Yes, Virginia, You (Probably) Got a “Tax Cut”

It’s Tax Day! Congratulations to everyone who made it through another year and gets to spend at least a few hours figuring out just how much of a bite Uncle Sam, your state, your locality, and anyone else who happened to be walking by took out of your income.

Of course, this year is a bit different. This is the first tax season after Trump’s tax cut, which purported to reform the code. One of the results of the tax overhaul last year was that payroll deductions were decreased, since the tax burden became a bit more predictable thanks to an expanded standard deduction and the elimination or reduction of some itemized deductions. However, this had has the reciprocal effect of reducing the refund that people are used to receiving at this time of the year.

This is a policy change that many conservatives and libertarians have argued toward for years. The complaints about the past system were that refunds 1) gave people the impression that they weren’t paying taxes but getting a benefit; 2) amounted to a massive interest-free loan to the feds.

The argument for the overtax-and-refund system were plenty. The biggest reason was resources: it’s easier to overtax people and refund the difference than it is to undertax them and try to collect on the bill. There are also two potential benefits to the overtax system: 1) it prevents people from having to write a big check they may not have the funds for if they’ve underestimated their taxes; 2) it amounts to a kind of forced savings so that people get an infusion of cash they can use for something expensive. Indeed, this one of the key arguments in favor of the Earned Income Tax Credit (EITC): that it gives poor people a sudden influx of cash so they can replace a clunker car with one that costs less in the long run or afford the security deposit on an apartment instead of renting day-to-day.

The subtleties of this, however, are lost on a lot of people. They barely noticed the $10 more a week in their paycheck. But they are noticing the $500 refund they’re not getting. Complaints have been building for weeks but have now reached a crescendo with various Democratic politicians and celebrities tweeting out things that are either ignorant of why refunds are smaller or pretending to be.

2/ Already this April, we’ve learned that tax refunds are down this year by $6 BILLION.

— Alyssa Milano (@Alyssa_Milano) April 14, 2019

The average tax refund is down about $170 compared to last year. Let’s call the President’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1%.

— Kamala Harris (@KamalaHarris) February 11, 2019

Even some of the President’s own supporters are complaining. We are now in the odd situation where most Americans got a tax cut but don’t think they did:

Ever since President Trump signed the Republican-sponsored tax bill in December 2017, independent analyses have consistently found that a large majority of Americans would owe less because of the law. Preliminary data based on tax filings has shown the same.

Yet as the first tax filing season under the new law wraps up on Monday, taxpayers are skeptical. A survey conducted in early April for The New York Times by the online research platform SurveyMonkey found that just 40 percent of Americans believed they had received a tax cut under the law. Just 20 percent were certain they had done so. That’s consistent with previous polls finding that most Americans felt they hadn’t gotten a tax cut, and that a large minority thought their taxes had risen — though not even one in 10 households actually got a tax increase.

…

The tax savings were relatively small for many families, however. The middle fifth of earners got about a $780 tax cut last year on average, according to the Tax Policy Center.

Most Americans would probably welcome a $780 windfall. But in contrast to 2001, when President George W. Bush’s Treasury Department mailed rebate checks to taxpayers, last year’s tax cuts showed up mostly in the form of lower withholding from workers’ paychecks. A few extra dollars in a biweekly paycheck proved easy to miss. Moreover, as taxpayers filed their returns, many found they were due smaller refunds than in the past, which may have further skewed perceptions of the law.

I find it amusing that people are upset about Trump, for once, doing a thing large numbers of Americans claim they support: simplifying the tax system.

Yes, I said, “claim they support”. Because this reaction was entirely predictable. I don’t mean the Democrats and their affiliated celebritwits pouncing on it. I mean the reaction of the general public.

The American tax code is absurdly long and insanely complex. It has spawned a multi-billion dollar filing industry and is so complicated that even the IRS sometimes gets it wrong. Just last week, a bi-partisan bill was written to make sure the IRS can’t do your taxes for you and, while it smacks of crony capitalism, it’s also an open question of whether the IRS even could file your taxes for you without making mistakes.

People have been demanding a simpler tax system for a long time. We’ve had various presidential candidates promise that the IRS could do your taxes or the code could be simplified down to a postcard or whatever. But what people say they want and what they actually want are sometimes two different things. People want a simpler tax code … except for the mortgage interest deduction. And the charity deduction. And state/local taxes, definitely. And daycare, obviously. And healthcare expenses. And retirement contributions. And is it really fair to tax capital gains like income?

Therein lies the rub: the tax code didn’t get complex because of a ancient Egyptian curse. It got that way because we wanted it that way. We want our special deductions and social-engineering credits and alternative systems and all the other jazz. We will never simplify the tax code until a majority of Americans decide that it’s worth giving up their favorite deduction for. Or worth giving up a refund for. And this outcry is a reminder that we’re not there yet, if we ever will be. I suspect, after a year or two, most people will get used to the new system and this hubbub will die down. But this portends a tax system that will mostly go on as the shambling drunken mess that it is.

Of course, in the long run, nobody’s taxes have been cut. As Harry Browne argued in the 2000 election, a tax cut without a spending cut is not really a tax cut; it’s a shell game. Eventually, things have to be paid for. The deficit is surging right now and we are on a completely unsustainable fiscal path. Trump’s tax cut has not reduced the tax burden, Laffer Curve misrepresentations not withstanding; it’s re-arranged it so that the burden falls on the future rather than the present.

So if you’re upset that your refund is smaller or non-existent this year, better hold on to something. Because it’s only going to get worse.