What will be the effect of ‘big beautiful’ tax refund checks?
By David Enna, Tipswatch.com
Last week I read a report by David Kelly, chief global strategist at JPMorgan Asset Management, that mirrored some of my concerns that sizable federal tax refunds could set off a short-lived inflation surge in 2026.
Kelly’s report is titled, “The Investment Implications of the Refund Surge.” It begins with this:
On August 7th, with little fanfare, the IRS announced that, as part of its phased implementation of the OBBBA (One Big Beautiful Bill Act), it would not be adjusting W2 or 1099 forms for the current calendar year but would provide guidance and new forms, in due course, for calendar 2026.
This seemingly innocuous statement confirms that we will see an even larger crop of personal income tax refunds early in 2026 than was anticipated when the OBBBA was passed. These higher income tax refunds should work much like a new round of stimulus checks, adding to consumer demand and inflation pressures early next year.
Kelly notes that at the same time the refund checks will be flowing, the Federal Reserve may be cutting short-term interest rates, creating a “sugar rush” of consumer spending. He theorizes:
When their effects fade, it is quite possible that Washington will provide yet another round of stimulus to boost demand ahead of the mid-term elections.
Measuring the surge
Kelly notes that most of the OBBBA’s tax breaks are backdated to Jan. 1, 2025, but the IRS will not be issuing new W2 withholding schedules for 2025. The result is that “far too much money will have been withheld from taxpayers and refunds will surge in early 2026.”
But how much? Kelly theorizes: “(T)he total cost of these provisions for fiscal 2027, at $116 billion, should be very close to the amount owed to taxpayers for calendar 2025, deflated by, say 8%, for the growth in income in between – so roughly $107 billion.”
JP Morgan estimates the average tax refund in early 2026 will be $3,743, up about $500 from the 2025 level.
Looking at the overall economic impact, if we assume that 80% of these extra refunds are spent, this amounts to roughly 0.27% of GDP. If this money were spent evenly in the first six months of 2026, it could boost annualized real GDP growth by over 0.5% in the first quarter. If we add to this the impact of lower withholding that should finally kick in at the start of 2026, it could add 0.8% to real GDP growth in the first quarter. ….
If consumers generally use this money quickly, then by the third quarter of next year, consumer spending could slow again and, by the fourth quarter, it could slump. …
It could well be that, faced with this possibility, Congress approves some further fiscal stimulus such as the “DOGE dividends” that were floated earlier this year or the more recently proposed “tariff rebate checks”.
And then what?
Kelly speculates the Federal Reserve will lower interest rates by 25 basis points on Sept. 17, which seems fairly locked in. He adds, “Such a move is unlikely to spur faster economic growth in the short run, setting the stage for another rate cut in October or in December or both.”
So … two or three cuts to short-term interest rates could come just months before the bigger tax refund checks begin rolling out through the first half of 2026. Kelly concludes:
(I)nvestors might doubt the Fed’s commitment to stable inflation, potentially leading to a steeper yield curve, a lower dollar and lower stock prices. For investors, this underscores the need to have a greater allocation to international assets denominated in foreign currencies and the importance of having alternative assets with lower correlations to U.S. stocks and bonds.
My thoughts
It was my theory that several of the OBBBA provisions had the potential to be inflationary in the near term — no taxes on tips, no taxes on overtime, larger senior standard deduction, a new break for auto-loan interest, higher state-and-local tax deductions. The result: more money for consumers to spend.
Kelly’s assumptions make sense, in that a $500 boost to income tax refunds (along with other tax breaks) could trigger more aggressive consumer spending, which in turn could spur inflation higher. Plus, once 2026 begins, W2 withholding levels will be adjusted, giving many consumers an increase in take-home pay.
Will consumers rush to spend? I recall, unfortunately, the sudden explosion of hot-rod vehicles on Charlotte streets during the COVID stimulus roll-outs. For some people, the money was going to down payments on a depreciating asset. Not good.
Or, we could hope, people would try to pay down personal debt. In mid-2025, the average American family was carrying $6,371 in credit card debt, the highest level since the New York Fed started tracking this in 1999.
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Treasury Inflation-Protected Securities 
So it is not the debt printing and loose credit, it is the government not taxing me and my family enough that is causing inflation…right…
Another major macroeconomic factor is that student loan forgiveness/ forebearance /suspension programs are being repealed, and so younger consumers have less to spend as they pay more on their student loans.
