Laggard economy, quirky rules boost tax refunds this year
With the tax season upon us, millions of Americans are already devoting weekends to hunting for elusive receipts and deciphering federal tax forms. This year there will be an especially large reward for time spent solving the mysteries of the tax code. Federal tax refunds paid this spring will be significantly higher than in the past, giving taxpayers an extra shot of cash that will help fuel the recovery, economists say.
Between March and May, taxpayers will find refund checks boosted or final tax payments cut by $22.5 billion to $26 billion, compared with the same period in 1981, says Rosanne Cahn, vice-president of Goldman Sachs & Co.
For the average individual taxpayer, that means $271 will be added to his refund or trimmed from his final bill, assuming the $26 billion reduction in taxes is divided among the 95.9 million indivudal returns slated to be filed this year.
If the benefits were limited to the 75 million taxpayers the government expects to get refunds this year, each check would be boosted by $347.
What economist Cahn calls ''this spring's surprise tax cut,'' is for the most part not the direct result of tax-trimming action taken by Congress. The expected hike in refunds will come because:
* Employers or the federal government in some cases did not adjust withholding tables to fully compensate for the 10 percent tax cut which took effect July 1, 1982. This accounts for $6 billion to $7 billion of the refund boost, Goldman Sachs estimates.
* Individuals who purchased All-Savers certificates will not have to make tax payments this spring to cover the interest earned on these tax-exempt certificates. This accounts for $1.5 billion of the tax reduction.
* Not all individuals who opened individual retirement accounts (IRAs) adjusted their withholding to offset the reduction in taxable income due to their IRA contribution. This contributes $9 billion to $11.5 billion of the cut in tax liabilities.
* The weak economy meant that the 26 million workers who were unemployed for part of last year were withheld at too high a rate when they were working. Withholding rates assume an employee will earn his current income for the entire year. This factor accounted for $6 billion of higher refunds.
While all economists do not agree with the precise size of the Goldman Sachs estimates, they accept the general dimensions of the phenomenon.
''The factors . . . are the right factors. All of them are correct. All of them are unusual, and all will have the effect of increasing the amount of refunds this year above normal,'' says Roy Moor, senior vice-president and chief economist of the First National Bank of Chicago.
Mr. Moor expects the higher-than-normal refunds to total between $20 billion and $22 billion.
The impact of cutting final tax bills or boosting refunds by billions of dollars will ''be very favorable on consumer demand,'' notes Sandra Shaber, senior economist with Chase Econometrics, a forecasting firm. A cut in taxes of according to Goldman Sachs estimates.
''The normal presumption is that 80 to 90 percent of that money would be spent,'' Mr. Moor says. ''It will be spread across the board and benefit all types of consumer spending.''
The upcoming round of refunds will at least equal the size of last July's $19 billion to $20 billion tax cut, Goldman Sachs estimates. It is expected to have a bigger impact on the economy since the money will be put into consumers' pockets at one time rather than spread through periodic paychecks.
As a result, sales of such big-ticket items as automobiles and appliances will get a special boost, economist Cahn argues, since taxpayers tend to use refunds in a lump sum.
Not all taxpayers will get an equal share of the refunds, of course. For example, the tax benefits from IRAs are open to all, but as a practical matter ''those benefits will go to upper income people,'' says Chase economist Shaber.
The relatively well-to-do are more likely to be able to set aside the $2,250 maximum IRA contribution for a couple with one member in the work force or the $ 4,000 maximum contribution for a couple where both individuals are employed.
Economists caution that estimates of the size of tax savings are imprecise. ''The range of error, it is important to stress, is pretty large,'' Mr. Moor cautions.
Given that caveat, it appears that the average refund this year will be about (including the additional $26 billion) spread over the 75 million returns which the government estimates will get money back. Last year, by comparison, the average refund was $769, according to the Internal Revenue Service.
Refunds normally jump when the economy has been in recession. ''But that has been compounded this year'' by other factors, economist Shaber says, most notably changes in withholding on wages.
There were two major reasons for underwithholding, says Goldman Sachs. First, differences occurred because tax-rate changes are rounded to the nearest whole percent, causing rounding errors. And there are fewer withholding brackets than tax brackets. So it is difficult to make withholding match tax liabilities. The result was that the 1982 tax cut was 7 percent, not 10 percent as advertised, economist Cahn says. Treasury oficials argue the effect of the cut was closer to 8.5 or 9 percent.
She adds that ''it is hard to tell,'' whether another round of underwithholding would be set off when taxes are cut by 10 percent this July. ''We won't know until we see the withholding tables.''