Trump’s next headache: ‘Unrecognized’ tax-cut benefits.

We warned about this  a year ago in the post

Will 143 million households notice that their taxes have been cut?

Regrettably, our prediction seems to be coming to fruition.

There have been a flurry articles citing tax preparers who are warning that,  tax refunds will be smaller this year … lower in average, with fewer people getting refunds.

Most recent IRS data support that claim: average refunds are down 8.4% from this time last year.

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That’s a big deal … and, will be a big headache for President Trump.

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What’s going on?

First, Trump’s tax cuts were skewed towards corporations.

The logic: Corporate taxes in the U.S. were much higher than in many (most?) other developed countries … so, tax cuts should incentivize companies to to invest and hire here at home.

Surely,  the corporate tax cuts get some of the credit for the booming economy but it’s nearly impossible to pin down how much of the boom is attributable to the tax cuts versus, say, ‘natural’ ups & downs of the business cycle, elimination of ham-handed Federal regulations, free money (i.e. near zero interest rates), etc.

And, of course, some highly visible corporate actions raise some populist ire: over-sized executive pay, stock buybacks, closed plants.  Even if these instances are few and far between, they’re noticed and headlined.

Bottom line: The indirect benefits accruing to non-corporate taxpayers are hard to pin down … and, thus, perceptually undervalued.

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Then, there are some basic behavioral economics.

For about 1/2 the country – the folks who didn’t pay any income taxes before or after the Trump tax cuts – there is no direct benefit – real or perceived.

So, at most, only half of the country are in play.

Within that half, some tax payers have lost highly visible, and emotionally-charged tax deductions.

Most notably, the SALT deduction (which Trump is rumored to be back-tracking on).

Whether or not a tax payer’s lost SALT deduction is balanced out by rate cuts doesn’t matter.

It’s a law of behavioral econ that people value losses way more than gains … especially when the losses are explicit and the gains are vague and difficult to quantify.

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Then, there’s the perceptual difference between how much somebody pays in taxes and how big is this year’s refund.

Take the test: How much did you pay in Federal taxes for your 2017 income? Did you get a refund or have to pay a balance due?

If you’re like most people, you can’t come close to recalling how much you actually paid in taxes – the amount withheld plus any balance due (or less any refund received).

But, you probably remember whether you got a refund or not … and, probably over-estimate how big the refund (or amount due) was.

That’s basic behavioral economics … and it closes the loop.

Anecdotally, I’ve heard that 2018 withholding schedules tended to under-withhold.

Some folks I’ve talked to insinuate that the there was intentional under-withholding to to make paychecks bigger … to spur the economy and enhance the appearance of the tax cuts.

Regardless, if under-withholding was done intentionally to front-end the apparent tax benefits, or if it was just an actuarial miss, the piper is now being paid.

Guaranteed: If  tax refund checks are fewer and smaller this year, tax payers will conclude that that Trump’s tax cut didn’t benefit them … even if their paychecks were fatter last year.

So, Trump’s signature legislative action may go from ‘bold’ to ‘yawn’ … or “ouch”.

That’ll be a hard perception to jawbone around … and, will likely pose a major headache for President Trump.

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2 Responses to “Trump’s next headache: ‘Unrecognized’ tax-cut benefits.”

  1. Malthus Says:

    Nothing but hopeful supply side speculation. There is no evidence that the corporate tax cuts have yet to spur anything more than stock buy backs. Moreover, there is historical evidence (back the good ol’ Eisenhower, leave to beaver, MAGA dreamtime) that when you have a 90% top marginal tax rate, people act rationally and all of the sudden nobody earns that much. What happens? People start to lower taxable income by investing.
    Personally, I’m canceling my Italian holiday, but over all, my taxes went down by less than a couple hundred bucks.

  2. Alex Says:

    I don’t care so much about the size of my refund. I’ll presume I’m getting back what I’m due.
    But, by golly, I’m itching to see whether I’m actually paying less in total taxes. Or not.

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