By Ryan Ellis
2020 Democratic presidential candidate Sen. Kamala Harris, D-Calif., on Monday tweeted out that the middle class got their taxes raised under President Trump’s signature Tax Cuts and Jobs Act. Her rationale? That preliminary reports from the IRS indicate that refunds are down very slightly on a very small sample of tax returns e-filed so far.
This is an absurd, bad faith statement on at least two levels.
The first problem is that a tax refund’s size has nothing to with whether or not one’s tax liability went up or down. Tax refunds are the product of overpaying the IRS, and therefore giving them an interest-free loan all year until you file your taxes and get your own money back. That number can go up or down every year for any number of reasons—for example, the IRS lowered the amount of tax withheld from paychecks in 2018 to account for the tax cut. That means people may have gotten their tax cut in their weekly paychecks, and not as much from their usual tax refund.
We know the middle class got a big tax cut from the Tax Cuts and Jobs Act. Tax rates were cut across the board — the old middle class marginal tax rates of 15 and 25 percent have been reduced to 12 and 22 percent, respectively. The standard deduction (essentially, the 0 percent tax bracket) doubled, and now stands at $24,000 for married couples (half that for singles). The child tax credit doubled from $1,000 to $2,000 per child, and is now available in full to any married couple making less than $400,000 per year. The alternative minimum tax, which used to ensnare nearly 5 million families in high-cost blue states like New York, New Jersey, and California, is all but repealed.
Put all that together, and the middle class were the big winners from the Tax Cuts and Jobs Act. According to the liberal Tax Policy Center, 90 percent of families making between $40,000 and $200,000 per year (a good working definition of “middle class”) received a tax cut. The average tax cut from the law is more than $2,100 per year. The conservative Tax Foundation reports that these middle class families see an increase in after-tax income of 1.7 percent. This is all confirmed by the non-partisan Joint Tax Committee, the official tax scorekeeper of the Congress. The middle-class tax cuts in the Tax Cuts and Jobs Act is not in dispute by anyone except Harris.
So why are tax refund levels down a slight amount (a little less than $200, or less than 10 percent) from last year’s tax season at this time? One answer is definitely that people who e-file this early (which means they have nothing more than wage income and simple financial and family setups) have received the bulk of their tax cut already in the form of higher take-home pay throughout the course of last year. Their refunds would have been gigantic had that not happened. Refunds being down slightly for these taxpayers is evidence the IRS got the tax withholding just about right.
But there’s a lot of reason to think that tax refunds will, by the end of tax season, end up the same or higher than last year. The families who can expect the biggest tax cut windfalls not already captured in the more generous tax withholding tables have yet to file. This is especially true of families who used to be trapped in the AMT, but now have that surtax lifted from their tax liability. It’s also true to a lesser extent for families with children who now unexpectedly qualify for the $2,000 per-child tax credit, and for wage earners with side hustles who now get to exclude one-fifth of those profits under the new qualified business income deduction.
There’s also going to be a lot of taxpayers waiting on Congress to retroactively cut taxes in 2018, and will be filing extensions or amended returns to benefit from that. Congress never reauthorized about two dozen “tax extenders” for businesses and families before 2018 ended. Congress also has not fixed several obvious technical errors in the Tax Cuts and Jobs Act draft that affect family-owned businesses that pay income tax on their personal returns. When Congress does get around to each of these tranches of legislation, it will mean retroactive 2018 tax relief and bigger refunds for these households.
Smart analysts realize this. Morgan Stanley did a report last fall in which they estimated that total refunds paid out this tax season will rise by 26 percent, or $62 billion. Not only is Harris wrong about the middle class seeing higher taxes (they got a very large tax cut), she is also wrong about refunds ending up lower than last year. Morgan Stanley’s work is confirmed by respected former Treasury economist Ernie Tedeschi and by the Treasury Department itself. The average refund last tax season was $2,771. With aggregate refunds rising by more than one-quarter, it’s very difficult to envision this average refund number going down. That $62 billion has to go somewhere.
Sometimes in Washington, clickbait headlines and shoddy tax analysis come together to raise the general level of stupidity. Kamala Harris knows better, and she should walk back her false statement about middle class taxes and tax refunds.