The refund illusion
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There are so many things that have been going on recently that I would much rather write about this week.
With things like the war in Ukraine; the actions of the NATO Alliance; a possible escalation to a World War, or nuclear Armageddon; the insanely huge U.S. Defense budget that will still not be enough; the dwindling stockpiles of available ammunition (from bullets, to tank rounds, to anti-tank missiles, etc.) and the inability of current U.S. and NATO infrastructure to ramp up the supply of military ammunition to meet the expected demands of just what Ukraine will need to keep Russia at bay; …I have almost completely forgotten about things like Chinese spy balloons and/or UFOs; the effect of stimulus checks and an artificially elevated minimum wage, along with the diminishing value of the U.S. dollar as causal effects of current inflation; ineffective COVID-19 mandates; or the complete failure of the government of Alabama to implement the legal usage of cannabis for medical purposes that was signed into law by Gov. Kay Ivey nearly two full years ago. However, because it is once again tax season, here are some of my thoughts to consider.
Every time I look at a pay-stub, and every year after I have received all of my W-2s in the mail, when I see where it breaks down how much of my paycheck was eaten by the ever-expanding black hole of unending government spending, it is hard to stop thinking about the ideocracy of our current tax system.
It is unfortunate that far too many Americans either skipped math class or failed it, or if they passed, still failed to grasp the basic concepts of economics, but our government depends upon that generalized ignorance of the population. One does not have to go far to see people celebrating a pending tax refund. To paraphrase one of my favorite lines from “The Princess Bride,” a large refund probably “does not mean what you think that it means.” With that, let us begin this year’s refresher course.
Simply put, after the final numbers have been crunched, you will get a tax refund because the IRS has collected, in advance, more money than you actually owed. The government had collected (through withholding) too much, and only because you filed information, or paid someone else to file on your behalf, proving that the government took too much from you, will the IRS then issue you a “tax refund.”
Outside of the brief “Revenue Act of 1861,” that went toward financing the (un)Civil War, no Americans paid a tax upon their income until 1913, after the 16th Amendment to our Constitution was ratified. Even so, until 1943, taxpayers still received the whole of their regular income, leaving each individual to sort out how they intended to set aside the funds to pay their taxes when they came due.
During World War II, the withholding system was devised as a temporary measure in order to better finance the war effort, effectively giving the government a regular incoming stream of cash instead of having to wait for a lump sum once each year in mid-April. In economics, money “now” is worth more than money “later.” This is proven each time someone takes out a loan for any given amount, and they agree to later repay the loan in full, plus interest.
Crunching the numbers for 2023, the median income for the average citizen of Coosa County will make $50,000 per year. With an average effective federal income tax rate of 8.48%, you will owe Uncle Sam $4,240 in total federal income taxes, and with an Alabama tax rate of 4.52%, you will owe the governor another $2,260 for state incomes taxes. In the end, your $50,000 salary was cut down to only $43,500 as your take-home income.
Some will ask “what does it matter whether the government takes those funds” if you are legally obligated to pay a tax on your income? Others will claim that they prefer that those funds be taken in small increments every couple of weeks, instead of having to pay what you owe in a single lump sum when it is due.
First, it is your money. You did the work to earn it. It is yours to do with as you will, until it becomes due on the fifteenth of April for each year. Only then will it belong to the government.
If you know that you will have to pay about $6,500 come April, you can set that money aside, either as cash in a piggy bank, or under your mattress, or in a bank account, or you can invest those funds.
If, for example, you invested into mutual funds, despite the daily rise and fall of stock prices, overall, mutual funds earn an average of up to a 15% return upon your investment. Your $6,500 would earn up to an extra $1,475 more income for you. Of course, you would then have to pay about $191.75 in both federal and state income taxes on that, but you would still have $1,283.25 more than you did had you not invested that amount. If you instead only put your money into a 12-month CD (Certificate of Deposit) which earned 3% annual interest, you could still earn an extra $695.
The fact that you are deprived of usage of portions of your income through payroll withholding should be enough to make you mad, but it gets worse.
The government operates under a double standard, as they will never pay out a bonus to someone who has overpaid their withholding, but in order to discourage people from minimizing their withholding, they will penalize anyone who “underpays.” Essentially the same as the “heads I win; tails you lose” double standard.
If after filing your taxes this year you find that you will be receiving anything but a moderate refund, you should update your W-4 tax form with your employer in order to reduce the amount being withheld from your pay. After that, contact your representative in Congress and let them know your thoughts on the current tax system, as well as your thoughts regarding the “Fair Tax.”