The Framing of Tax Refunds

LFG Marketing | April 01, 2019

LFG Marketing | April 2019

As of mid-February 2019, the Internal Revenue Service reported that the average tax refund from 2018 returns was down 17 percent, compared to the previous year. Considering that tax refunds represent an over-collection of taxes due, financial experts see smaller refunds as an indication of more accurate assessments of tax liability, a rare moment where a government agency seems to have improved its performance.

But don’t tell that to the average American, who has been conditioned to view a refund as a “bonus” from Uncle Sam. They equate smaller refunds with smaller bonuses, and for some, that’s not playing so well – even as the vast majority of taxpayers (approximately 80 percent) have seen their income tax burden diminish.

Over-Paying Is OK? Yeah, If You Get a Refund!

This brouhaha over smaller refunds is a classic case of framing; the way that a topic is presented impacts its perception.

Almost no one is excited about paying taxes; just think of the typical worker’s reaction when they see how withholding reduces their take-home pay by 20 to 30 percent. It’s not just the withholding that aggravates. Most workers are skeptical that any of this money will eventually return to them; most often, they perceive their taxes are paying for someone else’s government assistance.

A refund, especially a large one, tends to ameliorate both the frustration at withholding and the sense that government doesn’t deliver a benefit. Since the 1960s, about 70 percent of American taxpayers have received tax refunds each year. For 2017, the average refund was $3,256. Which is apparently enough to make many people forget that they overpaid their taxes.

“(M)ost taxpayers use refunds as a type of forced savings,” say writers Brian Faler and Aaron Lorenzo in a February 22, 2019, article for Politico. Taking the spin on over-payment a step further, “Some also misinterpret (refunds) as an indication of how well they’re faring under the tax system, presuming that if their refund goes up, they must be doing better.”

So instead of grousing about over-paying, a tax refund has become an annual happy moment. It is money that retroactively pays for holiday spending, funds this summer’s vacation, or makes a down payment on a new car. Merchants market to this reality, suggesting ways to spend your refund, even making loans against anticipated refunds.

Because the public has become accustomed to tax refunds, most Americans respond to the practice with a shrug. Yeah, we’re over-paying our taxes and giving the government a tax-free loan, but hey, we got a refund! What’s the big deal? Well, suppose the story was framed differently.

Inside a Different Frame, the Picture Changes

Imagine an alternate scenario in which a company was found to be systematically overcharging its customers, then refunding the difference once a year, but only after individuals submitted extensive paperwork to prove the excess costs.

Cable news networks would produce documentaries on the “shameful” actions of the company, fanning the flames of public outrage. Indignant politicians would most likely rail at the company and enact industry-wide legislation to prevent other companies from trying the same thing.

With so much bad press, the company would acquiesce to all demands for change, and politicians would take credit for standing up for their constituents. And no one would be saying, “Well, yeah, they over-charged me, but I got a refund!”

What About Your Frame?

If you received a refund of more than $5,000 this year, that’s more than $400 each month that didn’t have to be withheld from your earnings. Instead of accepting a forced savings that takes the money out of your pocket for a year, and delivers no return, what could that money be doing in your personal economy? It’s a question worth pondering.

Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-77341 EXP 3/2021