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A Generous Government Keeps Doling Out The Refunds Even As 2009-2010 Tax Withholding Difference Hits New Low
We previously discussed the curious phenomenon of increasing individual tax refunds handed out by the US Treasury, despite record weak tax withholdings, and speculated that the Treasury's generosity, which is very much unfounded, is one of the main reasons for the consumer "outperformance" year to date, due to the excess money obtained by US consumers courtesy of what appears an oddly lax Internal Revenue Service. We won't speculate on the secondary implications of governmental cash flows to and from taxpayers, and instead will focus on actually following the cash. The conclusion is simple: even as the IRS has paid out far more in refunds in 2010 versus 2009, the difference in gross tax withholdings between 2009 and 2010 is at year highs. The government can not afford to pay refunds, yet does so at an alarming pace. The net difference (withholdings net of refunds) for just the first 10 weeks of 2010 is already at a ($42.7) billion cumulative number: a new 2010 high.
The chart below demonstrates the weekly difference between gross individual tax withholdings in 2009 and 2010. Out of the past 10 weeks, there have been only two in which 2010 saw greater tax withholdings (and these were for $0.2 and $0.4 billion).
Visualizing the data series on a cumulative basis shows that by week 10 of 2010, the differential in the gross withholdings number has reached $35 billion.
What is surprising is that a comparable analysis of weekly refund payments in 2009 and 2010, shows just the inverse: in 2010 the government has paid nearly $8 billion more in cumulative refunds compared to 2009: $152.1 billion vs $159.8 billion.
Combining these two data sets indicates that on a Net basis (gross withholdings net of refunds), the delta has hit a year to date record $42.7 billion: $344.2 billion in 2010 vs $386.9 billion in 2009.
Yes, at a time when the Fed is doing all it can to fund each and every auction with an increasingly odd cadre of bidders, be they direct, fund based, BlackRock, or whoever, the government should do all it can to minimize the weekly funding delta need. Alas, as the chart above shows, the government keeps on paying more and more even as it is collecting less and less. And this happens, as the country is faced with a record budget deficit and healthcare "reform" which will likely add a few cool trillion here and there on the red side of the ledger. The US Treasury got the memo, and it just says spend, spend, spend, well into bankruptcy.
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"The government can not afford to pay refunds, yet does so at an alarming pace."
Remarkable insight. Perhaps it should just hold them back, and not pay the money that it owes. Hey, selective default. Cool.
Or, perhaps, the government should raise taxes on the wealthiest, and turn back the Bush tax cuts, and the Reagan tax cuts. That should help stimulate the economy.
"Refunds" mean people are overwitholding. It does not mean the government is taking in less. To be a refund the government has to collect it first, and then give it back.
Well, the government IS taking in less, because most people are making less. But to somehow tie this is to refunds is just too funny.
OMG. Hey perhaps the government can start a campaign to get people to stop withholding so much from their pay. That should solve the refund problem.
Or perhaps you meant to say that taxes are not keeping pace with government spending which has absolutely nothing to do with refunds. The question there is to either raise taxes, or reduce some spending, preferably that which has nothing to do with domestic consumption and investment, or a little of both. You really don't want to raise taxes when unemployment is hitting 20+% except perhaps in the form of luxury taxes.
Hey I know, how about closing about half of the 720 military bases the US maintains overseas that are a direct cash drain out of the country?
Assume some people withheld based on a specific income tax bracket, say 35% in the early part of 2009 and are laid off, and so move to a lower income tax bracket (due to underemployment) or no income tax bracket (due to unemployment).
I believe they are unable to regain any of what turned out to be overwithholding until they file their 2009 tax return. In that case, they likely would file earlier than usual (I did).
That would result in higher rate of refunds at the same time of lower rate of 2010 withholding.
Fits with the economic situation
he government is paying out more in refunds than it is taking in. And yes, refunds are tied to withholding as well as refundable credits. More than 50% of wage earners in the country now pay NO taxes and receive up to $4000 in EIC. This is only going to get worse, as you pointed out, the government is receiving less in taxes because people are making less. But those same people are getting MORE in refunds because they are making less. Talk about breaking the back of the middle class. With the healthcare passing, now the middle class has more than a broken back, they are being stomped and kicked into the ground. How do I know this? I work in the tax preparation industry and I prepare these $0 tax liability, high EIC returns and have watched over the years as more and more taxpayers DECIDE to earn just the right amount of money to maximize the EIC. My clients ask me "how much do I need to make to get the maximum EIC?" EIC is the most dis-inentivizing social engineering tax credit to come out of Congress. If EIC were eliminated (every citizen should pay some federal tax) Congress would be swimming in money to spend. In addition, for two years, 2009-2010, Congress gave another refundable credit (American Recovery education credit) that is paying out more in refunds than is being taken in. IMHO, there is no real money anymore, it's all digital and colored paper now. We're in for a world of hurt.
