United States has traditionally been a low tax nation. From the founding of the country until the early part of the twentieth century, the United States was in part defined by its mistrust of government power and its correspondingly low taxes.29
As such, it would appear that the checks and balances the Founding Fathers put in place to control the dangers of taxation worked pretty effectively.
At the beginning of the 20th century, Tax Freedom Day was January 22th, which meant that you had to work the first 22 days of the year to pay your taxes, after that, everything you earned in the other 343 days was left over for your own expenses, housing, food, vacations, whatever you wanted. This was an overall effective tax rate of 5.9 percent between federal, state and local taxes.
As can be seen in Figure 2.1, Tax Freedom Day declined slightly until 1918, when it jumps sharply, which coincides with our entrance into World War I. Given the increased government expense during a war this is not too surprising. After the war, however, while Tax Freedom Day did drop from its wartime high of 53 days, it only dropped to 35 days in 1923 and again in 1925. This new “low” was about 60 percent higher than the pre-war level. Following this post-war low, Tax Freedom Day started a steady increase.
The next big jump occurred during the 1930s with the Great Depression, when Tax Freedom Day exceeded its World War I highs jumping to the 50s and then even to the low 60s reaching a new high of 66 days in 1940. In this light the reason for the depression lasting so long becomes much clearer. At the very time the economy was struggling, government greatly increased the tax burden, making it impossible for the economy to recover.
Then came the start of World War II. At this point levels of taxation were already at historic highs, three times their pre-World War I levels, but the demands of the war meant it had no place to go but even higher still. By 1943, a new high was set with Tax Freedom Day occurring on April 4, 94 days into the year for an effective tax rate of 25.7 percent. This marked a whopping 327 percent increase over the tax burden at the start of century.
Given the demands of World War II, this is somewhat understandable. But following the war, while there was some drop, it was not very much. By 1949, Tax Freedom Day had been cut back to only 81 days, over double its pre-depression value, and four times the lows of the early part of the century. By the following year it was back into the 90s where it spent the rest of the decade normally exceeding even its World War II highs.
In 1960, Tax Freedom Day exceeded 100 days for the first time in American history. Following Kennedy’s tax cuts it dropped back down hitting a “low” of 98 days in 1965, a low that still exceeded the highs reached during World War II. Following this new “low,” it started up once again heading for new highs. In 1966, it passed 100 for the last time, topping out at 114 in 1981. Following Regan’s tax cuts it again dropped back to a new “low” of 107 by 1984. But then once again, it started to climb ever higher and higher.
As we started the 21st century, Tax Freedom Day set a new record, occurring on May 3, 123 days into the year, with an effective tax rate of 33.6 percent. Following the Bush tax cuts, Tax Freedom Day once again dropped back to a “low” of 106 days by 2003, but, as it has so many times before, it started up once again rising to 113 days in 2008.l
This represented an astounding 459 percent increase in taxes over the century. More importantly this new high in 2000 occurred at a time of peace and economic growth. The country was not at war. Even the cold war had been over for a decade. There were no other unusual events to require extra spending by government, and while the economy was slowing and heading for a recession, this had not been recognized and so was not the reason for any of the spending. This was the new “normal” level of spending. When we did slide into a recession and then later went to war following the attacks of 9/11, the need for government spending once again shot up from this new low.
Looking over the entire century a few things become clear. Before World War I the tax burden on the American people remained fairly low and in fact even declined slightly. The major increases in the tax burden that occurred between 1917 and 1945, occurred during times of major problems facing the government: World War I, The Great Depression, World War II.
Another clear trend, however, is that once these problems had passed, while there normally was some movement back towards the pre-problem tax burden, it was for the most part marginal and temporary. So while new taxes may have been justified by clear problems (though the higher taxes actually lengthened, not shortened, the depression) once the justification went away, the taxes for the most part remained.
Since World War II there has on the whole been a fairly steady increase in the overall burden. While this was in some part due to the Cold War with the Soviet Union and conflicts such as Korea, and Vietnam, these do not explain the steady increases. Nor do they account for the increase during the 1990s when the Cold War was over and the country had both peace and prosperity.
Another thing the graph shows is that while we have had what were called “major tax cuts” at times, the effect of these cuts have actually been fairly minor and on the whole have been only temporary. Even after the tax cuts, the overall total tax burden increased 459 percent over the century. This is before we take into account that the first decade was a period of decline where the effective tax rate went from 5.9 percent in 1900 to a low of 4.9 percent in 1909, while the years 1906 and 1907 had 5.1 percent rates, and the rate for 1910 was 5.0 percent. That was nearly a 17 percent decrease. If the later increase is compared with the low for the century instead of the rate in 1900, the increase would be an amazing 585 percent!
Looking Ahead
Such a phenomenal increase cannot be maintained. If taxes go up only 300 percent during this century, we would be at a 100 percent effective tax rate by the end of the century. At such a rate, all of your time would be spent working to pay your taxes with nothing at all left to pay for your own living expenses! This is clearly impossible. A more rational projection would be to take the rate of increase in taxes over the last 100 years and project this out into the future. I have done this in Figure 2.2, and it shows that if this trend were to continue we would reach a 100 percent tax rate somewhere around the year 2200.
But again this is impossible, as a 100 percent effective tax rate is impossible.m The point here is not to show that we will reach a 100 percent effective tax rate in any particular year. Any number of assumptions could have a very large effect on this projection.
Rather it is to show that the trends that have existed over the last 100 years cannot be maintained. At some point, long before a 100 percent effective tax rate is reached, the burden on the economy will become too great, and the system will collapse.
Unfortunately, no one knows where this collapse will take place. We are on a ‘stroll into the desert’ and the point of no return is approaching. But we don’t know if it is close, or if it is still some distance away. We know only that we cannot continue in this fashion forever. We certainly will not be able to maintain this rate of increase in taxes for another 100 years. And yet as we look to the future the need of the government for even more money to fund programs such as Medicare and Social Security is vastly larger than even today’s record highs; yet politicians are forever promising more.
A major problem with all this is that a primary reason for the growth in the tax burden is that government has become more and more involved in daily life, providing more and more services that people then come to depend on. The real danger is that once the tax burden reaches the point that the economy can no longer support it, the economy will begin to decline. At that point the only thing that can be done to revive the economy will be to reduce the burden that is the cause,. However since the economy is declining, the demand for government services will be increasing at the very time government needs to cut back.
Frankly if the history of the last century is any indication at all, in all likelihood, the burden will actually be increased even more, and as a result further hastening the collapse of the economic