People Think Getting A Tax Refund Is Bad. In Reality, Ramit Sethi Says It's Great. Here's Why

In a recent video on his “I Will Teach You to Be Rich” YouTube channel, personal finance expert Ramit Sethi debunked several common misconceptions about taxes. One of his most striking claims is that getting a tax refund is not the financial misstep many believe it to be.

“Please, for the love of God, stop worrying about taxes,” Sethi begins. “Taxes are tribal. They’re one of the most politically heated topics of all. And when it comes to taxes, I’ve learned that people really, really don’t like being told that what they’ve believed for the last 25 years is wrong.”

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Sethi passionately addresses a widely held belief: “People think getting a tax refund is bad. In reality, it’s great. Most people think getting a tax refund is bad because they use this old chestnut, ‘Oh, why would I give an interest-free loan to the government?’ Well, guess what the data shows? You would have spent that money.”

Data supports Sethi’s assertion. According to Investopedia, 40% of people save tax refunds for expenses and emergencies while 37% use them to pay off debt. This indicates that tax refunds are often put to good use, contrary to the notion that smaller, more frequent paychecks would be more beneficial.

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Sethi continues, “So there’s nothing wrong with a tax refund. Yeah, you lose a tiny bit of interest, but you’re actually probably gonna use it to pay off debt or save money. Good job.”

Not everyone shares these sentiments with Sethi, however. Some tax experts assert that getting a tax refund means giving the government a loan that they repay interest-free when you file. They might say if you had that money, you could have put it in an interest-bearing bank account throughout the year, earning more money from it. 

Sethi shares several other “tax truths” in his video, challenging common misconceptions. For instance, he refutes the idea that the U.S. is the highest-taxed nation in the world and clarifies the concept of marginal tax rates.

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“People actually think that it’s better not to make more money for tax reasons,” Sethi explains. "Please, for the love of God, learn what a marginal tax rate is! If you simply Google that phrase ‘marginal tax brackets,’ you will understand something that most of your friends do not."

He explains that when you start earning more money and move up into a higher tax bracket, the marginal amount – or the amount in the higher tax bracket – is taxed at the higher rate, not your entire income. 

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Sethi also tackles the myth that the rich avoid taxes through numerous loopholes. While some legitimate tax efficiencies are available, they are not as widespread as people believe. “In general, those loopholes are few and far between, and they’re largely available to the superrich who earn millions or, better yet, billions via capital gains, not ordinary salaries or even high salaries of lawyers and bankers.”

Ultimately, Sethi says that our political views cloud rational judgment around taxes – whether you are satisfied or dissatisfied with how taxes are spent or how much you are taxed. Sethi states that he is happy to pay his taxes to support the common good of America. 

While Sethi’s views might be controversial to some, his insights encourage a more informed and rational approach to understanding taxes. For personalized advice tailored to your specific situation, consulting a financial advisor can be invaluable in ensuring your financial strategies align with your long-term goals.

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