Teddy KGB thinks tax refunds are a joke.
It's a devilishly clever system the IRS has set up. We give too many tax dollars to the government throughout the year. The next year, we do all the work, for free, to verify the exact amount we should have paid (or we pay someone to do so). And when we get some of our own money back, we thank the heavens. That's a pretty sweet deal for the IRS. I wonder if Uncle Sam is riding the pony and making the Teddy KGB O-face every time he mails back a portion of our money.
As you can tell, I'm not a huge fan of paying income taxes. While I think local taxes are a fantastic deal, and we get a lot for our money, it's not the same with federal taxes. I am very appreciative of the military protection our tax dollars provide. And I like that programs like Medicare exist for our elderly citizens. But for the most part, I don't feel like the basket of services we get from the federal government is a particularly good deal. Compared to what we get from our local government, federal government seems pretty expensive.
Where Did the Income Tax Come From?
If you've never heard the surprising history of the US federal income tax, this Planet Money podcast is a fascinating and easy way to do so. Did you know that the IRS employed Donald Duck to pitch the idea to the American Public? True story. And it stuck, too. Now, just about all Americans pay their income taxes, every year. Never let anyone tell you the government is incompetent: they convinced an entire nation to start paying taxes on every dollar of their income, and they did it using a cartoon duck in war propaganda. Try convincing your neighbor to give you $15,000 sometime by sending him Family Guy clips. Here's the 1943 propaganda film (which gets pretty dark around the 4:19 mark):
Acknowledging the obvious good that our taxes did in the fight against the Axis, getting a refund does still feel a lot better than owing. A 2012 survey found that many people view a large refund as a means of forced savings, akin to a mortgage. Additionally, Ramit Sethi points to research indicating that people will save lump sums in times of hardship, while small amounts paid regularly (like, in your paycheck) will probably just get spent. Jason Hull wrote an excellent post outlining that same point: we are more likely to save a refund. So maybe a tax refund is a win-win for bad savers and the US government: the American public gets a forced savings program that sets them up for success, and Uncle Sam, well, he gets to hold onto our money all year.
But the readers of this blog are good savers. (Aren't you?) We'd be better off getting one or two thousand dollars throughout the year, and using it to invest, to help buy income properties, or to pay down high interest debt. Right? Or would we really be happier, and maybe even better off financially, if we got a lump sum the following year? Let me know what you think.
*Photo is from Steven Depolo at Flickr Creative Commons.