Tax refunds are going toward essentials this year

As tax day is almost here, analysts are eagerly waiting to see how refund checks will affect the economy. Unsurprisingly, a recent AP poll has revealed that average taxpayers won't be using their windfalls to boost the tourism economy. In fact, an impressive 54 percent of consumers are planning to use their tax refunds to pay bills. Almost a 20 percent increase over last year, the shifting numbers reflect a major change in priorities.

In 2008, seven percent of consumers claimed that they planned to spend their tax refund on food and clothing; this year, 17 percent will use their stimulus to buy necessities. Meanwhile 37 percent (as opposed to last year's 24 percent) will use their money to pay down debts. Others plan to cover utility bills or other necessities.

While this shift partly reflects a change in spending priorities, a large portion must also be chalked up to increased unemployment and decreased wages. For example, of the 54 percent that will pay bills, 17 percent are using their refund to pay rent or a mortgage. The fact that so many consumers are dipping into a windfall to pay for a basic necessity indicates the degree to which many essential expenditures are moving beyond the grasp of consumers.

This is further borne out by a salary breakdown of poll respondents: people making over $100,000 were more likely to spend their refund on vacations, while those bringing home less than $50,000 were more likely to spend their money on bills. This also reinforces the findings of a December 2008 Moody's study, which suggested that every dollar spent making the Bush tax cuts permanent would yield $0.31, while every dollar spent on an expanded food stamp program would yield an economic effect of $1.73. This makes sense, as those hardest hit by the recession don't currently seem inclined to put money into savings.

Over the coming months, it will be interesting to contrast the Obama and Bush approaches to stimulus spending. Rather than sending out huge lump sums to every taxpayer, the Obama tax cuts will take the form of a slight increase in the average paycheck. The argument is that, camouflaged by the regular pay cycle, this extra money is more likely to re-enter the economy, as consumers will treat their tax breaks as raises. It's already clear that yearly tax refunds, which seem comparable to the Bush checks, are speeding toward creditors; one can only wonder where the little paycheck boosts will go.
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