Democrats like Sen. Kamala Harris and the media are spreading hysteria over smaller tax refunds this year and painting the Tax Cuts and Jobs Act of 2017 as the Grinch that stole your tax refund. The real problem is the lack of financial education among Americans that allows lawmakers to hoodwink taxpayers.
Harris, a presidential candidate, tweeted recently that the average tax refund is down $170 according to IRS data on the early tax filing season. She claimed that the Republican-passed tax cut was a hike for the middle class and boon for the wealthy.
She couldn’t have been more wrong.
Her tweet earned an embarrassing four Pinocchios from the Washington Post for combining two factoids into a “misleading package.” “Misleading” is the same word that the Treasury Department used to call out media reporting about the smaller refunds. Despite the angst-inducing headlines, taxpayers should not take this as a bad omen.
The IRS data was based on a small sample size, likely smaller than the typical, non-shutdown year sample. There were fewer returns submitted and processed than during the same period a year prior.
Also, early tax filers tend to have just wage income and simple returns. They may be accustomed to a big refund and get less this year, but that doesn’t mean they didn’t benefit from the tax cuts. The tax cuts allowed taxpayers to keep more of their hard-earned income all year long in bigger paychecks.
Lawmakers who oppose the tax cuts are now banking on Americans accustomed to receiving big returns not understanding the basics about taxes and mistaking smaller refunds for paying higher taxes overall.
A big tax refund is not a windfall like winning the lottery or finding a wad of cash in the street. It’s money that you overpaid to Uncle Sam, who held it hostage all year long and finally released back to you the following year after you file tax returns.
If you earn wages, your federal taxes are withheld from your paycheck each week depending on the number of allowances you claim on your W-4 form. If too much tax is withheld then you can expect a refund, but if you had about the right amount of taxes withheld all year then you should just about break even, and not owe more, but also not get a big refund.
Yet, many Americans are in love with tax refunds, as Gallup found in 2007. Although half would rather break even, 45 percent would prefer to get a refund. The primary reason they said was that it's like getting a bonus, reward, or extra money. That may be how a refund feels, but it’s a misunderstanding of the system and overlooks the economic benefits of proper tax planning.
Paying the right amount in taxes throughout the course of the year makes it easier for people to budget accurately, plan for expenses, and, ideally, make room for savings. Instead of banking on a big lump sum to pay a major bill, which was the most popular reported use of tax refunds, a person could pay it down consistently over time, reducing interest or fees incurred along the way. For lower-income Americans, who incur late fees or rely on expensive emergency loans, the added income from each paycheck could be a better path to economic stability.
Despite how critics like Harris try to mischaracterize them, the 2017 tax cuts were beneficial.
Working and middle-class families enjoyed bigger paychecks last year. Income tax rates were cut across the board, the standard deduction and child tax credit were doubled, and there were other positive changes. According to the nonpartisan Tax Policy Center, taxes fell for all income groups on average last year and their after-tax income rose by more than 2 percent.
More Americans are able to find jobs and most report being optimistic about their financial futures. That’s also in part a result of the tax cuts, and far more valuable than a one-time tax rebate.
Now is the time to change the mindset that a big, fat tax refund is Christmas come early. If policymakers truly want to empower people, they would quell the angst over smaller refunds and educate citizens on how taxes work, rather than contributing to a partisan misinformation campaign.