Republicans are taking heat for an underwhelming tax season. Refunds are down from previous years, and blame is being cast on the party's 2017 tax law. President Trump's administration and the GOP are scrambling to explain why, but this is a trap they laid for themselves.
For decades, their policy preferences have inadvertently trained Americans to expect tax refunds as the norm.
Now, Republicans would argue that tax season is just getting started. It's possible that, by the time April 15 rolls around, more refunds will have come in and smoothed out total tax returns for Americans. This is true — but aggregate tax refunds are still lower so far: As of February 25, they were down 16.7 percent from the same time last year.
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Republicans would also argue that the size of your refund has nothing to do with how much you benefited from the recent tax cuts. This is also correct. The Internal Revenue Service (IRS) regularly publishes tables that workers and employers use to figure out how much tax the worker will pay that year. They then try to withhold increments of that amount from each paycheck. Come tax filing season, workers figure out if they withheld too little and pay the IRS the remainder, or if they withheld too much and get a refund.
In response to the 2017 tax cut, the IRS also adjusted its tables, which may have led Americans to change their withholding habits. In theory, you could've gotten a big benefit from the tax cut but still not gotten a refund, or even had to pay the IRS more, if you didn't withhold enough. In that case, you got the tax cut benefit through incremental increases in each paycheck.
Trump's Treasury Department tried to explain this, as did Rep. Kevin Brady (R-Texas) and Sen. Chuck Grassley (R-Iowa).
Americans have not been sympathetic. "The reason for that is rooted in human psychology," Helaine Olen wrotes at The Washington Post. People don't notice incremental increases in their paychecks as much as they notice one big check at tax season — a fact that tripped up the Obama administration when it passed a tax cut too, actually. Americans also tend to prefer refunds as a kind of self-discipline or forced savings.
Amusingly, the Trump administration may well have compounded the problem. There's some evidence the White House pushed the IRS to goose the withholding tables, to increase paychecks on the front end. (And thus reduce refunds on the back end.) Presumably, they thought bigger paychecks in the immediate aftermath of the tax cut would win them political plaudits from voters. If that was their plan, then, needless to say, it backfired.
But the Republicans arguably shot themselves in the foot in an even more profound — and less discussed — way.
America is fairly unique in the laborious tax filing process it imposes on its citizens. Lots of other countries — including several advanced Western economies — have some form of "return-free filing" system.
Basically, the government does your taxes for you, then just sends you the completed forms at the end of the process for you to check over. You can challenge the government's math if you want, or just sign off on it. Of course, individuals' circumstances can be complicated, and not every citizen benefits from the time savings of return-free filing. But the average American spends 13 hours and $200 to file their tax returns. In the Netherlands, for instance, the equivalent numbers can be 15 minutes and $0. It's remarkable.
Why don't we have that system here in the U.S.?
Partially, its lobbying from the tax prep industry — Intuit, H&R Block, TurboTax — who have an obvious commercial interest in maintaining the status quo. They've squashed previous efforts from the likes of Sen. Elizabeth Warren (D-Mass.) to move America towards free-return filing.
But Republicans also have an ideological interest in the status quo: They figure putting Americans through the drudgery of filing their taxes every year will keep voters keenly aware of their taxes, and thus more likely to favor tax cuts over tax increases. "Doing taxes keeps citizens aware of the tax burden imposed upon them by the government," as anti-tax activist Grover Norquist explained in a presentation. "A return-free scheme would allow the government to raise revenues invisibly."
But whether you use return-free filing or not also comes with consequences for your income withholding systems.
Most of those aforementioned nations use what's called "exact withholding." The government's tax agency tries to get the withholding exactly right, so no refund or extra payment is needed from the citizens at the end of the financial year. Or the tax agency tries to settle up the numbers at the end, before sending the final paperwork. Either way, the logistical burden is on the government.
Meanwhile, relying on individuals to figure out their own withholding, as America does, means they're more likely to overshoot or undershoot. And the IRS actually prefers that people overestimate their withholding, because reimbursing them with refunds is a lot easier than chasing after them, demanding the rest of their tax payment. As a result, and for a long time now, the IRS has biased the tables to encourage too much withholding. "Most people — around 75 percent — get a refund," Matt Yglesias explained.
To recap: Republicans want taxes to be as annoying as possible, so they make sure individuals and their employers have to figure out their own withholding. Then the IRS pushes most people to withhold too much, to lower its own bureaucratic hassle. As a result, Americans come to expect refunds as a matter of course. And now the GOP is suddenly trying to tell voters that, no, lower refunds are good, because it means each of your paychecks are bigger.
As Olen put it, "When you need to scold Americans on how they handle their money, you lose, even if you've got a point."
