Below is the brief explanation from the Tax Foundation, the organization which calculates it. (A more detailed explanation can be found here.)
How Tax Freedom Day Is Calculated
Tax Freedom Day answers the basic question, "What price is the nation paying for government?" An official government figure for total tax collections is divided by the nation's total income. The answer this year is that taxes will amount to 28.2 percent of our income, and the stretch of 103 days from January 1 to April 13 is 28.2 percent of the year. Income and tax data are then parsed out to the states, yielding 50 state-specific Tax Freedom Days.
This year's Tax Freedom Day comes a little earlier than last few years, but only because of the downturn in the economy. Not all states are equal however. I happen to live in the state with the 4th highest tax rate, so my Tax Freedom Day doesn't come until April 20th.
A more complete view of the tax burden government places on us is the Tax Freedom Day which includes the budget deficit----which is in fact simply a deferred tax burden and should be figured in. With the new deficit projections, we won't stop working for government and start working for ourselves until May 29. This is the latest date for "tax freedom" since similar levels were achieved at the height of WWII. The graph below only goes back to 1967, but the current trend is still impressive.
I found it interesting to note that the above dates are set by counting 103 days from January 1st, including weekends and holidays. If you just count Monday through Friday, the days you actually spend working, we don't starting working for ourselves until May 28th-- or if you include the deficit, not until July 28th!
Another very important aspect of these calculations is that these figures reflect the average tax burden. Since 40% of Americans don't pay income taxes, your individual tax freedom day will come much later. As Ari Fletcher points out, "A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes." As we approach the day when over 50% of the population do not pay income taxes, we come ever closer to the majority of voters receiving benefits from the government for which they do not pay. Talk about moral hazards!
"A government which robs Peter to pay Paul can always depend on the support of Paul."
-- George Bernard Shaw