Striking Photography by BoTax refund season has gotten off to a slow start this year. Washington’s fiscal brinksmanship during the “fiscal cliff” dealings forced the IRS to delay the beginning of the tax filing season by two weeks. As a result, Americans are getting their tax refunds on a lag.
While consumer spending has been resilient, UBS’s economics team believe consumer spending is actually lagging a bit.
Indeed, spending is very sensitive to refunds.
As UBS’ Maury Harris points out, the good news is that once refunds do start rolling in, they’ll provide a nice boost to the economy. Harris considers the last time refunds were late:
In March 1985, the IRS temporarily fell behind on refund issuance due to computer problems. By May of 1985, the IRS caught up on their refund issuance. It appears that the initial response by the consumer from the delayed refunds was to stop spending and reduce savings.
However, once consumers then received their refunds, there was a jump in spending, as well as an increase the saving rate.
Here’s the chart from 1985 showing what he’s talking about:
UBSThis year’s refunds could affect spending even more than temporary swings in tax rates and gasoline prices, Harris argues:
…tax refunds represent a substantial source of liquidity for the American population. Last year Federal income tax refunds totaled $310 billion—almost three times this year’s Social Security payroll tax hike and well over the approximately $10 billion per annum consumer expense rise for each dime jump in retail gasoline prices.
Harris says the IRS expects to receive more than 147 million individual tax returns this year. Of these, approximately three-fourths probably will receive refund checks.
This bodes well for the Spring shopping season.
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