Exclusive Commentary

Tax Day 2012: Two Views

Reid Cramer, New America Foundation and David John, The Heritage Foundation - Posted April 17, 2012


In response to the 2012 Tax Day, Spotlight has gathered reflections from two experts on each side of the aisle to address the question: what does tax day mean for low-income Americans?



Reid Cramer
New America Foundation

 
For over 26 million American households, tax day is a relief. Thanks to the Earned Income Tax Credit (EITC), filing taxes triggers a refund that may be the largest lump sum of cash these families receive all year. Unfortunately, for many other families, it’s just another day. One in four who qualify for the EITC don’t file, and they don’t benefit from what’s really the country’s largest anti-poverty policy effort—currently at over $55 billion. For those with low-incomes and few resources, their tax refund is a welcomed infusion of cash that can be used to manage their poor finances. Some will use the money to pay off bills or make a strategic pur
chase or two. But it turns out that tax time is also the right time to jumpstart the savings process.

For the past three years, New York City has conducted a pilot designed to maximize this opportunity. With the help of nonprofit groups offering free tax preparation services, participants were able to receive a $1 match for every $2 deposited in a basic savings account. Impressively, almost 75 percent have continued to save a year after opening their account. This year, $aveNYC is spreading to more cities as SaveUSA. It is an initiative that demonstrates how even families with low incomes will choose to save if the incentives work and the process is made easy and accessible. This policy has been proposed on a national scale. With the Saver’s Bonus, people would be able to divert a portion of their refund into savings and if they don’t have an account, they can open one right on their tax return. This would make tax day even more auspicious.



David C. John
The Heritage Foundation
 

At this point, most of us would be hard pressed to find anything good about tax day. Even this year’s delay until April 17th has just stretched out the annual anxiety.

Tax day is, however, also an opportunity to build savings for both emergencies and retirement, and in this area, the Internal Revenue Service (IRS) has actually found a way to make our lives easier. Filling out your return is just as painful as ever, but, since 2006, the IRS has allowed taxpayers receiving a refund to split that money among as many as three different accounts. 

Rather than just sending the refund to a checking account, where a good part is likely to dribble away on small inessential purchases, part of the money could go into a savings account, making the next car repair or other minor financial emergency a great deal less painful. Even more important, part of that money could go into
an Individual Retirement Account or other retirement savings account and build retirement security.

Using tax day as a way to save extra money for retirement will pay huge dividends in the future. A younger saver who puts away even a few hundred dollars annually in addition to regular retirement savings will see that money grow over time as interest and earnings compound into a decent amount of money. This can mean the difference between a comfortable retirement, and just scraping by. 

Tax day is still a chore, but just an extra bit of tax day saving can relieve some of the April 17th pain.


To print a PDF version of this document, click here.


The views expressed in this commentary are those of the author or authors alone, and not those of Spotlight. Spotlight is a non-partisan initiative, and Spotlight’s commentary section includes diverse perspectives on poverty. If you have a question about a commentary, please don’t hesitate to contact us at info@spotlightonpoverty.org.