IRS Refunds

Today you are supposed to settle up with the IRS on your 2017 taxes. One would think that Tax Day was a painful, hated day for Americans. But the IRS commissioner recently noted that about 80 percent of households receive refunds upon filing, rather than having to make a further payment.

The predominance of refunds is a problem. For one thing, Tax Day has become more like Christmas with the receipt of gifts from Uncle Sam, rather than a day of sober reflection about the costs of government. Those costs are obscured under the income tax by employer withholding and Tax Day refunds. (I discuss other ways that politicians hide costs here).

Another problem with widespread refunds is that they make the system more vulnerable to cyber criminals. With 112 million people a year receiving an average IRS refund of $2,900, the tax system is a juicy target for scammers. One growing problem is that criminals are hacking tax preparation firms to access client data, then submitting fake returns with large refunds, and then finally convincing victims to give them the cash.

Vast IRS data collection on just about every adult in the nation has created major privacy and cybercrime vulnerabilities. Michael Hatfield of the University of Washington has examined some of the risks, including extensive refunds.

The refund problem has been exacerbated by the growth in refundable tax credits—mainly the earned income tax credit and child tax credit—which provide more than $80 billion a year in subsidies to tens of millions of people. These programs are rife with abuse, and should be scaled back or eliminated.

Another reform would be for the IRS to change its guidance for employer withholding to reduce the amounts deducted from worker paychecks. If more filers had to pay additional taxes in April, the system would be less vulnerable to scams and more people would be reminded that government spending ultimately comes out of their wallets.