Earlier this week, Sen. Chuck Grassley, R-Iowa, chair of the Senate’s Finance Committee, and Rep. Kevin Brady, R-Tex., the ranking Republican on the House Ways and Means Committee, penned a commentary in USA Today telling Americans they’ve got it all wrong when it comes to the Republican tax reform and their own personal finances. If you received a surprisingly small tax refund for 2018, don’t you worry. You received the money last year, when you got paid. “Since many workers and their families live paycheck-to-paycheck, getting at least some of their tax cut in advance rather than delaying it a year is a life saver,” they wrote. Besides, they added, “You get to control your money. Not the IRS.”
Note to Republicans: When you need to scold Americans on how they handle their money, you lose, even if you’ve got a point. Tax refunds are down more than $5 billion from this time last year, according to an analysis performed by Investor’s Business Daily. People are squawking - on Instagram, on Twitter and/or to any reporter who will listen to them. Republicans assumed Americans would become converts when they saw they were getting a slightly bigger paycheck, after withholding tables were recalculated in early 2018. They assumed wrong.
First, most people never noticed they were receiving more money in their regular take-home paycheck. This isn’t because they like or dislike President Donald Trump. It’s because there’s plenty of evidence that small tax cuts - the typical middle-income filer received a break of less than $20 a week - often go unnoticed. The same thing happened when Barack Obama enacted a temporary tax cut early in his presidency. According to a New York Times-CBS News poll conducted in 2010, more than a year after Americans should have been seeing an increase in take-home pay, a solid majority of people had no clue they’d received a tax rollback. More people, in fact, thought their taxes had increased than decreased.
Second, taking a tax refund is not a financially optimal decision, and one many personal-finance gurus howl about every year, but people like it. The reason for that is rooted in human psychology. Tax refunds work as a form of forced savings for many people, a way of making themselves put money aside for post-holiday bills, vacations or a household repair. Yes, they could set up a savings strategy themselves, but that would leave it there, forever available to spend on a passing fancy or immediate need. More relevant: Many people don’t get around to setting aside dollars in the first place. They spend their money as it comes in. As a result, they rely on their tax refund. They would, apparently, prefer to receive something like a lump sum of $2,135, the average tax refund received in 2018 for a 2017 return. (About 75 percent of all filers received refunds in recent years.) Real estate - if you don’t take the money out in the form of a second mortgage or refinancing - works in a similar fashion. It’s an expensive savings vehicle, but it’s a savings strategy nonetheless, something that accounts for the fact that for many Americans, their home is their main source of wealth.
This behavior around tax refunds, contra congressional Republicans, is not a surrender of control. It’s knowing your weaknesses and making them work for you. People plan on their refunds and react to them in unsurprising ways. According to the recent paper “Tax Refund Expectations and Financial Behavior,” when low- and moderate-income filers receive the refund they expect, they use about 15 percent of it to pay down debt. An unexpected refund, on the hand, leads to increased spending and debt.
Finally, as millions of Americans grapple with their smaller-than-expected refunds, they are hearing more and more about the big winner of the tax-reform scam: corporate America. Amazon (whose founder, Jeff Bezos, is the owner of The Washington Post) owed zero corporate income tax last year. And as Axios reported earlier this week, General Motors, which made $11.8 billion in profit last year, filed for a refund of slightly more than $100 million.
There is no argument the Republicans can come up with to get around this reality. It’s not just that getting into arguments with people about human nature is a loser’s game. It’s that the GOP tax scam was always designed to benefit one group and one group only - the richest and wealthiest among us. Remember when Rep. Chris Collins (R-N.Y.) claimed, “My donors are basically saying, ‘get it done or don’t ever call me again’”? It’s why they pushed their reform effort as hard as they did. The refund imbroglio is bringing this point home to voters once again. Little wonder majorities of Americans say they support raising taxes on the highest earners and the wealthiest Americans. They know they’ve been had.