If instead of earning 1% in a savings account, the money is used to reduce debt (avoiding interest) accruing 5% interest, the $50 estimate from above becomes 5 x $50 or $250 per year. And it would be even less if the money is used to pay off tax-advantaged debt (like a mortgage).
And again, that's assuming a $10,000 refund is the alternative, which far exceeds the refund most people are in a position to get. If we assume a more realistic refund of $3,000, instead of $250 in annual savings, we're talking about $75 in annual savings, or $6/month. Whoop-de-doo.
Don't get me wrong, I'd rather have than not have $75. But this issue seems to generate more hand-wringing than it deserves, especially when you consider all the other ways people waste $6 in a month.
PS - You said above that the average person who gets a large refund will blow the refund on something frivolous, but for some reason you assume that if that same person opts for the extra monthly income (rather than the large refund) they'd use the funds in some really productive way (like reducing debt). That seems weird.
It seems to me that a few extra bucks every month are more likely to blend in without being noticed (not being used to reduce debt) than is a larger one-time "windfall" at the end of the year, especially if the person is the undisciplined financial planner you assume.