NCPA - National Center for Policy Analysis

Go Figure Why Many Like Tax Refunds

April 13, 2001

No self-respecting economist would defend the notion that tax refunds are great stuff. After all, the refunds are only the government's repayment of interest-free loans.

But some taxpayers are willing to have more money deducted from their paychecks than they will eventually owe in taxes, simply because they enjoy getting a government check for a thousand dollars or so early the following year.

  • Some 93 million Americans -- about 70 percent of filers -- will get a tax refund from the federal government this year.
  • The average refund has grown from $1,379 in 1994 to an estimated $1,740 for the year 2000.
  • In the 1990s, the average refund grew at an annual rate of 5.5 percent -- versus 5.0 percent for the average tax bill.
  • In the 1980s, by contrast, average refund growth trailed average tax growth, 2.3 percent versus 6.0 percent.

Many Americans see overwithholding as a form of forced savings, but those with significant amounts of credit card debt might consider how much of that debt they could retire simply by sending their creditors an extra $145 a month -- which is the average tax overwithholding. Of course the biggest bang for the bucks would be to put them in a 401(k). Invested in common stocks with the average historical annual return of 12 percent, it would grow to more than $500,000 in 30 years.

Source: Thomas A, Fogarty, "Average Tax Refund Keeps Growing, But Should It?" USA Today, April 13, 2001.

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