Income Tax, withholding, and refunds

Back in the day, when I was working for the Chicago Public Library, I always had a refund return on my Federal and a slight tax due on my State taxes. Then Bush, Sr., had his Economic Incentive Brainfart, and withholding was reduced, and I suddenly started owing taxes every year.

The rational was that if people had more money throughout the year due to decreased withholding they would turn around and invest the money in some manner that would enable them to earn more money, and that from this they would pay the taxes with no burden at tax time.

Stupid. That's all I can say about that idea, STUPID. The average worker has no investment plan, does not invest, and presumes that withholding will cover their tax burden with a refund left over, as it should and had done for a long enough period of time that generations of blue collar workers were raised budgeting for a refund to make purchases; the refund was their investment plan!

And withholding has not been adjusted back since then, because they all think readjusting withholding will be perceived as raising taxes. Idiots. The vast majority of folks don't really notice the difference in paycheck size that seven dollars would make, but everyone notices the difference come tax time, when they owe money, serious money, instead of having a refund.

See, the whole concept behind withholding is to spread the burden over the course of the year, in such a manner that no tax is owed at the end of the year. From a strict fiscal perspective this should be done such that refund or tax due is under $10.00, and the understanding being that amounts less than x, where x is the cost of processing payments, would neither be issued nor collected; that you don't lose money due to the cost of processing the paperwork.

For the longest time the majority of workers, the one's able to file short form returns, always had refunds, refunds large enough that they could make semi-big plans around them. Tax time was not looked at with dread, it was looked forward to with anticipation because they had a refund coming, and they had budgeted for that refund; the refund itself was a viable economic stimulus package, and one which had no negative emotions attached to it.

When people get refunds they don't complain about taxes, when they owe tax they complain; the tax burden may be identical, but perception is based on how the pocketbook is hit, and big chunks all at once are a pain and are perceived to be a pain, whereas refunds cause the sense that things aren't so bad, kinda nice actually.

Folks living paycheck to paycheck can't pay tax due returns. They really appreciate a refund. They generally have enough frivolous 'expenses' each paycheck that a slightly larger withholding won't be noticed, but the end result of a tax refund instead of tax due will be noticed. People who receive refunds are happy with their government, those who owe taxes are not.

Truly smart congresspersons would adjust things so refund returns were once again the norm for those who have no non-W2 income and no Schedule A deductions, the folks who fit the norm. It should be that if you do everything you are supposed to do by the governments rules that you will not owe taxes; anything else is the government deliberately yanking your chain, and deserving of public outrage.

1 comment:

Anonymous said...

Or remind folks that they can adjust their own withholding.