- Democrats are attacking Republicans’ Tax Cuts and Jobs Act after reports indicated that tax refunds dropped during the first week of the 2019 tax season.
- Democrats say the decline in refunds proves the law did not benefit the middle class.
- But that doesn’t tell the whole story.
- Taxes for middle-income Americans fell on average in 2018, according to multiple analyses.
- Financial experts also say the size of a refund is not indicative of the size of a person’s tax bill.
Prominent Democrats are blasting Republicans’ massive tax law over reports indicating the average American’s tax refund is slipping. But the fresh line of attack against the tax-code overhaul isn’t telling the whole story.
The new argument comes after data released Friday from the Internal Revenue Service showed that the average tax refund in the first week of the 2019 tax filing season was down 8% from the year before, to $US1,865. The total number of refunds also fell 24% from last year.
High-ranking Democrats jumped on the decline as proof that the GOP tax law, called the Tax Cuts and Jobs Act, was not a boon for the middle class as President Donald Trump and Republican leaders had promised.
“The average tax refund is down about $US170 compared to last year,” Sen. Kamal Harris, who recently announced a run for the 2020 Democratic nomination, tweeted Monday. “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%.”
House Speaker Nancy Pelosi also criticised the tax law by citing a slew of stories from news outlets that reported the slide in refund size.
“Once again, American families are feeling the reality behind the empty promises of the GOP Tax Scam,” Pelosi said in a release.
But while the decline of refunds is drawing the ire of many Americans, the line of attack by the Democrats is missing some key context.
The most glaring error is Harris’ claim that the lower refunds prove that middle-class families are paying more in taxes or received a “hike.” According to most tax experts, a sizable majority of American households making $US100,000 or less are getting a tax decrease this year.
According to the conservative-leaning Tax Foundation, 80% of all households received a tax-bill cut in 2018. Those in the middle quintile of income earners saw an increase to their after-tax income of 1.6% on average for the year.
Similarly, the nonpartisan Tax Policy Center estimated the middle quintile of earners would also see a 1.6% after-tax income increase and an average tax cut of $US930 per tax unit.
This isn’t to say every household in the middle class received a tax cut.
According to the think tank, about 7.3% of tax units in the middle-income quintile saw a tax increase because of the elimination of certain tax credits and deductions. But the think tank also estimated that more than 91% of middle-income taxpayers saw a cut.
So overall it’s fair to say people in the middle class, on average, saw their taxes go down.
In addition to the overall cut for the middle class, a focus on tax refunds does not reflect a person’s overall tax bill.
As Business Insider’s Tanza Loudenback laid out, financial planners say a larger or smaller refund is indicative not of whether a person paid more or less in taxes but rather of the amount withheld from their paycheck.
Employers withhold money from workers’ paychecks that goes to cover their taxes. When workers file their taxes at the end of the year, they either a) receive a refund if the amount withheld was higher than the amount owed or b) pay a tax bill if the amount withheld was less than their tax obligation.
“Just because you receive a small refund doesn’t mean you didn’t get everything back you were owed or that you’re worse off financially – it most likely means you paid the right amount of federal taxes you owed during the year and didn’t overpay,” Mark Jaeger, the director of tax development at TaxAct, told Business Insider.
With the new tax law, the IRS rolled out new withholding rules that were generally more conservative about the amount employers should withhold. While this increased take-home pay – about 90% of workers saw larger paychecks in 2018 because of the law – it also means employers erred on the side of withholding less from workers.
According to a Treasury Department report, a projected 4 million fewer taxpayers will receive a refund this year while the number of people owing a tax bill will increase by roughly the same number.
Additionally, the Treasury Department responded to concerns about refunds in a tweet on Monday.
“News reports on reduction in IRS filings & refunds are misleading,” the Treasury said. “Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data.”
Howard Gleckman, a senior fellow at the Tax Policy Center, pointed out that the refund data was extremely limited and the government shutdown may have caused additional problems.
As Gleckman wrote, the IRS received 2 million fewer returns during the first week of the filing season – the period of time that the average refund statistic was based on – and due to the shutdown, the IRS processed 4.5 million fewer returns compared to the first week last year.
“This is a bit like forecasting your favourite baseball team’s chances of winning the World Series based on the results of its rain-shortened opening day game,” Gleckman wrote in a blog post on Tuesday.
Interestingly, few Americans noticed the bump in take-home pay from the new withholding rules. But according to an October Gallup poll, 64% of people surveyed said they did not notice an increase in their take-home pay as a result of lower federal taxes.
And now people are complaining about the lack of tax refunds, with many Americans on Twitter using the hashtag #GOPTaxScam.
Whether the Tax Cuts and Jobs Act was successful in its other goals, or whether it favours wealthy families over middle-income families, is a debate among tax experts and economists. But using a decline in refunds to argue that the middle class got screwed misses the mark.
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