trump tax cuts

Tax Refunds Are Down. That’s a Threat to Trump — and the Economy.

More like IR-Mess, if you ask me. Photo: Jed Egan

Republicans once thought that the Trump tax cuts would save Paul Ryan’s majority. Now, they’ll be lucky if that legislation doesn’t cost Donald Trump a second term.

The GOP’s high hopes for its tax law weren’t entirely baseless. True, the president’s plan for “reforming the tax code” looked more like a plot for robbing the federal Treasury on the one percent’s behalf. But Republicans did set aside some hush money for the witnesses in the middle-class: Under their plan, roughly 80 percent of American households would see their tax burdens decline (however modestly). And since the GOP funded this regressive tax package with deficit-financing (instead of cuts to social programs that help working people), ordinary Americans really would benefit from the legislation in the immediate term.

And the immediate term was the GOP’s overriding concern. With the botched Obamacare repeal effort hanging like a noose around the party’s swing-district incumbents — and Donald Trump stoking the Democratic base’s angry energy on a daily basis — Republicans needed voters to realize that Paul Ryan & Co. had cut their taxes posthaste. Which is to say, they needed taxpayers to see the relief in their paychecks by November 2018, not in the tax refunds that wouldn’t be mailed until months after the midterms. Thus, the Trump administration reportedly pressured the IRS to err on the side of withholding too little from Americans’ paychecks “so people will see big increases in their take-home pay ahead of this year’s midterm elections.”

This now looks like a political own goal of historic proportions. Even with (allegedly) light withholding, the tax bill’s breaks for middle-class people weren’t large enough to attract much notice. Between changes in salaries, health-care premiums, and 401(k) contributions, most Americans didn’t detect much tax relief in their paychecks. The tax cuts actually became less popular after they took effect. And of course, Nancy Pelosi took the Speaker’s gavel.

Meanwhile, all across America, consumers started making plans for their forthcoming tax refunds. Roughly three-quarters of households usually get money back from the IRS — and for many American families, that deposit is the largest lump sum they see all year. Thus, millions of people structure their household finances in anticipation of their rebates, planning big-ticket purchases or to write down debt (for this reason, mortgage delinquencies almost always decline sharply in February and March). And Americans had reason to expect their refunds to be even higher than usual this year, what with those tax cuts that the Republicans had been promising.

Now, many are suffering an unwelcome surprise: As of March 29, total tax refunds were about $6 billion lower than over the same period in 2018. In an economy as large as the United States’, that isn’t an enormous figure — this year’s average tax refund is only about $20 less than it was last year. But that modest reduction is not evenly spread across the population. Many Americans are seeing slightly higher tax refunds than in the past. But 1.6 million other Americans — who received tax rebates in 2018 — are discovering that they actually owe the government money this time around. And the impact of more than 1 million Americans experiencing a sudden, sharp decline in their anticipated purchasing power has proven far greater than that of a much larger group of taxpayers seeing modest gains.

This reality is reflected in opinion polling — a new CBS survey finds that nearly three out of four Americans believe the Trump tax cuts either raised their taxes or left them unchanged. But the development’s most significant ramifications can be seen in consumer behavior. As CBS News reported earlier this month:

The smaller number of tax refunds this year is showing up in another way: Lower retail spending. Retail sales dropped from January to February, surprising economists who had expected a modest rise as seen in past years. Indeed, excluding car purchases and gas (whose price has been rising), February’s retail sales were 0.6 percent below January’s.

Analysts say that lower tax refunds are largely to blame for the drop in spending, since many families use refunds as a “mandatory saving” mechanism that pays out each year come tax time. For the median family receiving a refund, it amounts to more than three weeks’ pay, a JPMorgan Chase study found last year. In the weeks after a refund is received, families spend more on large purchases such as furniture or appliances; credit-card payments and travel, the study found.

This development is a much greater threat to Trump than his tax law’s dreary poll numbers. One of the primary reasons so many people lost their tax refunds this year is that the Trump tax cuts phased out many deductions that disproportionately benefit residents of blue states (such as the state and local tax deduction, which is more valuable in areas that have high state and local taxes). Thus, Republican strongholds have largely escaped “refund shock,” which has been concentrated in high-tax, Democratic areas. But “red” and “blue” America share one macroeconomy. And if consumer spending in blue areas drops off enough, it could take red America’s economic growth down with it.

The auto sector has led U.S. growth during the post-2008 recovery. But last month, retail auto sales fell by 4 percent. And if that dip turns into a trend, the implications for the American economy in 2020 could be significant. As Bloomberg’s Danielle DiMartino-Booth explains:

April retail car sales are unlikely to rebound as tax bills hit household budgets. This one month of added strain will likely be the proverbial hair that breaks the camel’s back. According to Ward’s, auto inventories have already piled up to the extent production cuts of 4.2 percent were pushed through in February.

… The strain of inventories is increased further by the weakness in car sales in China, the world’s largest market since 2009. In 2018, Chinese car sales rang in at roughly 28 million units, compared with about 17 million in the U.S. As was the case with retail sales in the U.S., 2018 marked the first year of falling Chinese sales in decades … Auto factory workers are already working 2.5 percent fewer hours than they were at this point last year, a trend that’s accelerated to an annualized pace of 14.3 percent in the last three months. When cutting hours doesn’t do the trick, layoffs kick in … a development that will weigh further on U.S. spending even as consumption’s contribution to GDP has slipped to a year low. It’s likely the world economy is woefully unprepared.

It’s worth noting that, in the abstract, there’s nothing nefarious about reducing tax withholding — after all, if you receive a refund during tax season, that effectively means that you gave Uncle Sam an interest-free loan the previous year (which is money you could have been investing for a return). But there’s a reason why the field of behavioral economics exists. Human beings are not perfectly rational creatures. And how we perceive (or misperceive) reality can have very real material consequences.

Bloomberg’s assessment of the macroeconomic outlook is exceptionally gloomy. And it’s entirely possible that our economy will shake the current dip in consumer spending like a passing cold. But it’s also conceivable that the tax-refund-disappointment-induced drop in aggregate demand will hasten the end of the expansion that Donald Trump inherited (which has been, by far, the president’s greatest political asset). And if that does happen, then the Trump administration’s (alleged) efforts to fiddle with withholding will have backfired not only in PR terms, but also in concrete, economic ones.

Falling Tax Refunds Could Take Down Trump — and the Economy