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From The Archives -- The Taxman Cometh

[ Posted Wednesday, October 13th, 2021 – 17:17 UTC ]

There will be no new column today because I have busy been doing my taxes rather than writing. I am (in general) lazy, and therefore usually get an automatic extension, which falls due on October 15th rather than April 15th. Since I've spent all day immersed in tax forms and numbers, I thought I'd revisit taking my rage out at Paul Ryan (and the rest of the usual suspects) for so royally screwing up the tax forms and entire income tax system.

First, an except from the first article I wrote about the 2017 Republican tax reform law which caused this whole mess. This is what I had to say about it back then:

They swore you would be able to do your taxes on a postcard, but what they really did is make the tax code even more complicated. They cut taxes on businesses by forty percent, but they sure didn't cut your taxes by that amount. You may see a few extra dollars in your paycheck next year, and then again you may not -- nobody's really sure who will wind up paying more taxes under this swamp creature of a tax plan. Even if you do get a few more bucks back, you will have no idea if you'll just owe it back at the end of the year, because Republicans purposefully made all of these changes so complex and dense that you won't know until you sit down to do your taxes whether you'll win or lose. And even if you do get a few hundred bucks back at the end of the year, your tax cut will be disappearing after a few years, while Wall Street's monstrous 40-percent cut is permanent. Republicans said this was necessary so businesses could plan for the future -- meaning they don't care about American families who also have to plan for the future. Meanwhile, your deductions will be limited and you will lose your personal tax exemption of $4,000 per person -- while Wall Street actually gets more deductions. That's how Republicans view things -- you and your family are a hated "special interest," while big business is worthy of even more loopholes to exploit.

That is flat-out unfair. It is, in fact, nothing short of a scam. Republicans have forgotten the forgotten Americans once again in order to lavish money on their donors. Call it the "Donor Party," slogging through snow in the deep of winter. And guess who is on the menu? You are. The Republican Party, to paraphrase one of its founders, is now the party "of the wealthy, by the wealthy, and for the wealthy." Period.

The Republican Party sold out the middle-class, plain and simple. They forgot the forgotten Americans, once again. They put over a trillion bucks on the nation's credit card to give big businesses a 40-percent tax cut. Fully 83 percent of the benefits of this plan go to the wealthiest one percent of Americans. A whopping 86 million middle-class families will eventually see their taxes go up because of this monstrous con job. At best, you and your family might see a few extra dollars for a few years, before your taxes get even worse. That's at best, mind you -- you might actually see your taxes go up next year.

The other article I figured it was timely to revisit was written in early 2019, when the first tax forms under the new system were being filled out. It's wonky, but I am in a wonky numbers sort of mood right now, so please forgive me.

I will say that -- very slowly -- the tax forms are returning to a much more normal format (since that whole "fill your taxes out on a postcard" thing was never the big selling point people like Paul Ryan assumed it would be). This helps, but it still obfuscates things far too much. I am hopeful that if the Democrats undo some of the tax changes that they'll also return the tax forms to their previous format, but I am not exactly holding my breath. In any case, hopefully I'll be done with everything tonight so new columns can resume tomorrow.

 

Originally published on February 11, 2019

Tax filing season is underway, and the process of millions of Americans understanding the brand-new tax code and tax forms has now begun. So far, it doesn't seem to be going particularly well. Stories are appearing in the media about people being shocked and surprised that things have changed. Some will be pleasantly surprised, but they're not the ones the stories have been written about. Because for many, this year's tax season is going to mean they either get a much smaller refund or that they actually owe additional taxes, when they were used to getting an annual refund. This is bad financial news for any family, but it also points out how skewed most people's general thinking is on income taxes.

By this, I am not referring to the ideological or partisan debates over taxes, but rather the practical nuts-and-bolts way we go about paying our income taxes in this country. In other words, Trump supporters and Bernie supporters alike will probably have the same reaction, because most people focus on the wrong thing when thinking about their own taxes.

This is going to get wonky, but I'll try to keep it as simple as possible. Anyone making an income pays income taxes. Let's take an average citizen or family who makes a decent living and thus pays $10,000 a year in income taxes. That's a lot of money, but this is the number that most people don't focus on or even think about, for the most part. It's a footnote to the real amount they want to hear, which is how big their refund is going to be this year.

