Today is April 15. The day your federal income taxes are due.
Every year, nearly eight out of 10 U.S. tax filers get a federal tax refund. The average amount paid over the past few years was roughly $2,800, according to the most recent IRS data.
Who gets these refunds varies by income group. While 84% of those making less than $50,000 received a refund in 2012, only 34% of those making more than $200,000 did, according to an H&R Block analysis of IRS data. But their average refund – at $12,611 – is more than six times the average $2,086 that those in the lowest income bracket received.
Of course, this doesn’t mean exactly what it says. About half of all Americans pay $0 in federal income tax. Many of the refunds include the Earned Income Tax Credit, a redistributionist scheme premised on the idea that someone who is not inclined to work can be convinced to do so if the government pays them a tax credit.
Last week, Washington Post columnist Michelle Singletary, whose financial acumen rivals that of my teenage daughter, wrote a rather unremarkable column: A fat tax refund says your strategy is wrong. (I know, right?)
I don’t want a big tax refund.
No, I’m not loopy. I just know that if my tax situation doesn’t change much — I did not add a dependent, get married or buy a home — I try to figure out what I call the tax “sweet spot,” meaning I get a tiny refund or owe a few hundred dollars or less.
Many people like getting a large refund. They treat it like found money, but it’s not a reward. That big refund means they gave the government their money to use all year long — interest-free.
On the surface you think, so what? All a big tax refund is, is an interest free loan I floated to Uncle Sugar instead of buying stuff for me and my family. Whereas owing the IRS money, so long as it isn’t so egregious that it causes additional penalties and interest, is the government giving you an interest free loan. Given the two options I know which one I prefer.
Now Singletary is perplexed that her readers, primarily liberal, inside the Beltway, Democrats, disagree:
As tax season was rounding to a close, I was surprised at the number of readers who took issue with my encouraging people not to aim to get a tax refund.
Bill R. Teer of Fairfax, Va., wrote: “Your column implied that it is a mistake to have too much withheld from your salary and give the money to the government interest-free. In today’s interest environment, I strongly disagree with you. If an individual had the discipline to save $100 per month rather than having it withheld, the savings at the end of the year would be $1,200 probably in a money market account with an interest rate of close to zero percent. As I believe it is unlikely that the discipline to save the $100 per month would be there, come refund time there would be nothing in the bank and no refund. So why not have forced saving in the form of withholding and get the refund?”
The government has the right to force you to be virtuous… so long as you practice the right virtues.
“I see your point that you don’t want someone else having use of your money all year, but from a practical standpoint, the amount of interest lost is probably pretty small. And, if an individual sees that check as a bonus and uses it to pay off a credit card or part of an auto loan, then that’s probably a good thing since having a few bucks added to the paycheck will most likely not be noticed and will just be spent on another cup of Starbucks.”
The government has a better use for your money than anything you could do with it.
Come at this issue like everyday people, suggested William Adams of Springfield, Va. “Think of letting the IRS hold your money as a very cheap premium on an insurance policy against having problems with penalties and interest from the IRS as well as gaining peace of mind over the stress of having to meet a deadline when you have other things pressing and can’t file on time.”
You are incompetent to manage even the pittance your capitalist overlords let you have. Daddy IRS will make it better.
What is Singletary’s response:
But here’s the thing on the issue of refunds: Part of my mission is to push people and challenge them to develop more discipline. I want them to take every opportunity to be better money managers. Nonetheless, if getting a refund is the only way some folks will save, fine. The most important thing is that they come out better off financially.
No. The important thing is that we stop allowing the government to a) treat us like its wards rather than its masters and b) stopping the fiction that the government is “giving you money.” Ben Domenech, writing in today’s The Transom, says:
It’s also a day to consider one reform that would be very positive for the country: reversing the 1943 law making withholding mandatory. It is a dangerous, disruptive, and necessary step to end the current tax regime. The overwhelming majority of Americans pay their taxes by having them extracted from their paychecks before they ever see the money. Operating under the fiction that the government is giving you money as opposed to returning what it has already taken is damaging to the psyche of the nation’s taxpayers. The primary argument against such a move – that millions of irresponsible Americans in the income tax-paying classes won’t save up enough to write a giant check to the government come April 15th – encourages a viewpoint of the role of government as an entity that must constantly protect us from ourselves. Withholding was originally mandated as a wartime step, but its continuation since then disguises the property rights involved, essentially offers the government an interest free loan, and shields taxpayers from the ramifications of federal spending. The country would be better off if everyone experienced what entrepreneurs and business owners do: writing the most sizable checks every year to the government, and watching that hard-earned money walk out the door. Taxes are terrible. Withholding is designed to make them seem less so. Ending this mandate should be a bigger priority for those who want to reform the tax code.
If we were constantly reminded of the extortionate amount of money we are remitting to the federal government from each paycheck rather than receiving a “windfall” from the government, a lot changes would be made to the tax code and to the size of government. Unfortunately, our electorate is composed of Michelle Singletary’s readers. People too slothful to save on their own. People dismissive of your right to possess your money. And proto-fascists willing to use the federal government to impose their idea of virtue upon you.