News
Why do so many Americans receive such a big tax refund? Every year, the IRS sends a check of around $3,000 to Americans who paid more taxes than they should. The excess withholding is a puzzle: why do consumers prefer to give the U.S. government an interest-free loan? Wouldn't a quick trip to the payroll administrator be worth the effort if it meant a bigger paycheck? Michael Barr, an editor of the RSF volume Insufficient Funds, spoke to the Wall Street Journal last week about his research on the problem:
"People want to have a ready way to save," says Michael Barr, a University of Michigan law professor and a former Obama and Clinton Treasury official. "For some families, tax time is a good time to do so."In the mid-2000s, Mr. Barr and colleagues surveyed about 650 low- and moderate-income families in the Detroit area who had filed tax returns in 2003 or 2004. About 82% received refunds—either because they had overpaid or because they qualified for the federal Earned Income Credit, a federal cash bonus to low-wage workers that is paid through the IRS. [...]
In fact, Mr. Barr and co-author Jane Dokko of the Federal Reserve Board, found these folks don't want smaller tax refunds. In the survey, researchers offered them choices: Withhold $100 a month more and get a bigger refund (an option favored by 35%), withhold the same amount and get the same refund (46%) or withhold less and get a smaller refund (only 19%.) This and other survey findings appear in a coming Brookings Institution book, "No Slack: The Financial Lives of Low-Income Americans."
Barr argued in Insufficient Funds that Congress should create a new "tax refund account" that would deposit the refund for unbanked low-income individuals in a new account. This would allow more people to receive their refund quicker (rather than wait for the paper check), and it would improve access to the banking system. Taxpayers would have to choose to opt-out of the system if they did not want to deposit their refund directly. "By using an opt-out strategy and reaching households at tax time," Barr wrote, "this approach could dramatically, efficiently, and quickly reach millions of low- to moderate-income households and bring them into the banking system." Read his edited volume for more.