Throwing off the tax refund crutch

By: 
Dennis Warden
Publisher

Congress introduced payroll withholding and quarterly tax payments during World War II with the vote of the Tax Payment Act of 1943.

This accomplished two things. It made it easier for the IRS to collect taxes, because it was done automatically with each paycheck. Next it greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.

Most people have no idea how much money they pay to the government over the course of a year. (It’s right there on your payroll stub. Look at it next time.) Most of us are just concerned with how much money they get back after filing our taxes.

I call it the tax refund crutch.

In the past I’ve been just as guilty as the next person. I too have relied on a tax refund in the spring from Uncle Sam. In reality tax refunds are a crutch that financially smart people have learned to do without.

Of  course the national media that is predominately against anything that President Donald Trump says or does has been writing negative stories about this as fast as they can.

Here are some of the headlines in the news.

Smaller tax refunds surprise those expecting more relief —New York Times

People are getting smaller IRS refunds — CNBC

Where’s my tax refund? — Newsweek

Millions of Americans could be stunned as their tax refunds shrink — The Washington Post

According to IRS figures, released on Feb. 14, as of Feb. 8, the average tax refund was down by 8.7 percent from the previous year—from $2,135 to $1,949. It may be hard to realize but that is a good thing for the taxpayers.

The goal for all of us should be to neither owe any taxes nor be getting a refund by April 15 each year.

It was exactly one year ago this week that my column touted the benefits of the Trump tax break. According to my calculations in 2018, the payroll tax — tax form 941 — which includes Social Security, Medicare and withholding, was reduced from 10.54 percent to 8.2 percent.

At that time Warden Publishing employed 17 people. In our first payroll after the tax plan went into effect our employees took home an additional $226. Over the course of a year that amounted to a raise of approximately $5,876.

According to datausa.io there are around 16,947 people employed in Gasconade, Maries and Osage Counties. If my employees are average that would have meant a tax reduction of over 5.8 million just in our part of central Missouri.

But because everyone paid in less to the government they are not entitled to as large of a refund this year.

Let’s go back to simple middle school math for an explanation. The reason anyone gets a refund check from the government is because they paid in too much. 

Would you over pay your local grocery store or the gas station on purpose with each purchase you made?

Can you see any scenario that would cause you to over pay AT&T $100 each month for your cell phone? Then, at the end of the year fill out a long form asking them for a refund of your overpayments totalling $1,200. 

That would be crazy. Yet that is exactly what most Americans do every year with their taxes. They over pay on purpose in order to get a refund.

The reason it is done this way is that the money is taken out of our paychecks before we see it. Basically we are too lazy to save money on our own.

All of the local financial institutions will be glad to set you up with a savings account, or a Christmas Club account. You just need to have the financial fortitude to put money in that account every month.

Of course if you want a big tax refund in April 2020 you just need to tell Uncle Sam to deduct more of it from your paycheck each week. Be aware that Uncle Sam will not pay you any interest for the use of your money over the course of the year.

Maybe I should start a new business where every employee in our three county area would automatically have $20 deducted from their paycheck each week and deposited into an account in my name.

I could place it in a interest bearing CD account, earning around $10,000 per year, then at the end of the year I would send everyone a refund check and keep the earnings for myself. Sounds good to me.

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