April 12, 2006
America Celebrates Tax Freedom Day
PLEASE DO NOT CITE—AN UPDATED VERSION OF THIS STUDY IS AVAILABLE HERE.
Special Report No. 140
Executive Summary
Tax Freedom Day will arrive on the 116th day of 2006 — Wednesday, April 26. Because of the rising tax payments that accompany economic growth, this year’s Tax Freedom Day is three days later than it was in 2005 and a remarkable 10 days later than it was in 2004.
Despite the rapid growth of the total tax burden between 2004 and 2006, Tax Freedom Day still shows the effects of the Bush tax cuts in 2001 and 2003. Even as late as April 26, Tax Freedom Day is still celebrated seven days earlier than it was in 2000 when the tax burden reached its peak and Tax Freedom Day was delayed until May 3.
Although a significant tax cut has been enacted in each of the last five years, only two of those were large and long-lasting enough to continue affecting the tax burden in 2006. Those were the Economic Growth and Tax Reform Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). However, these tax cuts did little to diminish the progressivity of the federal income tax. Naturally, then, as economic growth has resumed, so has the growth of the tax burden.
The tax burden will be higher in 2006 not because of tax increases — none have been passed at the federal level recently and none are expected in 2006 — but rather because of rapid economic growth expected by most economists to continue through the year.
After a recession in 2001 and 2002’s nearly stagnant but slowly growing economy, economic conditions improved significantly. The economy is now producing tax revenue commensurate with its impressive growth. The unemployment rate in February 2006 was 4.8 percent, down from 5.4 percent a year earlier in February 2005 (Bureau of Labor Statistics).
Additionally, Gross Domestic Product (GDP), the standard measure of an economy’s size and strength, grew by a robust 6.5 percent nominally from 2004 to 2005 (Bureau of Economic Analysis). These figures indicate a rapidly growing economy, which is always reflected in a later Tax Freedom Day unless tax rates are cut significantly.
Recently much attention has focused on the growing size of federal budget deficits. In fiscal year 2006 the deficit is projected to be $319 billion. If taxes were increased immediately to pay for this budget shortfall, Tax Freedom Day would experience a significant increase of 10 days from April 26 to May 6, which would set the record high Tax Freedom Day.
Attached Files
- Special Report No. 140, PDF, 269.5 KB
by Scott A. Hodge and Curtis S. Dubay
