Explaining the "Refund Anticipation Check" product

The Wandering Tax Pro Robert Flach asks:

I do not understand the “Refund Anticipation Check” being offered by Henry and Richard in replacement of a Refund Anticipation Loan (RAL).

I just heard an ad that says it takes 15 days to get a Refund Anticipation Check from H+R Block (granted it was a Jackson Hewitt ad).

If you submit the return electronically, as H+R will, and choose Direct Deposit you should get your refund in 15 days or earlier.

Why would anyone in their right mind pay Henry and Richard a ridiculous fee to give them a check when the IRS will have the money in their account in the same amount of time or sooner absolutely free?

Here is the rationale for the Refund Anticipation Check (RAC) offered by Block (and many small tax preparers as well.)

Many taxpayers they serve simply do not have the cash to pay for their tax return preparation up front. The RAC product allows Block to deduct their tax prep fee from the refund. That way Block is sure of getting its fee.

The RAC product (like its cousin the RAL) also reduces the transparency of the transaction--the taxpayers may not notice how much they are paying for tax return prep because it is buried in a huge stack of paperwork as an item subtracted from their refund.

To my Eco 391 students: this is what behavioral economists mean when they talk about the "salience" (i.e., visiblity) of a price. Effectively, the RAC allows the tax preparer to reduce the salience of the price they are charging for their product.

Government officials can and do exploit salience just as private business people do. For example, fewer people realize how much they pay for tolls now that many folks use EZ-pass. Many people have no idea how much they pay in gas taxes, because it is buried in the price of the gas they buy. Many people also have no idea about how much they pay in taxes due to payroll withholding--they focus on the "refund" they get rather than all the money that was withheld from their paychecks throughout the year.

For more about salience, see the following three papers:

"E-ZTAX: Tax Salience and Tax Rates," Amy Finkelstein The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 969-1010, August 2009

"Schmeduling" Jeffrey Liebman and Richard Zeckhauser, 2004

Raj Chetty & Adam Looney & Kory Kroft, "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September 2009.