Lower Tax Refunds, Not Bad News

Despite what CBS and others tell us, the report from the IRS that “tax refunds are about $170 lower than last year” is not bad news. The fact that “the average refund so far this year is $1,865, down from $2,035 in 2018” is only a timing issue. People who think otherwise are forgetting how income taxes work.

Employers are required to withhold taxes from each paycheck. These are sent to the federal and state governments. It is better to have them withhold a little more to avoid being hit with penalties and interest for not paying enough up front. But traditionally, taxpayers have jacked up their withholding on each paycheck to ensure a large refund. It makes up for lacking the discipline to voluntarily put aside a little each pay period. 

At the beginning of each year they experience what seems to be a windfall. But it’s not some gift from Uncle Sam; it’s really just a matter of getting their own money back after it has been withheld from them throughout the year. Withholding and the refund are not separate, unrelated pieces. They are each part of the whole. Changes in one lead to changes in the other, but the total paid in taxes is exactly the same whether you get it today or next March.

Getting a smaller refund leads some to believe that the tax cut was not real. (See the CBS piece for examples.) But they have only themselves to blame. “According to payroll processing firm ADP, only a small fraction of workers bothered to change their withholding” as the IRS urged them to do after their employers adjusted their withholding. They were happy to get more in their paychecks, but want to complain later about a smaller refund.

If they looked at total taxes paid, it would be obvious. When someone else files the tax forms and people only sign at the bottom, it’s so easy to ignore the total tax and only care about the size of the refund check. 

Then the news media stir things up by airing the complaints and making a big deal of it while only explaining the details in the last part of the report (if at all). And Bloomberg predicts that Democrats will intentionally promote this misunderstanding to their political advantage. 

As one expert told CBS, "I think taxpayers generally will try to avoid thinking about taxes, even after a major overhaul." The story is the same with taxes, tax refunds and other related issues, such as Social Security and Medicare. Many Americans don’t want to take the time to understand the details. They just want to complain. The frightening part about democracy is that someone who doesn't pay attention has the same number of votes as someone who does.