Wednesday, May 25, 2022

A Little Inflation Math: Your IRS Tax Refund

Click here to read the original Cautious Optimism Facebook post with comments

A little inflation math from the Cautious Economics Correspondent for Economic Affairs and Other Egghead Stuff.

Suppose for a moment inflation remains sustained at 8.5% for a year.

Now suppose also that you get a refund from the IRS when you file your taxes at the end of the year.

Most people know that getting a refund means you’ve granted the Department of the Treasury an interest free loan for the use of your money, and that receiving a tax refund means “You haven’t beaten the IRS, the IRS has beaten you.”

However due to inflation you receive your refund in devalued dollars, worth about 8.5% less than when they were withheld from your paycheck a year prior.

So not only have you given the government an interest free loan, but as Milton Friedman pointed out in the 1970’s, you’ve effectively paid the government 8.5% interest for the privilege of lending them your hard-earned money.

Governments love inflation.

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