Lots of people have been finding out that their tax refunds from the Internal Revenue Service are lower than they expected, or nonexistent. The average refund for the first two weeks of tax-filing season this year was down 8.7 percent from a year ago, the IRS reported Thursday, and the number of refunds was down 15.8 percent.
Part of the latter drop is due to the government shutdown that ended just as filing season was starting, but given that (1) employment and wages were up in 2018 and (2) most Americans are supposed to be getting a tax cut from the Tax Cuts and Jobs Act enacted in December 2017, these declines are pretty strange.
The Government Accountability Office did predict last July that something like this might happen. The combination of the new tax law and subsequent tax-withholding decisions by the Treasury Department (of which the IRS is part), the GAO said, would cause the percentage of taxpayers due refunds to drop to 73 percent from 76 percent and the percentage who would owe money at tax time to rise to 21 percent from 18 percent. That’s not a huge shift, but combined with lots of people getting reduced refunds, it does seem like a recipe for pretty widespread disappointment.
In response, the Treasury Department has been arguing this week that people should just chill because having fewer, smaller refunds is actually a good thing. From Bloomberg News:
“Most people are seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government,” the Treasury said in a statement Thursday. “Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers.”
It is true that a big refund does tend to mean that your employer overwithheld your taxes. But arguing that smaller refunds are “positive news for taxpayers” displays a pretty shocking ignorance of how most Americans organize their financial lives.
If inflation and interest rates were as high as back in the 1970s and 1980s, the bad things about saving via overwithholding would clearly outweigh the good. But over the past couple of decades, the amount of interest one can earn on a few thousand dollars of savings over a few months has been trending toward small change, while the value of the “locked up, out of reach” aspect of tax overwithholding has become the subject of a growing behavioral science literature on commitment mechanisms.
Once that tax-savings account becomes available in February or March, it admittedly does create a bunch of difficult spending decisions. Paying down debt, going to the doctor and paying an attorney to help with a bankruptcy filing are big tax-refund spending categories that are kind of hard to argue with, but big purchases made with tax-refund money often don't work out so well.
But reducing those refunds really isn’t the way to help.
It’s likely that this year’s refund decline was mainly the result of big tax-code changes whose impact was hard to predict precisely by either taxpayers or the IRS. But it has seemed all along, as journalist David Dayen first suggested just as the tax bill became law in 2017, that there was a lot of pressure on Treasury officials to reduce withholding so that tax cuts would show up quickly in people’s paychecks. If they overdid it, it will amount to not only a political misstep but also a cruel betrayal of millions of people just trying to figure out a reliable way to set some money aside.
Justin Fox is a Bloomberg Opinion columnist.