Denys writes:

> The mechanism used by the IRS to return that 5% overcharge is the subject
>  of Wirt's post.  He is also trying to create a problem where there isn't
>  one.  If your regular refund is $1000 every year, then this year's refund
>  would be $1,300.  The IRS is sending you $300 right away.  You will go
>  through the regular mechanism and get your other $1,000 at income tax time.
>   For the vast majority of wage earners, this will be a no-brainer.  There
>  are always corner cases and these corner cases are the ones Wirt was trying
>  to turn into a majority.

All politics aside, let me explain more fully the algorithm in force.

What the refund check is not:

     o a gift from a grateful government.

     o a tax rebate on previously paid taxes

     o your share of the current surplus

What it is is an advancement payment on the likely refund you would have
received next spring. Indeed, that's what the IRS is calling it, an "advanced
payment."

As John mentioned, the Congress this year lowered all tax brackets, with the
largest percentage change being the bottom bracket, 15% down to 10%, a 33%
reduction in taxes owed. Most tax brackets, however, did not see anywhere
near that percentage drop.

Congress made this tax reduction retroactive to the beginning of the year.
Based on the 5% reduction in the lowest tax bracket, Congress applied this
percentage accross the board to all taxpayers, but applied a $600 cap, thus
making the higher wage earners' effective advance refund check much smaller
than 5%. The purpose of the advance refund is to rebate the taxpayer for the
overage that you have likely paid on the first half of this year's taxes in
payroll deductions.

But this is only one side of the story. The other side are payroll
deductions. Earlier this year, the IRS sent out new payroll tax deduction
tables. There were two ways that the government could have tried to get the
first half of the year's tax overages into the hands of the people.

The first potential algorithm was to adjust the payroll deduction tax tables
that took effect on July 1 to reflect the 10% rate that Congress passed for
the minimum taxpayer. If they had done that, your withholding would have
immediately dropped with this month's paycheck. But the advance refund check
would only have then been 5% x 1/2 year, or 2.5% of your likely refund,
making the refund checks $150, $250 and $300. These numbers may have seemed
too small to make any real difference to the economy or be politically
effective.

Rather than do that, the new July 1st IRS tax tables are unchanged for anyone
earning under $60,000 (and barely changed for those at that level or slightly
above). Thus, what one hand is giving you, the other is taking away. You
*will* receive 5% of your likely refund with the coming check, capped at
$600. But your withholding will be unchanged for the remainder of the year,
even though Congress and the IRS know that you are now overpaying on your
current deductions, based on the tax rates that were made retroactive to the
beginning of the year. As an example, if your actual tax rate is now 10%
based on the tax reduction act that Congress passed, you are nonetheless
continuing to have your payroll deductions calculated at the 15% rate of last
year.

Next spring, when you file your tax papers, you will file at a lower rate
than you are currently paying, thus your refund will be larger than it would
have been otherwise, but your refund then will be reduced by the amount of
the check you receive now.

Ultimately, all the numbers have to add up, and they do in the current
protocol, minus those few people who get refunds that they will not deserve
next spring. These few people actually do apparently get a gift from the
government.

If there is a sleight-of-hand in all of this, it is that the government is
sending out these checks with a great deal of hoopla (and little explanation)
while taking the same or more equivalent dollars out of your current
paychecks. In essence, you are paying yourself your own refund.

Wirt Atmar

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