Independence Day

And although four months into the year might seem like a good time to take a few days of R&R, the unfortunate reality is that none of us can afford to. You see, although we've been working since Jan. 1, we have yet to make a dime of income for ourselves to spend or enjoy.

In fact, just this past weekend, we celebrated "Tax Freedom Day." Calculated by the nonpartisan, not-for-profit Tax Foundation, April 27 marked the date when Americans have finally paid their federal, state and local tax burdens for the year. Starting April 28, you're finally able to start making money for yourself. Bills have been piling up, but you haven't bought one plate of food or stitch of clothing. In fact, the only bill you've paid so far is the one to the government.

While New Year's and Christmas might get all the press, Tax Freedom Day is ultimately a much more meaningful holiday. It's a celebration that inspires happiness, a giddy sense of liberation and also grief and frustration. Any way you look at it, the statistics regarding taxes in this country are nothing less than startling.

More than the bid/ask spread, terrible analysts recommendations, Enron (ENRNQ), Alan Greenspan, commissions, loads, subscriptions, data fees, cable connections, computer hardware, software or research, the biggest cost to investing and wealth creation is without doubt taxes.

Taxes are Americans' biggest expense. The average law-abiding citizen works 117 days to pay their taxes — 11 days more than it takes to pay for their food, clothing and shelter combined.
 

This great country might have been founded on the principles of political and economic freedom, but contemporary leadership has come to believe that soaking its populous, especially the most wealthy, is as American as apple pie.

According to the Internal Revenue Service, the top 10% of income earners (who make over $87,682) pay more than 66% of the nation's income tax. The bottom 50% of the nation's income earners pay 4%.

But the taxes themselves are just the start of the true tax burden. According to the Tax Foundation, Americans will spend 5.8 billion hours just figuring out how much tax they have to pay. Add up all the accountants, tax-prep services and software, and the overall cost of tax compliance is estimated at $194 billion annually, the equivalent of a 20.4-cent surcharge for every dollar the income-tax system collects. Tax compliance amounts to a sum greater than the annual revenue of Exxon Mobil (XOM) ($191 billion) and only slightly behind that of Wal-Mart (WMT) ($219 billion). Even worse, the high cost of compliance harms the poor more than any other group. For those who make less than $20,000 a year, just figuring out how much they're obligated to pay comes to over 4.5% of their total yearly income.

Despite the government's politically motivated "get tough" stance on supposedly crooked auditors, the biggest frustration expressed by otherwise law abiding citizens isn't Arthur Andersen, but a bloated tax system that nobody, even the so-called experts, seems to understand completely.

The Gettysburg address is 269 words, the Declaration of Independence is 1,337 words, and the Holy Bible is 773,000 words. The Federal income-tax code weighs in at 6.9 million words. The average person reads about 150 words a minute, so even if you read the tax code for eight hours a day, it would sill take you roughly a month and a half to get through the entire thing. Hope you've got good eyes and a knack for lawyer-speak.

Because the wealthy and upper-middle-class pay the most taxes, it's hard for some to get angry about the severity of our national tax bite. Just as Scrooge McDuck, the comic-book miser who bathes in a room full of gold and jewels, is a cartoonish parody of the super-rich, the popular belief that wealth is horded by the rich to the detriment of the poor is likewise a slanted misrepresentation of reality.

Call it "trickle down" if you wish, but the laissez faire principles of free-market economics benefit both the rich and the poor — not one at the other's expense. Economic liberty means that honest wage-earners have the right to keep more of their hard-earned dollars, and even a cursory knowledge of high-school economics suggests that allowing them to do so will ultimately have a more beneficial impact on the overall economy.

Wealth isn't a zero-sum game. When wealth is created, it's done through free cooperative trade. When wealth is spent, it supports jobs. When it's saved, it's invested by bankers and money managers to create new wealth. The only wealth in this country that goes to waste is that which goes to the government, which spends it willy-nilly and at an alarming rate.

And although we'd like to think that every penny of our money goes toward protecting our borders or preserving the peace, a frighteningly big chunk of our income is siphoned into Depression-era social programs that someone you've never met has decided is in your best interests, from farm subsidies to steel tariffs. If you happily use Microsoft (MSFT) products every day, take heart that you've spent upward of $35 million prosecuting the software giant over the past few years. And even if you enjoy the occasional Marilyn Manson record, keep in mind our country is spending $273,000 to combat "Goth" culture in Blue Springs, Mo. According to the Citizens Against Government Waste, the grant's procurer, Missouri Rep. Sam Graves, a Republican, has claimed the money would be spent studying why Goth adolescents are drawn to illicit drugs. Oh please.

They say there are two certainties in life — death and taxes. One we have little control over. The other, however, remains within our power. But like lab rats, Americans are caught in a maze from which there seems no possible escape. The first step comes with realizing that taxes aren't just a nuisance to the rich, but a national crisis that affects us all — one that's growing worse with each passing year.

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund.