Most people experience “tax day” in perfect inversion of its reality. 3 of 4 Americans will get a tax refund from the IRS this year, for an average of $2,933. While that’s unequivocally bad news, indicating you’ve given the most feckless, reckless spenders in the nation an interest-free loan from your personal accounts, psychologically, many people experience tax day as a windfall.
Most wage-earners (92 percent and holding steady over the past decade) are W-2 workers, whose taxes are withheld by employers. That means everything we pay into government coffers is siphoned off almost silently. The money never hits our accounts, so we barely notice it’s gone. We may remember the first, heart-sinking flash of revulsion when reviewing our first physical paystubs (asking, as one young man did, “If I earned that, why can’t I get it?”), but most of us are now paid with digital time cards and direct deposit. The difference between what our employers shelled out for our work and what we get to keep — 28.4 percent, by one international estimate — is almost undetectable during the rest of the year.
But the 75 percent of US adults who expect a tax ‘refund’ say that lump sum is “important to their overall financial situation,” according to a survey by Bankrate. About a quarter say they’ll use it to pay down debt, another quarter to boost their savings. Those folks lost out on the gains that of putting that money toward their own goals. And thanks to 2022’s soaring inflation, they’ve lost a significant portion of the actual value of each dollar withheld.
A meddling paternalist might argue it’s for the best, since most Americans seem to lack the capacity (or discipline) to accumulate $3,000 in savings when left to their own spending choices. But it’s unlikely that receiving it as a perceived windfall will improve their odds of building up a rainy-day fund or saving for retirement. More to the point, having that money taken from them (even if some of it is given back) made it harder to save all year.
The refund check may only represent a small amount of what Americans overpaid in taxes, when government waste and mismanagement is taken into effect.
Many people experience psychological discomfort when parting with money, even for purchases they choose themselves. The unpleasantness associated with small-scale involuntary loss of money, like a traffic ticket or a stolen wallet, is higher still. Disguising the pain of paying taxes with the refund shell game may be a key strategy for preventing widespread tax defiance (to which Americans have historically been quite prone). Just 21 percent of us end up sending in a payment at tax time, and even then, for a fraction of what’s been charged to our accounts over the preceding year.
If everyone had to write a check for the full amount on April 15, as comedians and commenters have long quipped, there’d be revolution tomorrow.
Even if we could clearly envision how much we pay in income and payroll taxes, we’d still overlook much of the tax burden we collectively carry. In addition to what we can see on our pay stubs, the average American household pays $2,690 in property taxes (including renters, for whom tax is baked into housing costs). We pay hundreds of dollars in state and local fuel taxes, for our own vehicles and the price of every product shipped from anywhere else. And another $440 in vehicle property taxes.
Once we take those already-taxed dollars to the store (or our favorite online shopping site), we pay local and state sales taxes of around 7 percent. The price of each item we buy has already been raised by the sales, property, and import taxes paid by businesses, and passed on to the consumer. The same is true of taxes on the property they own, and the payroll taxes paid by a business for everyone they employ. Over and over and over again, our dollars are depleted by the ravenous government machine, helping itself to a slice of every transaction.
However high our taxes are, they are insufficient to cover the profligacy of federal spending, which is surging toward 25 percent of total GDP. The total federal taxes collected exceed 20 percent of GDP, and the remainder borrowed, which adds to the national debt and imposes a slightly different kind of tax. At $31.6 trillion, or about 125 percent of GDP, the debt allows politicians to keep on spending more than taxpayers can possibly support, and adds interest payments to our bill.
Perhaps the quietest extraction of taxes for most Americans is inflation. By dumping unprecedented amounts of money into markets (the M2 Money supply increased 33 percent between 2000 and 2022), expansionary monetary policy whittled away at the value of every American dollar sitting in a savings account or or payroll fund. Whether they spent it or saved it, Americans’ money won’t buy as much as it did last year, and those who overpaid taxes will get less value refunded than was seized. Everyone who didn’t get at least a 7 percent raise last year, especially those relying on a fixed income or Social Security, was charged taxes on top of taxes on top of taxes.
It’s almost impossible to calculate how much you, or any of hundreds of millions of other Americans, pay in taxes each year. Every transaction serves as an excuse to siphon off a bit more of the economy from the private sector to politicians’ priorities. Every penny diverted distorts market information and raises the price of investing and earning. Every dollar squandered makes it harder for Americans to make ends meet.
Tax season’s sophisticated sleight-of-hand will have most Americans wondering what they’ll buy with their refund, instead of questioning whether they saw results for all the dollars they won’t get back.