Tax Freedom Day is getting later and later

Henry

By prof. Richard Grant

Recent levels of taxation and spending suggest that South Africa’s Tax Freedom Day will fall on 20 May this year, four days later than last year.

With complete data at the end of 2024, the date may be revised to be a few days earlier or later. But for the past 30 years, the day when taxpayers finally start working for themselves has been getting later each year – and making most people poorer.

Tax Freedom Day was calculated and introduced for the first time by a businessman in America about 80 years ago. His plan was to compare the overall tax burden in his country with a national income benchmark. Accordingly, he calculated the number of days it would take the “average person” to earn their mandatory tax on a year’s income.

Simply put, this means that if Tax Freedom Day was on January 1, taxpayers paid no tax. If it was on December 31, the government took all our income as taxes and left us nothing. The later in the year this day is, the worse it is for the average tax payer and everyone who works for a living.

In most societies, politicians like to show off the money they spend or hand out money to their supporters. However, they do not like to show that they levy taxes to finance that spending. The politicians have different motivations than most economists, who may recommend a broad tax base and a low tax rate to support tax efficiency, which means sacrificing as little productivity as possible for every rand tax levied.

For politicians that might be fine, but they would rather make tax levies less noticeable to the average voter and delay them until later through deficit spending.

Year Tax Freedom Day
1995 April 23
1996 April 20
1997 April 26
1998 April 28
1999 May 4th
2000 April 29
2001 April 29
2002 April 18
2003 April 25
2004 April 25
2005 April 29
2006 April 28
2007 April 25
2008 April 25
2009 May 3
2010 May 4th
2011 May 5
2012 May 11
2013 May 9
2014 May 12
2015 May 19
2016 May 10
2017 May 9
2018 May 11
2019 May 10
2020 May 25
2021 May 19
2022 May 17
2023 May 16
2024 May 20

To calculate Tax Freedom Day, general government spending is a simple proxy for tax revenue plus the cumulative burden of deferred taxes due to the financing of government budget deficits with debt and the net transfer of wealth due to inflation. This figure divided by the current Gross Domestic Product (GDP) will show the tax burden as a percentage of GDP and also what percentage of the year is worked to cover that tax burden.

A problem inherent in the financing of public debt is that the visible tax burden that accompanies current spending is postponed and this makes voters less aware of the true cost of the government’s activities. Thanks to deficit spending, governments have control over more resources than current income flows would indicate.

Just as a consumer is prepared to buy more of a product when the price is lower, the average voter is prepared to vote for more government services when these services seem cheaper. But voters are not all equal in their knowledge of tax treatment. Taxpayers in the higher income groups must surely know that every new rand they earn is subject to a marginal tax rate of 45% – and higher marginal tax rates put a damper on productivity.

The use of deficit financing not only makes voters less aware of the real costs of government, but also transfers part of the immediate tax burden to future tax payers – both those living today and those yet to be born. But current taxpayers also carry the accumulated burden of past deficits. What it costs the government to repay its debt, these days forms the largest single component of the national budget, more than basic education, and makes up almost a sixth of consolidated government expenditure. Each round of deficit spending increases this burden.

As the government’s expenditure increases over time, its need for tax revenue grows at the same rate, pushing the day when tax-freedom arrives even later. Since 1996, Tax Freedom Day has moved from mid-April to mid-May. This coincides with an increase in general government expenditure from 30% of GDP to 38%. Over the same period, the average real GDP growth rate declined by three percentage points.

One would hope that this increase in government would at least aim to raise the standard of living. Instead, however, the rising tax burden and resources shifting from the private sector to government control result in lost productivity and slower income growth. The negative relationship is striking. (See the chart, which excludes the outlier growth rates in the years of Covid-19 lockdowns.)

The lost productivity is compounded by the poor administration of government programs and institutions and by the structural disincentives and compliance costs of the regulatory order, high inflation, ineffective policing and pervasive corruption. A complicated and inefficient tax structure increases the depressing effect of the tax collected in total.

Our assumption is that a government that is relatively small will necessarily prioritize its expenses and will concentrate on things that are considered essential and of the greatest importance. When this government expands its operations, it adds the “second best” programs, with each new program being less important or less productive than the previous core operations. But when the government gets bigger, the private sector gets smaller and increasingly important production is therefore likewise lost. Costs are increasingly rising – and living standards are falling.

To promote prosperity rather than stagnation, the government can at least keep the growth in its expenditure below the GDP growth rate.

  • Richard J Grant is a professor of finance and economics at the University of Cumberland in Tennessee, America, and is also a senior consultant for the Free Market Foundation.