The party that permanently fixes the student loan mess will own the White House for 40 years.
Is the big story here that the US Treasury will need to borrow even more than it is borrowing at present to pay for these refunds? It also is getting a 0% loan from many of us this year that it will not get next year.
Isn’t this prediction only in the absence of tariffs increasing an average taxpayer’s COL?
Well, us bond nurds are ready for any inflation surge with our stockpile of TIPS and I-bonds.
Forgot to mention DFLEX also has a $49 fee in/out EXCEPT at ETrade. They also use a lower minimum for IRA of $5,000 vs the $100,000 for taxable.
I’m looking at floaters. TIPS nosedived during the last bout of inflation.
TIPS funds (like VTIP and TIPS) nosedived. The final value of individual TIPS being held to maturity was unaffected by the interest-rate adjustment of the market price, while the inflation adjustment kept accruing.
To be fair, VTIP really didn’t “nosedive,” and in fact held up pretty well. Annual returns:
2021 5.36%
2022 -2.96%
2023 4.62%
2024 4.74%
YTD 5.77%
Jim Paulson had a different take on expectations for 2026! See https://www.youtube.com/watch?v=cmObwEFrq_Q
He raises a lot of interesting points and reinforces why I use the word “uncertain” when describing our financial future. Tariffs, monetary policy, Fed independence, growing deficits, presidential midnight tweets, Europe at war, etc. I hope he is right about avoiding a recession.
Thanks as always for your thoughtful analysis. I was hoping you would address the firing of Lisa Cook. Have you shared your thoughts elsewhere?
I haven’t written about it. It is distressing to see the independence of the Federal Reserve at risk. I would be interested in seeing a similar microscopic analysis of the past financial actions of all members of Congress and all members of the administration.
Me too.
Maybe something good will come out of this. The tit-for-tat nature of US politics suggests to me that this will escalate. All of these elected knuckleheads must be above reproach.
Thank you for pointing out the stimulus effect of 2025 tax refunds as a result of the OBBB. Normally one would think this is a good problem to have from a consumer standpoint, and from a GDP standpoint, but these are not normal times. I know this wasn’t the focus of the article, but I’m not sure you can have this discussion without factoring in the excessive tariff policy, their volatility, and their effect on prices. Adding to that uncertainty yesterday was the U.S. Court of Appeals for the Federal Circuit, who affirmed a lower court ruling that Trump did not possess the authority to impose taxes on nearly all imports to the United States. While it is possible (even likely) that the conservative Supreme Court will overturn the ruling, in the unlikely event that they uphold it, wiping out tariffs in one fell swoop (at least temporarily) could provide even more stimulus. It makes predicting future inflation, already a fool’s errand, literally impossible.
The “senior provision” of the tax bill allowed me to cancel my 4 QTR estimated tax payment in January, so no extra refund for me. But I agree with the article’s expectations for the average taxpayer that has withholding.
There are a lot of spinning plates. Because of the higher standard deduction for people over 65 (or other phased-out benefits), it may make sense for a retired investor to put off making Roth conversions or other decisions that could raise AGI to the phase-out levels. That would also mean reducing the planned course of estimated taxes — just as you did. You are ahead of the game. My mind hurts when I think about re-calculating estimated taxes.
Just a heads up here: In your “My Thoughts” section, you wrote “no taxes on TIPS” when I’m sure you meant “tips.” I think autocorrect created a typo.
Thanks for catching that. I type the word TIPS with capitals 2,000 times a year so it is hard to reverse the muscle memory. It is fixed.
Do high yield bonds ever make it into your portfolio; if so, what would cause that?
I don’t own high-yield bonds or bond funds. There is probably a strategy there, but I stick to the safety of Treasury issues and investment-grade corporates like you find in a total bond fund. The current high-yield spread is close to a multi-decade low of 2.75%.
I know we can’t do that does make it tough to justify anything but investment grade corporates.
I once had a high yield bond mutual fund but not for long.
Consider DFLEX which takes credit risk in the form of Mortgage Backed Securities and Collateralized Loan Obligations. It has a yield significantly above IG Corporates in areas with spreads not so compressed.
DBLIX is even better in a tax deferred account for high state tax filers – it strips out Treasuries which you would hold in your taxable account. But I have only found it available at Fidelity with a $49 fee in/out, so best to buy a large amount and hold a longer time. Also they have a waiver on part of the fee which may expire August 1 2026 – keep an eye on that expense ratio…