Trump's "Midterm Election Economic Booster": Massive Tax Refunds Coming Soon, With an Average Amount as High as $3,500!

American consumers are about to experience an unprecedented “cash rain.”

According to Chase Wind Trading Desk and Morgan Stanley’s latest research report released on January 23, thanks to the retroactive provisions of the “One Big Beautiful Bill Act” (OBBBA), personal incomes will see a surge in the first quarter of 2026. By the end of May, total personal tax refunds are expected to reach about $350 billion (approximately 2.5 trillion RMB), a year-on-year increase of 20%.

This wave of tax refunds is not a natural increase, but rather a policy-induced “shot in the arm.” The OBBBA act includes extensive retroactive consumer tax cuts for the 2025 fiscal year. Because last year’s withholding tax tables weren’t adjusted in time, consumers will receive these benefits as a lump sum through tax refunds over the next few months.

Key data: Morgan Stanley estimates that this year’s personal tax refunds will be $40–$70 billion higher than last year. If the number of consumers receiving refunds remains the same, the average refund will increase by $550 to a historical high of around $3,500.

Tax cut details: These windfalls mainly come from deductions on overtime pay, tips, senior citizen allowances, auto loan interest, as well as raised caps on state and local tax deductions and increased child tax credits.

What does this mean for investors? Morgan Stanley points out:

Short-term consumption boost: Although the market generally expects actual consumption growth to slow at the beginning of 2026, this massive tax refund will support spending throughout the year, especially in the first half.

Liquidity injection: This is a clear signal of fiscal stimulus, directly improving household balance sheets, especially for middle- and high-income groups.

Data noise: Investors should watch for volatility in economic data released in January and March; the surge in income data may be an accounting effect (with BEA recording annual tax changes in January), while actual cash flow will be distributed in batches in Q1 and Q2.

Who is celebrating? Middle- and high-income groups are the biggest winners

Unlike previous stimulus policies focusing on low-income groups, the distribution of OBBBA benefits has distinct class differences. Research shows that middle- and high-income earners and senior consumers will benefit the most.

Structural divergence: The bottom 10-20% income groups will hardly benefit, as they do not owe federal income tax after various deductions and credits.Breakdown of benefits: 38% of the tax cut windfall comes from deductions for tips and overtime pay (benefiting middle-income earners). 30% comes from raising the SALT cap (mainly helping high-income earners and homeowners). 20% comes from boosted senior citizen deductions (benefiting middle-income seniors).

Income surge vs mild spending: Where will the money go?

Morgan Stanley believes that although income data will be dazzling, the proportion that translates into actual consumption (marginal propensity to consume) may be lower than expected.

Income forecast: Morgan Stanley expects that thanks to tax refunds and lower withholding, actual disposable personal income in the first quarter of 2026 will grow at an annualized 4.1% quarter-on-quarter rate, completely reversing the flat trend in the second half of 2025.

Spending reality: Not all tax refunds will be spent. Historical data shows only about 30–40% of refunds are spent in the first quarter after receipt. Since this round mainly benefits high-income and senior groups, their marginal propensity to consume is typically lower, so more funds might go into savings or repaying debt (such as credit cards and auto loans).

Model prediction: Morgan Stanley estimates the act will only boost actual consumption by 20 basis points this year (about a 40-basis point impact on GDP overall).

Tariff clouds: 16% effective tax rate and plunging shipping volumes

While fiscal stimulus is underway, the shadow of the trade war still looms.

High tariffs: Since the Trump administration raised tariffs on August 7 last year, the effective US tariff rate has risen to 16.0%, and is expected to remain at 15–16% through 2026. US Treasury tariff revenue continues to climb, with rolling 63-day annualized customs and excise tax deposits reaching $391 billion.Shipping winter: The real economy is feeling the chill. After the “race to export” boom in Q1 2025 to avoid tariffs (actual imports surged 38%), import data subsequently collapsed (Q2 down 29.3%, Q3 down 4.7%). Currently, weighted average shipping capacity into the US plunged to 80%, and although it has rebounded somewhat, shipping volume has not fully recovered.

Macro overview: modest GDP growth, Fed remains on hold

GDP tracking: Morgan Stanley raised its estimate for real GDP growth in Q4 2025 to 2.1% (annualized quarterly rate), mainly reflecting strong service sector spending.Fed’s stance: Despite fiscal stimulus, don’t expect the Fed to change its position right away. At the FOMC meeting on January 28, the Fed is expected to keep rates unchanged. Powell may emphasize “robust” economic growth, a cooling yet healthy job market, and inflation that is still slightly elevated due to tariff factors.Fiscal deficit: The report forecasts that over the next few years the US fiscal deficit will remain just below 6% of GDP (5.8% for 2026), indicating that fiscal policy will continue to mildly support the economy.

The market is about to experience a liquidity pulse driven by tax refunds. While this obscures some signs of economic weakness in the short term, investors should clearly recognize that this is more a “one-off” fiscal windfall, not endogenous growth. Focus on high-income consumer stocks and beware of continued pressure on shipping and trade-related sectors.

Risk warning and disclaimerThe market has risks, investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their particular situation. Investing accordingly is at your own risk.