With Tax Day less than a week away, everybody has two questions on their mind: Will I get a tax refund? How much will it be?
Those who are lucky enough to get a tax refund are often ecstatic to find a check in the mail with their name on it. But a tax refund is deceptive. Tax refunds occur when the government over-taxes a citizen and then must pay back the over-counted sum. For example, a person who receives a $1,000 refund was actually charged $1,000 more than he should have been in taxes withheld for his earnings. Most people view the refund as a nice way of the government “balancing its checkbook” with its constituents.
The reality is much different, because the government actually owes us much more than we receive in refunds. Government returns fail to take the earnings potential of the refund into account. For example, the man who got the $1,000 refund could have earned another $200 had he invested it in the stock market. What’s more, the company whose stock he bought could use his funds to help pay for a new employee. The cost of this $1,000 being removed from the economy, even for a short time, can not be made up simply by returning it to the owner in its original condition.
Government inefficiencies are the culprits responsible for over-taxation and the resulting deadweight loss. A simpler solution is needed. A flat tax system, in which everyone pays a certain percentage of income across the board, would by the ideal set-up, because it would be impossible for the government to over-estimate how much a person would owe. A two-tiered system would be more realistic in the current political situation (as proposed by Paul Ryan), though it too remains far off.
Until the day for a flat tax comes, Americans will continue to be ripped off with their tax refunds.