Updated at 4:39 p.m. ET
President Trump promised that his tax changes, passed in 2017, would give most Americans a tax cut.
However, as the first federal returns for 2018 come in, some taxpayers are discovering an unpleasant surprise: Their refunds are smaller than expected. In fact, as of Feb. 1, the average refund is down by about 8 percent from the same time last year, according to the IRS.
The reasons for these smaller refunds vary. For most people, it's because each paycheck has grown slightly, thanks to reduced withholding. On balance, they are likely to come out ahead.
However, the smaller refunds have triggered shock and anger. Taxpayers faced with smaller refunds or higher taxes have been airing their grievances online with the hashtags #GOPTaxScam and #GOPTaxScamStories. Meanwhile, Donald Trump Jr. and others have pushed back, claiming the complainers are misinformed.
Nicole Kaeding, director of federal projects at the Tax Foundation think tank, cautioned against getting angry for the wrong reasons. The Tax Foundation had advocated the 2017 tax overhaul as being pro-growth.
"Don't judge your taxes by your refund. That's only one part of the conversation," Kaeding said. Moreover, she added, "Ideally, you don't actually want to receive a large refund. Because what you've done is given the federal government an interest-free loan. Instead, what would be better is to adjust your withholdings so you get more take-home pay in every paycheck."
The Tax Foundation has posted a calculator for taxpayers to compare what they owe this year to what they would have owed under the old tax code. Kaeding estimates that 80 percent of tax filers received a tax cut from the overhaul, while 5 percent saw their taxes go up.
Even after accounting for withholding, some people are paying more in taxes. Kaeding said people who saw their taxes increase tend to be high earners in areas with higher state and local taxes.
However, some people of limited means have also seen their taxes rise.
Victoria Pearl Wright said she and her husband expected to get a tax refund similar to the $5,085 check they received last year. Wright, 24, is nine months pregnant, and she said she planned to use that check to cover expenses when she takes unpaid maternity leave as venue manager at a cafe-bar in Houston. But this year Wright did not get a refund. Instead, she said she and her husband owe $79.
"When I did my taxes and saw that we weren't getting a refund, I was so emotionally floored, I had nothing but shock go through my body," Wright said.
My husband and I owed money for the first time ever, and are “middle class” according to the tax brackets.— VP Wright (@thevpwright) February 9, 2019
We don’t even make 50k/yr.
No EIC, elimination of other write-offs and deductions, meant the IRS keeps 4K we already paid and we still owe $79. #GOPTaxSCAMStories
Wright said she did notice a slight increase in pay each month — but only about $30 for herself and her husband each on average. She believes her taxes rose because they lost the ability to deduct business expenses and, as a result, earned slightly too much to qualify for the earned income tax credit. She has asked friends to donate to a maternity leave fund she opened on PayPal.
Mark Mazur, director of the Urban-Brookings Tax Policy Center, said others may face challenges similar to Wright's predicament. He said people who have children older than 17 are not eligible for the standard child tax credit; instead they get a smaller dependent credit and lose a personal exemption. People who had large deductions for state and local taxes now have those deductions capped at $10,000. His organization estimates that 6 percent of households will see an individual income tax hike this year.
"A lot of people are focused on the amount of refund they get, and when they have a smaller refund then they expected, they're unhappy," Mazur said. "In addition, there are some people who are having a tax increase. And I think what you're seeing on Twitter and elsewhere is kind of a conflation of both of those things."
That confusion was evident in debates that erupted online. Sen. Kamala Harris, D-Calif., noted the decline in the average tax refund. "Let's call the President's tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1%," the presidential hopeful wrote on Twitter.
The average tax refund is down about $170 compared to last year. Let’s call the President’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1%.— Kamala Harris (@KamalaHarris) February 11, 2019
One woman responded that her total taxes were $1,800 lower this year. "Thanks, President Trump!" she tweeted.
I came out about $1800 better off, myself! Thanks, President Trump!— BeTrueBeYou (@SheLoves2Laugh_) February 13, 2019
That is how it works for 40 hour a week working Americans!
USA❤💙 USA❤💙 USA
Trump Jr. retweeted a Breitbart article that depicted Harris as Pinocchio. "Of course refunds are down. People are paying less in taxes and the code is simplified," Trump Jr. wrote. "Do you really not understand that? Now do the effect of proposed Dem tax hikes has on income!!!"
Of course refunds are down. People are paying less in taxes and the code is simplified. A refund means you overpaid and got money back. When you pay less the refund will be less.— Donald Trump Jr. (@DonaldJTrumpJr) February 12, 2019
Do you really not understand that?
Now do the effect of proposed Dem tax hikes has on income!!! https://t.co/Xu7Yz9ir3b
Richard Thaler, who received the 2017 Nobel Prize in economic studies, said when the Trump administration passed its tax cut, it also adjusted the withholding tables. That means the IRS took less money out of each paycheck. Changing the withholding tables did not require new laws and was not widely publicized, Thaler said.
"In a world of rational economic actors," he said, lowering withholding "would have made everybody happy, since they would be getting the money they would have to wait all year for, in each paycheck. But we don't live in that world, and people like refunds."
