Thank, Don’t Blame, the Tax Reform for a Smaller Refund

Congratulations, you’ve finished doing your taxes! I mean, sorry, I know many of you insist you were robbed! But look, on the bright side, at least you were robbed less this year than last, all else held constant. If you are the average American family, your taxes were more than $2,100 lower this year. All but a very small section of the federal tax-paying public received at least some relief this year. And, contrary to the prevailing rhetoric of the mainstream media, the Tax Cuts and Jobs Act (TCJA) will increase the share of taxes paid by higher earners. But the facts are irrelevant these days. It’s all about the refund. At least, that’s the impression one would get from reading the headlines leading up to and following Tax Day this year.

In early February, Democratic Sen. Kamala Harris took to Twitter to voice her opinion: that the TCJA is a tax hike on the middle class to line the pockets of the 1%. Others followed, echoing the popular (and yet false) refrain that “falling tax refunds highlight the Republican tax scam.” Even Speaker of the House Nancy Pelosi fell victim to the misconception that the size of one’s tax refund is somehow related to their tax bracket or marginal tax rate.

Of course, every lie relies on some piece of truth to make it sound believable. As of the last week in March, the average tax refund sat at $2,873. At the same point last year, the average refund was $2,893. A little math shows that refunds are down by an average of $20—representing a decrease of about 7 tenths of a percentage point. Again, this tells us nothing about whether the average person’s taxes went up or down because the size of your refund has nothing to do with the size of your tax liability. Fundamentally, a tax refund is just the return of an overpayment to the Internal Revenue Service (IRS).

When you “do” your taxes, you are simply calculating your income tax liability minus what you’ve already paid via the taxes withheld from each of your paychecks. If your liability is lower than what you’ve already paid through withholding, you get a refund, and conversely, if it’s higher, you have to break out the checkbook. Notice how none of this tells you anything about whether your tax rate(s) went up or down. While a change in tax law may alter the way withholding is calculated, leading to more (or less) being deducted from your pay each month, again, this tells you nothing about your tax rate.

But wait—there’s more: getting a refund essentially means you gave the government a zero-interest loan for the whole year until you file your return and get your money back. If it hadn’t been unceremoniously sequestered by the government, you could have put that money towards the down payment on a house, a new set of tires, into the record-performing stock market or interest-bearing instrument, or even under your mattress (to lose value to inflation). No matter what you would have done with the money, it would have been more valuable in your hands at the end of every month than collecting dust in a government account until its return to you some time after April 15^th.

No doubt, getting a smaller refund will surprise many Americans—but it’s hard to argue that having an extra $200 in your pocket every month is a bad thing, much less that it means people’s taxes went up! Recent data from H&R Block shows taxes are down some 25 percent due to the TCJA. Further, their dataset shows refunds up by 1.4%—meaning nearly 96 percent of the reduction in taxes went directly into everyone’s paychecks. It’s easy for folks like Sen. Harris and Speaker Pelosi to exploit the visceral reaction to getting a lower refund to take unsupported jabs at the TCJA, but the facts don’t lie: almost everyone got a tax cut in 2018, and if you got a lower refund, more of your hard-earned money was free for you to use throughout the year. Don’t blame the Tax Cut and Jobs Act if you got a smaller refund—celebrate the awesome things not loaning the government more money every month allowed you to do!