Will Tax-Refund Delays Trigger Another Recession?

4798Congress seems bent on simultaneously debating the fiscal cliff, where the remedy is a short-term widening of the deficit, and the fiscal crisis, where the remedy is a long-term narrowing. Difficulties of reaching an agreement over both problems at the same time make it increasingly likely that the fiscal cliff, or more accurately the tax shock, will not be averted before January.
One part of that shock has so far gone little noticed: Tax refunds may get delayed until the second quarter, with more than $200 billion at risk. In the first quarter of this year, the Internal Revenue Service cut checks totaling $212.8 billion to 75.3 million taxpayers, with each check averaging $2,826. Similar figures apply to first quarter 2011.

The risk of a delay in sending out these huge sums is not based on mere speculation. Paul Cherecwich Jr., chairman of the IRS Oversight Board, warned in a Nov. 19 letter to the Senate Finance Committee that "more than 60 million taxpayers would have to wait until late March or later to file their returns and receive a refund."

If, as the IRS official warned, any substantial portion of those refund checks gets deferred to the second quarter, there could be a noticeable hit to consumer spending in the first quarter. Over the past four quarters, consumer spending in nominal dollars has increased by an average of $90 billion per quarter. If $100 billion in refund checks gets deferred, that alone could put consumption in negative territory.

Source: Barrons | GENE EPSTEIN 
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