NCPA - National Center for Policy Analysis

Your Tax Refund Is an Interest-Free Loan to the Government

April 16, 2015

More than three in four taxpayers get refunds, and the average amount they get back is close to $3,000, according to the Internal Revenue Service (IRS). But if you are among the millions expecting a payout from the IRS this spring, make no mistake: That money was yours all along. Getting a refund means you paid too much in taxes last year and the government is paying that money back — without interest.

How much do Americans give up by lending their money to the government? Consider these scenarios:

  • Suppose, for example, that you'd put the money in a savings account instead. Interest rates right now are low — really low. If your refund is $3,000, the interest you could have accrued might have been enough to buy yourself a small cup of coffee.
  • But suppose you'd invested the money instead. Last year was a good one for the stock market. If over the course of the year you'd put $3,000 in a basic index fund that tracks the S&P 500, it'd be worth an extra $235 or so today. That's a solid month's worth of weekday lunches.
  • Of course, there's no guarantee the market will repeat those results this year, and investing runs the risk that you'll lose your refund altogether.

Yet, most Americans do not seem to have much problem with lending their money to the Treasury interest-free. The Bankrate survey found that 57 percent of respondents wanted to receive a refund, and a third of respondents said they planned to save or invest their refunds. There's some research to support tax refunds as a way of encouraging saving: Economists have found that people are more likely to spend $500 if it shows up as an extra $20 in every paycheck than if it arrives as one lump sum.

Source: Ben Casselman, Reuben Fischer-Baum, "Don't Be So Happy About That Tax Refund," FiveThirtyEight, April 15, 2015.

 

Browse more articles on Tax and Spending Issues