Hey I know, how about closing about half of the 720 military bases the US maintains overseas that are a direct cash drain out of the country?
Always encouraging to see the "sacred cow" dod questioned. We go hysterical when spending 100 billion for healthcare which is supposed to improve quality of life but spend 663 billion to perpetuate endless wars and support the corporate military establishment which destroys, maims and mulates life. When are people going to see the dod for what it is - a really cool video game that actually kills and disfigures people.
Wthi all due respect, refunds are given to people that overpaid their taxes. So, the money doesn't belong to the government. They should be giving it back without hesitation. And they should be spending their time reigning in a massive cost base and balance their budget just like every household should be doing.
Or, perhaps, the government should raise taxes on the wealthiest, and turn back the Bush tax cuts, and the Reagan tax cuts. That should help stimulate the economy. quote from pavlovian think tank
yes in one area ,, guns at head ,,,, stimulate the economy by taking away , from one group.. taking a slice of the pie,,, then porking the rest into unproductive areas,
to stimulate the economy do away with all taxes .. slowly reduce the size of government,, bring home the protective tit of world wide military ,
do away with some depts of government ,,
why is it the only real stimulis is jumped over ,, and shoving more guns into a person face the answer.
throw up protective terriffs .. bring manufacturing jobs home,(hamburgers do not count) rid the world of the fed. state banks .. lots of ways to stimulate .
always dividing the small productive capital of the people called taxes,,
tax and burn
dumpster.
I hope you realize I was being sarcastic. I was pretty obvious about it.
Raising taxes is the not what you want to do when the economy is slumping.
That's why the statement about refunds was so odd. It is a de facto tax increase, and even worse, it is not legal. It is keeping money that people have 'loaned' to the government at no interest by over-withholding.
jesse
reread post .. thanks for clarifying lol
i will sleep well tonight
Thanks.
I actually liked your ideas. shutting down departments and programs is great. protective tariff is not feasible because of those folks at the WTO, but devaluing the currency worked for china in the 1990's.
don't sleep too well. The congress is still in session.
lol..
need the terriffs,, to hell with WTO
No panic here, move along
EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast. Even Italy has slipped into the pro-IMF camp, knowing that rescue costs can be shifted on to the US, Japan, Britain, Russia, China, and the Saudis, lessening the burden for Rome.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/749471...
Ambrose rocks!
PEOPLE ARE MAD AND ARE CHEATING ON THEIR TAXES. LOL.
No biggie. All they gotta do is "sell" a few more treasuries to the Fed. You know, this whole income tax thing is so passé. And inflation is so much easier. I'm sure nobody will catch on.
"Oddly lax"? Tell that to the IRS bitch who's currently hounding me. Now she's calling me in to a meeting to discuss why I didn't file my 2008 taxes. Bitch, I don't have time for these stupid games!
Fight the IRS, People. They bleed.
I am Chumbawamba.
well you did or did not file 2008 taxes,,,
she will keep hounding ,
next time file .. even if the taxes were zero,lol , sign the little box and let the trusted cpa do all the meetings ,,,
Think of all the workers who lost their job April of 2009.
You better believe they will get large fraction of their taxes withheld back.
BTW, did you know you can claim a deduction on your job search?
The cost of your resumes, gas and mileage( the cost of traveling on planes and trains too), parking meters, even meals while out on interviews are deductible.
Consult your tax advisor, then take every dime with glee.
start a littke side line business,,, print some cards ,, 'joes consulting inc,''
then every where you go is a deductable event ,, consulting .. leave a card ..get a name ,,
50 cents a mile ,, deduction,, plus computor costs, phone expense... when in hawaii on vacation,, leave a card get a name ,, lol
Don't forget the gift to the public homebuilders in the form of another year of loss carrybacks which was quietly passed at the same time the first time buyer and replacement home buyer tax credits were passed. The tax refund to Pulte Homes was something in the order of $800MM.
The jump in refunds is a function of several things.
1. A lot of people worked only part of the year last year because of layoffs.
2. A lot of people had hours cut back as the year progressed and hence had too much withdrawn for taxes particularly early in the year.
3. Lots of new Refundable Tax Credits:
A. $1,000 for going back to school
B. $8,000 for first time home buyers and $6,500 for people with homes who bought a second (these credits alone were paid to several million people thereby pushing up the average refund)
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