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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?

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    The Internal Revenue Service does pay interest if your refund is delayed by more than x days, where the exact value of x is something that you can probably find somewhere on the IRS web site. – Dilip Sarwate Mar 10 '13 at 21:05
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    In Sweden they pay substantial interest, so much that some people voluntarily choose to pay too much by withholding, so they get more + interest back. – gerrit Jul 29 '15 at 13:42
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    I suspect the Swedish tax system's a bit simpler than the American version. But I may be wrong. – keshlam Jul 29 '15 at 17:00
  • Consider this from the other side: should you pay interest on tax that you still owe come April 15? – chepner Apr 2 at 13:02
  • @chepner: Sure, why not? If you have taxes withheld correctly, or pay your quarterly taxes appropriately, you should never actually owe anything on april 15th. – Jason May 17 at 14:41
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  • 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.

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    And also because calculating the interest due would involve tracking your salary and investment income on a day by day basis. The cost of doing this would almost certainly eat up any interest payments you gained. – DJClayworth Mar 11 '13 at 16:16
  • Don't fully agree, but +1 for first and last sentences. – keshlam Jul 28 '15 at 22:14
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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.

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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.

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    Reads like a rant rather than an answer... – keshlam Jul 29 '15 at 3:41
  • @keshlam (shrug) Do you dispute my point or just my choice of words? – Jay Jul 29 '15 at 5:02
  • I don't think it actually addresses the question. – keshlam Jul 29 '15 at 5:12
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    @keshlam Well, I don't want to get into a running argument about it. The OP asks why taxes work this way. My reply is that they work that way because Congress passed laws saying that's how they'd work. I think that's the only real answer that anyone could give. If you agree that this law is a good idea, you could discuss why you think it's a good idea, but that may or may not have anything to do with what members of Congress were thinking when they made the law. Arguments pro or con that someone thought of after the law was passed have nothing to do with why the law was passed. ... – Jay Jul 29 '15 at 6:06
  • ... I suppose you could look up the debates in the Congressional Record for the time and see if anyone discusses alternatives and why alternatives didn't get voted in. But that would just tell you why the people who spoke in the debate thought it was a good idea, not why all 535 members of Congress voted for it. It's quite possible they had many different reasons, ranging from "paying interest would be too complicated" to "the government needs the money" to "if the majority leader is for it I guess I'll go along" to "my wife is against it and I'm mad at her so I'll vote for it." – Jay Jul 29 '15 at 6:10
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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.

  • I don't see how this addresses OP"s question. – JohnFx Jul 31 '15 at 16:55
  • The answer is self evident, they're not holding your money, it is paid by the company you work for at the end of the year. – Bob Brooks Jul 31 '15 at 16:58
  • I think the answer could be more clear on that point. It seems to just restate the what, but the OP is asking about the why. – JohnFx Jul 31 '15 at 17:01
  • Currently our tax code is about 5 inches thick, and about I'm guessing 1000 pages long, that may be a good place to start. That is if OP, would like a more solid concrete answer. My answer is, this is a debt that is owed the Internal Revenue Service, and because our tax withheld is not truly held by the internal revenue service, it is held by the employer, and paid quarterly, The Internal Revenue Service would not pay interest on funds held. – Bob Brooks Jul 31 '15 at 17:06
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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.

  • Does this answer add anything new? – Nathan L Dec 1 '16 at 0:13

protected by Chris W. Rea Apr 2 at 3:17

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