The IRS paybacks can boost the economy faster than any tax cut
By Noam Neusner
For many Americans, the first harbinger of spring is a refund check from Uncle Sam in their mailbox. This year about 70 percent of tax filers will get a payback from the Internal Revenue Service, averaging $1,751. The total payout: at least $150 billion--or about 11/2 percent of gross domestic product.
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This should be a welcome tonic for the sluggish economy, as consumers use the money to buy cars, furniture, vacations, and other good stuff. And no doubt refunds, which began trickling out in January, have already provided some stimulus. This year, however, the IRS says that while the average refund is up, the number of refunds is likely to decline for the first time in almost a decade. Accountants also report more clients with net taxes due because of profits on exercised stock options. Those trends, combined with economic pessimism, could spell trouble for the auto dealers and others who count on cash-rich customers in April and May.
"In the past few years, you could guess people were taking it and spending it. This year, we can't judge it yet," says Joel Naroff of Naroff Economic Advisers. In fact, March retail sales declined, especially of furniture and appliances, two categories that normally benefit from tax refunds.
To be sure, what could be bad for the economy might be good for the taxpayers themselves. Overpaying the government by thousands of dollars--and charging no interest--is not a winning strategy, especially if that money could be sitting in an interest-bearing account or used to pay off high-interest credit card bills.
Make me save. But while most people understand that, they still allow their employers to overwithhold taxes from their paychecks. Why the suspension of wisdom? "Loss aversion," explain the behavioral economists. People would rather be owed than owe. "Self-control," say the psychologists. People figure it's the only way they can make themselves save. "Fear," say accountants. Nobody wants the IRS breathing down his or her neck. Plus, the IRS penalizes taxpayers who don't withhold enough taxes.
"From my experience, people go out of their way to pay the government," says Peter Hoffman, a CPA and chief financial officer at New York brokerage Perrin Holden & Davenport Capital. "They view a refund as found money," says Meridee Maynard, a CPA and vice president of Northwestern Mutual. "Writing a check is more painful."
When asked, many taxpayers--as many as half in a Northwestern Mutual survey--say they will save or invest their refunds. But from past experience, most accountants discount these responses. They say that once a refund check is mailed, it's as good as spent. In short, taxpayers can be much like dieters: Money, like calories, will be consumed if available.
And woe to the politician who tries to fiddle with the system. In 1986, an IRS effort to get Americans to keep more of their income bombed because it required them to fill out a complicated four-page W-4 form. In 1992, President George Bush cut withholding to spur spending; the following year, 5 million fewer Americans received refunds, and they blamed Bush, who by then was out of office.
Weak will welcome. For its part, the Treasury is happy to oblige. Taking in more than it should gives the government free use of cash for a year. It also limits underpaying. After all, paycheck withholding was launched in 1943 partly to stop cheating.
Still, if taxpayers are as weak-willed as their accountants say, that's good news in the present economic climate. Car companies and furniture stores aren't the only ones counting on a lack of discipline. President Bush needs consumers to cash those rebate checks, fast. His tax cut package promises a family of four an average annual savings of $1,600--but not for a while. The most that taxpayers can probably expect this year is the $85 billion cut the Senate has voted. That's just $425 per filer--not likely to pack the same punch as those big refund checks.
