I’m terrified of doing my taxes this year, and there’s a pretty good chance you are, too. Here’s why.
Earlier this week, Democratic presidential candidate Kamala Harris posted a misleading tweet about what Americans can expect from their tax refunds this year. The answer, as she correctly pointed out, is “so far, about $170 less on average,” but Harris took it a step too far when she added this was essentially a tax increase on middle class Americans. It’s not technically an increase. But GOP leaders didn’t leap on that—they said stuff like this:
Of course refunds are down. People are paying less in taxes and the code is simplified. A refund means you overpaid and got money back. When you pay less the refund will be less.
Do you really not understand that?
Now do the effect of proposed Dem tax hikes has on income!!! https://t.co/Xu7Yz9ir3b— Donald Trump Jr. (@DonaldJTrumpJr) February 12, 2019
Trump Jr. is right on two counts here—refunds are indeed down and a lot of employed Americans who have taxes withheld each paycheck are this year paying slightly less of that withholding—but he’s wrong in the larger sense, where Harris was right: This year’s taxes will hurt middle- and low-income Americans.
But Trump Jr. also ignored what many Americans also either ignore or don’t yet fully grasp: Tens of millions of Americans—by recent estimates one out of every three of us—now work freelance or contract jobs, and those people don’t get taxes taken out of their checks or cash payments. They pay taxes in one annual lump, and they won’t see any benefits from the changes to withholding. Worse, the new code restricts access to major exemptions these Americans depend on annually for refunds or reductions.
In other words, a whole lot of people are finally going to feel the effects of Trump’s tax cuts. I know articles on taxes can be dense and boring, but this problem is easy to understand. Here’s why, regardless of politics, millions of Americans will be angry this April.
Refunds are down
The preliminary IRS data backs up Harris’s claim: The average tax refund is down 8 percent (or $170) from last year. Why? Trump’s tax plan did increase the standard deduction, but it also eliminated major personal and dependent exemptions (as well as capping deductions for state, local, and real estate taxes). And per the Washington Post’s Glenn Kessler, “The size of the tax refund has no bearing on whether a person’s taxes rose or fell. A person might end up giving less of their income to the IRS—and still end up with a smaller tax refund.”
Two reasons this is bad. First, as mentioned earlier, tens of millions of freelance and contract workers don’t get any benefit from the changes to the IRS withholding tables. Second, the trade-off between less withholding and a smaller refund isn’t just a question of people being more responsible with their monthly budget math. (Last year the IRS asked us to make sure our paychecks reflected those withholding changes, but unsurprisingly, as many as 80 percent of us didn’t do that. That also indicates a fairly sizable majority of working Americans aren’t keenly aware of the small increase in their regular paychecks.) The smaller annual refunds will have an outsized impact on millions of people—more than we’re probably aware of.
First, what Trump Jr. and the GOP calls the “simplification” of the tax code includes restricting eligibility for many exemptions lower- and middle-class Americans depend on each year—two of the biggest being the Earned Income Tax Credit and the Child Tax Credit. So yes, the government is withholding a little less in federal taxes per paycheck, but when you pay your annuals you might find valuable deductions have now evaporated. The distinction between withholding and annual taxes might not matter to numbers, but it matters to people: Nearly 80% of Americans—80%—live paycheck-to-paycheck. The obvious consequence is that now nearly two out of three Americans save little or no money. For someone living payday-to-payday, that small take-home increase per check makes little real-world difference.
But what happens when those people do their taxes this year and find they won’t be able to pay down their debt?
Debt ex machina
This is an especially disturbing complexifier. Millions and millions of Americans use their annual refund to pay down debt. For an idea, one out of four Americans use their tax refund to pay debt from holiday spending alone, and today—a decade after the Great Recession—consumer debt is at an all-time high. It’s absurd for the GOP to expect middle- and low-income households to budget their incremental withholding gains across twelve months to account for spending, rent, car payments, credit cards, and other debt, but that absurdity rises to the point of cruelty when on top of that we’re also now expected to budget for a smaller annual refund, the size of which we can’t even be sure of ahead of time.
Now think about those Americans who will no longer qualify for critical exemptions and see their refunds vanish entirely—and possibly even find they now have to pay more in one lump sum. Add tax debt to that list.
It’s also bad for the U.S. economy. Holiday spending is a critical economic boost for U.S. GDP annually. Consumer spending makes up 70% of our GDP, and about 20% of retail purchases occur over the last two months of the year. If we expect Americans will overhaul their spending and debt habits to account for a smaller annual refund (they won’t), consumer spending will drop and the economy will sputter.
The gig is up
But wait there’s more. One out of three Americans works in the gig economy, and those paychecks don’t benefit from the new withholding changes. Why do so many of us work freelance or contract jobs? That 80% paycheck-to-paycheck number probably has something to do with it.
Further, the gig economy also pads the employment figures Trump loves to brag about. The jobs numbers the government releases each month make the gig economy appear much smaller than it is. The U.S. gets that employment data from surveys of employers, not employees, so the reports reflect the number of jobs, not the number of people working. Say you’re a teacher in Fairfax County, VA, and find you can no longer afford that area’s rising cost of living. You might choose to moonlight as an Uber driver to supplement your teacher’s salary. You’re one person, but now you work for two entities: The county and Uber. Depending on the hours you put in, both employers could report you as an employee, and voilà, the economy has just “created” a job. In terms of that month’s report, then, you aren’t one employed person, you’re two jobs.
Over the last year, I’ve contributed work to several publications and companies. Depending on the hours I put in, at times throughout the year I could have represented anywhere between two and five jobs.
In other words, more Americans than ever have racked up more debt than ever, while saving less money than ever and working paycheck-to-paycheck, often in multiple jobs that earn them untaxed income now rendered ineligible for the new withholding-based tax cuts. They’ll also see exemptions vanish, and get a smaller (or non-existent) refund.
But wait, there’s more. The GOP’s indifference to these workers is a political calculation. Donald Trump rode the “white working-class” euphemism to the White House, but—almost unbelievably, though it really shouldn’t shock us—the only income bracket Hillary Clinton won in 2016 was voters making less than $50,000 a year. This is reflected in the tax code.
Rich Americans do pay more in income tax (less wealthy Americans are taxed hard in other forms, such as sales, property, etc.). According to a Washington Post fact-check (using Treasury Department data from 2017), the top 20 percent of income earners paid about 95 percent of income taxes that year. When you further stratify that group, the top 10 percent paid 81 percent, and the top 0.1 percent paid 24.1 percent of all income taxes. And this year the government estimates 572,000 people will file returns claiming more than $1 million in income, but 27 million people will file as earning between $50,000 and $75,000. Almost 70 million people are expected to file in the sub-$50,000 bracket.
In other words, there are (obviously) many more middle- and low-income Americans than wealthy Americans, and though they might pay less in terms of sheer dollars, this also means the savings from tax cuts in those brackets get diluted because they’re shared among a larger pool. In other words, fewer dollars per taxpayer for low earners, more dollars per taxpayer for high earners. When you shift from sheer dollars to a ratio of those dollars to income—and one step further, to savings—things look worse still. So yes, we expect the wealthy to pay more, but, perversely, we feel we should give them more, too. And now we expect Americans to re-engineer their budgets and overhaul their spending habits in order to further dilute the little they do get.