# Guess Who Pays Your Taxes?

The idea that Americans work for a third of the year before reaching Tax Freedom Day is flawed.

On April 21, 2014, the U.S. celebrated Tax Freedom Day. This is the day when Americans have finally earned enough income to pay off Uncle Sam. Hard-working Americans and libertarians alike will bemoan the burden of government, which makes us slave away for almost a third of the entire year just to pay the taxman.

Except there’s just one problem. From an economics point of view, Tax Freedom Day is hogwash.

Suppose your pretax salary is \$100,000 a year, and your total tax rate is 30 percent. According to the math of Tax Freedom Day, that means that you pay \$30,000 in taxes. But according to Econ 101, this isn’t actually what you pay, because that \$100,000 wasn’t all “yours” to begin with.

To see this, take the above example and imagine that all taxes dropped to zero. In that case, your pretax salary would be the same as your after-tax salary. Would your employer then pay you \$100,000 a year? Not likely. Because remember, when there were taxes, you were willing to work for \$70,000 in take-home pay. If taxes suddenly vanished, you wouldn’t suddenly start demanding \$100,000 in take-home pay. Your salary would rise, but not all the way to \$100,000.

This is what is known in economics as “tax incidence,” and it’s one of the very first things they teach you about taxes in Econ 101. The burden of taxes is split between employers and employees -- between buyers and sellers of labor. You may think you pay \$30,000 in income tax, but actually your employer pays some chunk of that and you pay the rest.

Of course, most of us lie somewhere between these two extremes.

By collecting income tax from workers instead of from employers, our government tricks us into thinking that we, the workers, are paying all the taxes. But actually, the employers are paying a lot of them.

But, you may be thinking, isn’t it more important to consider how much taxes the nation as a whole pays, rather than just workers? Well, maybe, but if you do that, you should remember that the nation as a whole also receives benefits from the government. First of all, government employs a lot of people. If you work for the government -- which includes the military, schools, police, fire departments, the defense industry, and a lot of the health-care and construction industries -- then all of your income comes from someone else’s taxes. For a government employee to celebrate Tax Freedom Day is a little like a cow celebrating Grass Freedom Day.

Most of the remaining government spending goes to transfer payments -- Medicare, Medicaid, Social Security, corporate subsidies, health-care subsidies and so on. It’s a little silly to celebrate Tax Freedom Day when a lot of the money you pay is getting mailed back to you as a check.

Now this isn't to say that government spending is efficient. A lot of it might be waste. Nor is it to say that transfer payments are fair or good -- a lot of them might be unfair and wasteful besides. As for our tax system, it definitely isn't the best it could be -- our tax rates might be too high, our collection system is inefficient and we might be taxing the wrong sorts of things.

But the idea that the government takes all of “your” money until April 21 is just wrong. Tax Freedom Day is a silly myth, cooked up by people who haven’t thought carefully about Econ 101. Or maybe they have thought about it, and have just chosen to ignore it.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net

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