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Long Story Short - Was your tax refund what you hoped it would be?
Did the Tax Cuts and Jobs Act Reduce People’s Federal Taxes?
(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the "Balanced" section)
The stories are commonplace in the news and on social media: the taxpayer who either received less of a refund in 2019 compared to what they received in 2018 or, even worse, went from receiving a refund in 2018 to having to write a check for taxes owed in 2019. The Tax Cuts and Jobs Act (TCJA) was the most sweeping update to the U.S. tax code in more than 30 years. For individuals, the TCJA reduced federal income tax rates, increased the standard deduction, doubled the child care tax credit, repealed the personal and dependent exemptions, and capped the deductions for state and local taxes, among many other reforms. But, according to SurveyMonkey, only 40% of Americans believed they saw savings, and only 20% were sure they had. An NBC/Wall Street Journal poll in March found just 17% of Americans believing they would pay less in taxes.
Vast majority of taxpayers had lower liability. In an April 15th article, the Tax Foundation noted the estimated net impact of the TCJA is that 80% of filers had lower tax liability in 2018, with another 15% having no material change. Only 5% of taxpayers were estimated to have paid more in taxes.
And the impact was widespread. Using IRS data, The Heritage Foundation found that average households in every congressional district got a tax cut in 2018. More than 88% of individual taxpayers in every district and every state got a tax cut or no change in their 2018 liability.
Average individual income taxes down. On average, all households paid roughly $1,300 less in individual income taxes in 2018 than they would have under the old law.
The size of the refund does not paint an accurate picture. As part of the tax overhaul, the Treasury Department changed its withholding tables, which in some cases meant that tax cuts came in the form of larger paychecks throughout the year, but smaller or no refunds at filing. In other words, the tax cut was there, but taxpayers did not see it as it came in 26 paychecks as opposed to one lump sum.
Average refunds are down. The average refund was down at the start of the tax season by 8%, which increased to nearly 17% by mid-February.
The impact overwhelming favors “the rich.” The highest earning 1% can expect tax cuts averaging more than $51,000 in 2018, more than what the median American worker makes in a year. The lowest income households (those making less than $25,000) got an average tax cut of about $40.
In the long run, rates will increase. According to Matthew Yglesias, “It’s actually the case that in the long run TCJA will raise many working- and middle-class people’s taxes. To conform to budget reconciliation rules, Republicans made it so the nonregressive tax cuts largely expire after 10 years while the revenue-raisers and the business tax cuts are permanent.”
Why do so many people continue to believe the TCJA did not lower their taxes? According to the New York Times, the view “appears to flow from a sustained – and misleading – effort by liberal opponents of the law to brand [Trump’s tax reform] as a broad middle-class tax increase.” According to the IRS, for the week ending April 12, 2019 the relevant tax statistics for the filing year were as follows: total returns received – 119.4 million, up 0.7% from the same period in the prior year; total returns processed were 115.7 million, up 0.8% year-over-year; total refunds were 84.4 million, down 1.9%; total refund amount $235.9 billion, down 3.1%; and average refund $2,795, down 1.3% year over year. What the IRS statistics do not capture, however, is the additional weekly take home pay received by taxpayers due to the adjusted withholding schedules. So, with the average refund through April 12th nearly flat year-over-year and with taxpayers having received more in their paychecks throughout the year it would appear that the TCJA did actually reduce the vast majority of people’s taxes.
The Trump Tax Cuts: Separating Economic Fact From Fiction, Adam Michel and Cobi Williams Foundation for Economic Education, October 08, 2018
The middle class needs a tax cut: Trump didn’t give it to them, Isabel V. Sawhill and Christopher Pulliam, Brookings Institution, October 16, 2018
The First Filing Season under the TCJA, Erica York, Tax Foundation, April 15, 2019
The Three Numbers To Know About The TCJA In 2018, Howard Gleckman, Urban-Brookings Tax Policy Center, April 18, 2019
Average tax refunds are up. And by the way, the IRS says it has $1.4 billion waiting to be collected, Michelle Singletary, The Washington Post, March 14, 2019
Why millions of people are getting hit with a surprise tax bill this year, Matthew Yglesias, Vox, February 6, 2019