Windfall or Expectancy: How Do Low-Income Tax Filers View Tax Refunds?
The federal income tax system delivers more cash assistance to low- and moderate-income families than any other public program—and it does so in a one-time lump sum that can total more than one fifth of a household’s annual budget. For instance, a two-adult, two-child family with earnings equal to the federal poverty guideline of $23,050 in 2012 would owe no federal income taxes. Their estimated tax credits total $6,825, the cash equivalent of three and a half months of wages.
Antipoverty tax credits have enjoyed considerable bipartisan support over the past two decades, but policymakers are now questioning whether the credits’ combined magnitude and lump sum delivery fit public priorities. Empirical evidence on how tax credit recipients fit refunds into their financial lives can help inform policy debates. Toward this end, this paper presents new evidence on two sets of questions. Do low-income tax filers expect to receive refunds, and - if so - how much do they anticipate? This question is important in light of behavioral economics evidence that persons spend windfalls differently than expected amounts. Second, what reasons do tax filers give for their estimations? This question brings low-income filers’ voices into the public debate.
METHODS
Clients of a community-based VITA tax preparation service responded to a semi-structured set of interview questions about their tax-time thinking and experiences. Findings reported here are from interviews of a racially diverse group of 38 tax filers, just over half of whom lived with dependent children. Tax filers were asked to predict their refund amounts and queried about their estimating process. The research team created analytic summaries to derive a set of working themes and verified these themes using cross-case analysis.
FINDINGS
All but one of our 38 study participants expected to receive refunds, with an average anticipated refund of $2,844. Participants justified their expectations with factual and social explanations. Factual explanations describe how refunds are calculated, such as outlining the factors that go into the formulas. In contrast, social explanations focus on the larger meaning of receiving money back from a system designed to serve societal or policy goals. Sometimes specific factors have both factual and social dimensions. For instance, the most common factor mentioned was income level. Factually, tax and credit amounts are calculated based on earned income. Existentially, low-income workers are seen as worthy, or deserving, under the work-based social contract that characterizes American anti-poverty policy around the turn of the 21st century. In addition to income, participants cited features of the tax system and issues related to citizenship as the metrics they used to predict their refunds.
DISCUSSION
This new research shows that persons approach tax season with generally accurate ideas about the likelihood and size of refunds. The reasoning behind these predictions is based on both broad stroke understandings of tax rules as well as deeper ideas of citizenship and deservedness.