Market Watch: Look Out for your Tax Returns after the Trump Tax Act

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Christmas for the average American taxpayer is back with the tax return season. After heavy tax cuts by the Trump Administration, taxpayers were expecting heavier tax return checks but in a surprising turn of events, people are receiving lower tax returns as compared to the previous fiscal year.

In the wake of President Trump’s tax cuts, the average tax return check amounts to $1,865 only, 8.4 percent smaller than the average refund in the period last year.

The American taxpayer feels betrayed by the Trump Administration’s promises when it passed a $1.5 trillion tax overhaul in the final weeks of 2017 that cut rates for both individuals and corporations, giving fellow Republican Trump a major policy victory.

The complicated and highly celebrated tax cuts have made the life of a tax filer a bit complicated. Rather than enjoying a return from the IRS at the end of the fiscal year, some taxpayers were in for a surprise when they found out that they owe the IRS money rather than getting it back.

According to a report by from the Government Accountability Office, a legislative agency that provides data to Congress, it is estimated that about 30 million people, or 21 percent of U.S. taxpayers, are expected to owe money to the IRS this tax season.

In 2018, the Trump Administration along with the Treasury Department and the IRS updated the withholding tables to reflect the new Tax Cuts and Jobs Act. The biggest changes were the end of personal exemptions, the doubling of the standard deduction, and reduced individual income tax rates. These are the guidelines for employers to follow to deduct the right amount of tax from your paycheck. The Tax cuts aimed to reach to a system where more and more people paid perfect taxes. In other terms, when you get to the end of the fiscal year, you wouldn’t owe the IRS any money, but you won’t get a refund either.

People are actually getting confused between their tax returns and how much taxes they paid. A vast majority of 80 percent of Americans did receive a tax cut last year. The only difference is that you got your tax returns over the course of the entire in terms of bigger paychecks that you get from your employer. So logically, you are not getting lower tax returns, but psychologically, it is a big shift for American who were expecting a big juicy paycheck at the end f the fiscal year. The problem is that people didn’t understand why they were getting more money in their paycheck and probably didn’t save enough throughout the year.  

Business across the country enjoyed a very fruitful year. The Tax Act lowered the corporate tax rate from 35% to 21%, the lowest since 1939. Large corporations like Amazon who can afford tax lawyers get through loopholes to pay fewer taxes or at times no taxes at all. This leads to the effective tax rate to drop at 18 percent leading to less revenue for the government.

The Republican reasoning behind these heavy tax cuts was to increase the inflow of cash in the economy. By taking fewer taxes from the taxpayers, the government indirectly is increasing the purchasing power of people since they are left with more money to spend.

A higher purchasing and spending power lead to higher investment in the economy. People invest more money leading to higher jobs creations. The Trump Administration passed the tax act to reduce the rising unemployment rate which stood at 4.1 percent when the bill was passed.

The unemployment rate did go down, reaching a historic low of 3.7 percent in 2018, but the unemployment rate didn’t fall as expected by the Administration. Tax cuts rather flushed companies with enough cash to buy back shares. Buyback of shares hit a historic high, reaching $1 trillion in 2018, 50 percent higher than the previous year.

Tax Cuts aren’t always a good idea to boost the economy. A higher purchasing and spending power can induce a high rate of inflation leading to a higher living cost. The US economy saw a mild controllable rise of inflation of 1.9 percent in 2018 because of the Federal Reserve.

The Fed stepped into the matter after the heavy tax cuts to control inflation by raising fed funds interest rates to 2.25 percent in 2018 as compared to zero in 2015.

Many have argued that the fed is being biased against the Trump Administration by raising rates, but if not for the federal reserve, the country would be suffering from a mild recession along with an economic boom.

The tax cuts done by the Trump Administration can be perceived as good and bad both. It gave enough money to corporation to clear off some of their debts and buy back shares, but wasn’t beneficial in reducing unemployment rate.

In the end, it depends on people and how they would like to receive their tax returns - spread over the entire year for better budgeting or getting a lump sum amount at the end of the fiscal year for a trip to Disneyland.