The Tax Foundation keeps track of how much the average American spends on taxes such as federal and state income taxes, social security, medicare, sales and excise taxes, and property taxes.  Comparing the sum of these various taxes with the average American’s income results in some surprising conclusions.

According to the Tax Foundation the average American will spend 30.8% of his/her income on taxes in 2008.  Yikes. 

To put this in perspective, if you dedicated all of your income starting on January 1 to pay your annual tax burden, you wouldn’t be finished until 113 days later on April 23rd - “Tax Freedom Day.”  Only after that would you start to make money for yourself. 

There is perhaps some irony that Tax Freedom Day falls so close to April 15th, the day personal income tax returns are due.

Which Tax is the Largest Culprit?

Income taxes are the largest culprit by far.  Of the 113 days the average American works to pay taxes, income taxes are responsible for 42.  The rest break down as follows:

Federal, state, and local income taxes … 42 days

Social Security and Medicare … 28 days

Sales and excise taxes … 16 days

Corporate income taxes … 13 days

Property taxes … 12 days

Taxes Are More Expensive Than Food, Clothing, and Housing

The Tax Foundation also calculates the number of days the average American works to pay for basic livings costs:

Food … 35 days

Clothing … 13 days

Housing … 60 days

Health and medical care  … 50 days

Notice that taxes cost more than food, clothing, and housing combined.

It’s a Hypothetical Average

Now of course we don’t work the first 113 days of each year to pay taxes.  Instead we pay them a little bit at a time.  But Tax Freedom Day is a useful visualization to help us understand the extent of the tax burden Americans face. 

Tax Freedom Day is calculated using the tax burden of the average American.  Some taxpayers pay a greater percentage of their income and some pay less.  Tax burdens differ because of progressive tax rates, different tax rates for different types of income, and the various deductions and credits that disproportionately affect a taxpayer’s tax burden depending on his circumstances.

The tax laws do not treat all types of income equally.  No matter how much you pay in taxes, it makes a lot of sense to be aware of how different types of income are taxed.  For example, income earned from labor generally is taxed more heavily than income earned from capital.

Conclusion

It’s sobering to realize how many hours I work to pay my taxes each year. 

I can’t control how the government writes the tax laws, but I can utilize those laws to reduce my tax burden as much as possible.  It’s important to take advantage of things like tax-advantaged retirement accounts, tax-favored health insurance, deductions and credits, and the lower tax rate on capital gains. 

To quote the well-known judge Learned Hand in a federal tax case from 1934 (Helvering v. Gregory):

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions.”