Smaller tax refunds could ding first-quarter GDP

If Americans’ tax refunds continue to be smaller than people are used to, the hit could damage consumer spending enough to take a sizable chunk off economic growth for the first quarter, some economists say.

“We think households are on track to receive perhaps $30bn less in the first quarter than last year,” Michael Pearce, senior U.S. economist at Capital Economics, said in a note Tuesday. That’s without considering the possible effects of any further IRS delays.

The U.S. Treasury projected that 2.5 million fewer Americans would get a tax refund this year, and the refunds in the first week of filing season were 8 percent smaller than the previous year. If both those trends continue throughout filing season, that means $30 billion less in refunds than the year before, Capital Economics said.

Given how little hard information there is, the $30 billion figure is a “ballpark estimate,” Pearce told CBS MoneyWatch. But even if the total amount refunded is the same as last year, it doesn’t mean everyone will benefit. If the tax cuts helped mostly wealthier taxpayers, as many economists have suggested, that could still result in lower spending.

“If the refunds are going mainly to higher-income individuals, they’re more likely to invest them or save them,” Pearce said. Working-class and middle-class people, on the other hand, are more likely to use their refund on a large purchase, such as an appliance or a down payment on a car. “You could still have a bigger hit to the economy if you have middle-class consumers who are relying on those refunds and not getting them,” he said.

The IRS’ own projections show it’s falling behind on refunds

Not everyone agrees with that forecast. UBS predicted that refunds this year could be as much as $20 billion higher than the year before, but it noted, “Nobody — not us, not other economists, not the US government — knows whether refunds will be larger or smaller than in past years.”

That uncertainty is thanks to three main changes, UBS said. Fewer households this year are subject to the alternative minimum tax, the child tax credit is larger than last year and tax withholding tables — which employers use to calculate how much to withhold from paychecks — were likely incorrect last year, the firm said.

The GDP growth figure was already set to be lower on the effects of the government shutdown, which started in late December and lasted nearly the entire month of January. The top White House economic adviser said last month first-quarter growth could be “very, very low,” and even zero. A drop in consumer spending from smaller refunds could take an additional 7 percentage points off first-quarter growth, according to Capital Economics.

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