Practically speaking, a whole bunch of people see their refund as "getting money back from the government." It's like a free bonus that appears in April each year (or earlier, for those who don't procrastinate). Some years the bonus is slightly bigger, some years it is slightly smaller, but it's a big fat extra paycheck that appears from the U.S. Treasury each year.

Say for our Joe Citizen that his withholding adds up to $12,500 for the year. This means he's getting $2,500 back as a tax refund. Woo hoo! Let's take the kids to Disneyland!

Under the new Donald Trump (or, more accurately, Paul Ryan) tax plan, though, maybe Joe Citizen is going to owe $500. Instead of getting a big bonus check from the government, he'll have to sit down and write a check to the government -- for five hundred bucks that he wasn't planning on spending.

As you can see, this is going to be a shock to many. They're going to assume that somehow the Trump tax cuts raised their taxes. And many of them are going to be angry about that. Even if they're not actually right.

Because Joe Citizen's income taxes could either have gone up, stayed the same, or gone down. The refund has nothing to do with this number, really. That's the part that most people -- including almost everyone in the media outside of business reporters -- just don't fully understand.

Whether or not you get a refund is a product of a formula that includes how much federal income tax is taken out of each paycheck (your "withholding"), how much in total taxes you owe for the whole year, and how close to accurately predicting the total tax are the withholding tables. It's complicated, in other words.

Joe used to have $250 in withholding taken out of each week's pay (for simplicity's sake, we're going to use a 50-week year since it divides so easily). This is where the $12,500 figure comes from, at the end of the year. Picture it as an account at a bank that you pay into all year long.

Joe used to owe $10,000 a year, meaning that at the end of the year, the extra $2,500 came back to him. But what this really means is that the tables which estimate how much to withhold are a bit off. If they were more accurate predictors, Joe would get a much smaller refund. Joe should really be withholding only $200 per week, which would mean zero refund and zero extra taxes owed at the end of the year.

But now the whole pack of cards has been tossed into the air. Joe's tax rates at the end of the year are going to be different (because they were changed by the Ryan tax cut). Joe's withholding is going to be different, because the withholding tables have also been changed. Whether the tables match up at the end of the year is what we'll all be finding out on our tax forms this time around.

The tax people were pressured to give as much money back to people on a weekly basis as possible. This way (Ryan and the Republicans figured) more people would get more money in their paychecks, everyone would agree the tax cut was great, and then they'd all elect more Republicans in the midterm elections. This didn't exactly work out, but that was the plan, at any rate.

But the withholding tables are just estimates, and the Ryan tax code realignment was a radical change to the entire system. Case in point, whereas the main income tax form (1040) had 79 itemized lines on it last year, this year it will only have 23 lines. The 1040A and 1040EZ forms have disappeared. Everyone will be filling out 1040 instead. This has long been a Republican bugaboo -- "make taxes so simple you can fill them out on a postcard." They didn't quite get there this year, but they got a lot closer (23 lines versus 79).

The form is radically different, and how you calculate your taxes is also radically different, in multiple ways. It's too complex to even address here, but the shrinkage in the 1040 form should point out how different things are in the new system.

The people responsible for creating the withholding tables had to figure all of this out, and they had to do it in the dark. The new withholding tables went into effect last February, less than two months after the new tax law passed. There was no redesigned 1040 form at that point, all of those details would be worked out in the future. So they had to make some guesses.

In doing so, they said that one goal was to make the withholding more accurate. Something like three-fourths of American taxpayers get a refund every year, which shows that withholding is overestimated for most people. If the tables were more accurate, people would get much smaller refunds (the average refund has previously been in the thousands of dollars), or would have to pay a small amount at the end of the year.

But what was really driving them was the political imperative to get more money in people's paychecks as fast as possible. So they may now be underestimating what people owe.

Now, this did change most everyone's paycheck. Joe is now only paying $210 a week, but he barely noticed the fact that he's been getting forty more bucks in his paycheck all year long. Forty bucks is a tangible number, but kind of small to be noticed all that much.

