When the US government pays you your tax refund, it doesn't include any sort of interest payment for what is essentially a loan to the government. Why doesn't the government pay interest?
- Because it is up to you to set the correct amount of withholding so it closely matches what you are supposed to pay in taxes. And if you screw up? Well, too bad for you.
- Most people don't have a good understanding of interest and the time value of money, so it would just add more confusion and misconceptions. ("Wow, I paid the government some taxes and now they're giving me back even more money")
- It is not remotely the government's job to make sure you get the most money. On the contrary, they make tons of non-obvious tax traps and it's up to you to figure out how to optimally navigate them. They are more than happy to find ways to get money from people unwittingly.
Conversely, if you under-withhold and owe the government a small amount of taxes (as long as it's not enough to trigger the penalty), you also don't need to pay the government interest either.
Rephrasing Jay's answer into a more practical form:
It would be possible for the government to do this, though not easy. If you really think it's a good idea, lobby your congresscritter to propose the appropriate law.
But be careful what you wish for. To pay new interest, the government needs to get that money somewhere -- increased taxes, increased fees, decreased benefits. They also need the money to fund the additional processing needed to make this work. The net result is that total taxes on the country would go up by more than this would reduce them. All you'd be doing would be paying the government to reward overwithholding and, effectively, increase the penalty for underwithholding.
It will be a lot faster and simpler to just adjust your own withholding levels to minimize overpayment. And arguably fairer.
In other words: The government doesn't pay interest on over-withholding because the consensus at this time is that doing so is not a good idea. Since this is a democracy, you are free to try to change that consensus, but I really don't think you can, or that you'll want to once you think it through. If you want to attack this windmill anyway, nobody's stopping you; go for it.
Because they're the government and they make the rules.
Maybe whoever wrote the tax laws had some philosophical or economic reason. Or maybe not. It doesn't make much difference.
You could ask this sort of question about all sorts of government policies. The reasons that the lawmakers had may or may not sound valid to you. But you still have to obey the laws they wrote or you get fined or jailed. Unless you're a politician or a celebrity in which case you get a pass, but whatever.
Consider the tax withheld payment on your estimated income for the year. Your employer estimates what you would probably make and over estimates the amount to withhold from your check. At the end of the year if the amount that was withheld is higher after all deduction and credits, you get a refund for over payment.
Most must not understand the question by the OP. Taxes are a cost of living here in the USA,it pays the 100k+ salaries of public officials. They TAKE it from you and if you don't give them the amount they demand you go to jail,period.You may get a refund but it is interest free BUT they only pay interest if they don't give it too you by a certain date and it certainly isn't what the government charges you for being late.