25,000, and those four pay 20 percent of their income in taxes, not 33 percent. In this example, the median family -- the one that falls in the middle with half earning more income half earning less -- makes $25,000 and pays 20 percent of its income in taxes.

Using the average tax rate instead of the median violates the approach that most analysts use and exaggerates the proportion of income the typical family pays in taxes, says the Center for Budget and Policy Priorities.

Finally, and perhaps most important, the Tax Foundation doesn't talk at all about what Americans get back for the taxes they pay. Your paycheck may go partly for taxes, but you're still working for your own well-being and that of your children.

Sure, there's far too much waste and needless spending in government. But remember, our federal taxes pay for national defense, air-traffic controllers, highways. They provide food, health care, disability benefits for the needy. Payroll taxes finance Social Security and Medicare for older Americans. State and local taxes go for schools, parks, police and much more.

So go ahead and joke, even gripe, about the IRS and taxes. But recognize what life would really be like if Tax Freedom Day were January 1.

Carl T. Rowan is a syndicated columnist.

Pub Date: 4/22/97

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