So now Joe sits down to do his taxes and finds that he's only paid $10,500 into the system all year long. In other words, he has already gotten back $2,000, but it has been in such small increments ($40 a week) that he didn't really notice it. He certainly isn't thinking about that $40 while filling his yearly forms out.

This is where things get tricky, so we'll split Joe into triplets (who used to pay the same taxes but have slightly different living circumstances). Joe, Jack, and John Citizen have all paid in $10,500 this year and are used to getting back $2,500 each year.

Joe's income taxes actually went down by $1,000. His total tax bill for the year is therefore only $9,000. Trump and Ryan saved him a cool thousand bucks with their tax cut. But chances are he will never think about this or even notice it. Instead, he will get back a refund of only $1,500 and think that his taxes have gone up $1,000. The way he sees it, nothing has changed except that his refund went from $2,500 to $1,500. Ergo, his taxes went up by a grand.

Jack's taxes stayed exactly the same. He's still paying $10,000 a year. The Trump/Ryan tax cut was a wash for him, and didn't change his circumstances at all. But he's only going to get back a refund of $500, so he thinks that his taxes have gone up by a whopping two thousand dollars. Last year, $2,500 refund; this year, $500 refund -- a clear loss of $2,000.

John has the bad luck to live in a blue state with very high-priced real estate. So his taxes actually did go up under the Trump/Ryan system. His total taxes for last year add up to $11,000. But he only paid the same $10,500 as the others during the year, because of the withholding tables. So he now owes $500 in taxes. His actual total tax went up by $1,000, but he may think his situation is far worse than it really is, because the way he sees it, he went from getting a $2,500 refund to having to pay $500, so he thinks his taxes went up by a whopping three thousand dollars, when it was really only by a third of that.

So, to recap: The guy whose taxes went down by $1,000 thinks his taxes went up by $1,000. The guy whose taxes stayed the same thinks his taxes went up by $2,000. And the guy whose taxes actually did go up by $1,000 thinks his taxes went up by $3,000. In other words, none of them is right, because none of them is factoring in that extra $40 a week (which is where the $2,000 discrepancy in each case comes from). And all of them think they're worse off then they actually are. That's bad political news for the Republicans.

How many people will focus on the actual number they should be focusing on -- the total amount of income taxes they pay each year -- and how many will be solely focused on their refund? This flawed way of seeing income taxes is pretty widespread, from what I can tell. It's how most people talk about their taxes, and the lens through which most people see income taxes. The bottom line, for them, is the size of the check they get back each year, and that's all they care about. Everything else is just a flurry of unrelated numbers.

Actually understanding the whole system is complicated. How many people gave up somewhere along the way and aren't even reading this article to the end, for instance? My guess is that the backlash is only going to grow as more and more people do their taxes in the next few weeks. The Trump/Ryan tax cut was already the least popular tax cut in modern history. Already, people saw it as heavily rigged for the wealthy (which is correct, since it was). And now they're going to get a very ugly surprise when they fill their taxes out. Even some people who will actually be paying less income tax will be angry that their refund wasn't as big as usual. And they're going to be in no mood to hear long-winded explanations of how the tax code and withholding tables actually work.

-- Chris Weigant

 

Follow Chris on Twitter: @ChrisWeigant

 

6 Comments on “From The Archives -- The Taxman Cometh”

  1. [1] 
    Elizabeth Miller wrote:

    Chris,

    After all of that, I feel compelled to issue you a very personal invitation to attend your namesake CW Sunday Night Music Festival and Dance Party. It sounds like you're gonna need it!

    So, come as you are and bring along your favourite tunes, if you wish.

  2. [2] 
    Elizabeth Miller wrote:

    ... but, you don't really care for music, do ya?

  3. [3] 
    Elizabeth Miller wrote:

    What song is that from?

  4. [4] 
    nypoet22 wrote:

    i like how the first verse is about bible psalms and music theory at the same time.

  5. [5] 
    Elizabeth Miller wrote:

    I know, right?

  6. [6] 
    Elizabeth Miller wrote:

    Here is my all-time favourite version and then I'm off to bed ...

    Hallelujah

    She sang this at the Leonard Cohen tribut in Montreal on the first anniversary of his death, Tower of Song but, I haven't been able to find a youtube video of it. I have it on DVD!

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