Thaler, who teaches at the University of Chicago, said most people don't know within $10 what their paycheck is. So a slight increase would have gone unnoticed. On the other hand, he said, people use withholding and the expected refunds as a de facto savings plan.
"People have trouble saving," Thaler said. "For many people, the day they get their tax refund is the one day of the year that they're actually financially solvent."
A Treasury Department spokesperson said the new tax law "cut taxes across the board, particularly for middle-income families. Most people are seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government. Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers."
Mazur of the Tax Policy Center said people worried they cannot afford higher taxes should file their returns on time anyway. He recommended paying as much as possible with the return and then calling the IRS to arrange a payment plan for the rest. Not filing a return on time can cause penalties that are often worse than the penalty for paying taxes late, he said.
When the tax overhaul passed in 2017, fewer than half of Americans approved of it. Then-House Speaker Paul Ryan, a Republican, promised that more people would grow to like the tax plan once it took effect.
"When people see their withholding improving, when they see the jobs occurring, when they see bigger paychecks, a fairer tax system, a simpler tax code, that's what's going to produce the results," Ryan said in 2017. "Results are going to make this popular."
That does not seem to be the case. In September 2018, some 46 percent of Americans disapproved of the changes to the tax code, Gallup found.
The tax overhaul gave most Americans a break in what they owe the government; however, those tax gains were expected to be spread unevenly across income brackets, with high earners enjoying the biggest windfalls. Households earning between $500,000 and $1 million would see an average income increase of 4.3 percent after taxes, while households earning between $50,000 and $75,000 would see their income increase by an average 1.6 percent after taxes. In all, the average household was expected to get a tax cut of $1,610, the Tax Policy Center calculated.
Individual tax cuts are scheduled to expire in 2025.
STEVE INSKEEP, HOST:
What is really happening with our taxes? The IRS says the average tax refund so far this year has been 8 percent smaller than last year. And that is prompting outrage since President Trump's signature achievement was supposed to be a big tax cut. Well, it turns out your taxes may well be lower than they were in the past. NPR's Daniella Cheslow reports your taxes just don't seem lower right now because of the way the administration gave you the break.
DANIELLA CHESLOW, BYLINE: In 2017, President Trump promised that his tax overhaul would benefit most Americans, and they would see the effects right away.
(SOUNDBITE OF ARCHIVED RECORDING)
PRESIDENT DONALD TRUMP: Come February, when they open their checks, and they say, wow, what happened? - I have a lot more money in here - I think that's really going to be something very special.
CHESLOW: That did happen. People saw more money in their checks last year. That's because the government reduced the amount of taxes taken out of each paycheck - also known as withholding. But now something else has happened. As tax refunds are starting to come back from the IRS, they're smaller - on average $170 smaller. And fewer people are getting them. That is causing pain. Taxpayers have been airing their grievances on social media with #GOPtaxscam and #GOPtaxscamstories. Richard Thaler, a Nobel Prize-winning behavioral economist, says the Trump administration changed the withholding on purpose.
RICHARD THALER: I can only assume that it was done in an effort to show people money as soon as possible. And the misjudgment, I think, was in thinking that people would notice such a small difference.
CHESLOW: Paycheck by paycheck, Thaler says, people don't notice an increase of $10 or $30. But when they don't get a hefty refund they're expecting and maybe even planning around, it's a big deal.
THALER: For many people, the day they get their tax refund is the one day of the year that they're actually financially solvent.
CHESLOW: Nicole Kaeding, director of federal projects at the Tax Foundation think tank, says 80 percent of filers got a tax cut from the overhaul.
NICOLE KAEDING: Don't judge your taxes by your refund. That's only one part of the conversation.
CHESLOW: At the same time, Kaeding says, 5 percent of filers saw their taxes go up. Most of those people are high earners who live in states with steep state and local taxes. However, some increase taxes have hit people of limited means, like Victoria Pearl Wright and her husband in Houston, Texas.
VICTORIA PEARL WRIGHT: When I did my taxes and saw that we weren't getting a refund, I was so emotionally floored. I had nothing but, like, shock go through my body.
CHESLOW: Last year, they got a refund of more than $5,000. Wright is nine months pregnant. She had planned to use their refund this year to cover expenses while she takes unpaid maternity leave from her job at a cafe. She thinks their taxes spiraled because they couldn't deduct business expenses, and they earn slightly too much to get a tax credit for low-income earners. Now, she's asked friends to donate to a maternity fund she set up on PayPal.
KAEDING: My husband's probably going to have to, like, pick up Lyft additionally. We don't really know what we're going to do.
CHESLOW: Tax experts say if you think your tax bill will be more than you can pay, you should still file your return on time. Pay what you can and see if you can arrange an installment plan with the IRS. And Thaler, the economist, has some advice for the government.
THALER: If they had asked my opinion, I would have told them don't touch the withholding tables.
CHESLOW: Rather, give people the same tax refunds they're used to getting year after year. Daniella Cheslow, NPR News, Washington.
(SOUNDBITE OF KETTEL'S "BOOTMENS") Transcript provided by NPR, Copyright NPR.