August 10, 2020; New York Times
Who wouldn’t love a tax holiday?
One of President Donald Trump’s executive orders promises to defer employees’ payroll tax for all employees that earn less than $4,000 per two-week pay-period ($104,000 a year). As Darla Mercado of CNBC explains, “An employee making $50,000 per year would earn about $1,923 per biweekly pay period. A deferral of Social Security taxes would allow that worker to pocket approximately $119 for each paycheck—or $1,073 over nine pay periods.”
Sounds great. But there are a few problems:
- It’s a deferral, not a real tax holiday. That means that an employee who saves $1,073 this fall would owe the feds $1,073 in 2021.
- Only people with jobs get money. For the one in five who were receiving federal supplemental unemployment payments before July 31st, the amount received is $0. In fact, neither the Republican HEALS bill nor the Democrats’ HEROES bill contained a provision for a payroll tax holiday, since the greater priority is to support people who don’t have jobs, not those who still do.
- It is a very effective means to sow confusion among both employers and workers. As Alan Rappeport and Gillian Friedman write in the New York Times, the measure “poses difficult legal and logistical questions” that add to uncertainty for both employers and workers.
Arnold Kamler, chief executive of the bicycle company Kent International, says he’d “rather just keep paying the payroll tax as it is now and deducting from the employees. If it does go into effect, we’ll be very upfront with the workers and tell them: ‘Don’t spend it. Just put it away.’” Others—the US Chamber of Commerce and the National Retail Federation among them—were similarly unenthusiastic. “Clearly there are a lot of unresolved issues with it,” David French, senior vice president of government relations for the Retail Federation, remarked.
Rappeport and Friedman add, “If every business in the United States deferred the Social Security payroll taxes that they withhold for their workers to the end of the year, up to $40 billion a month would be added to the paychecks of Americans…but it is far from certain that many companies or workers will take the White House up on this offer, which experts said would be logistically difficult for the Treasury Department to force on them.”
“Since employees must still pay those taxes next year, this order is really an offer of a zero-interest loan rather than an actual reduction in tax liability,” Michael Feroli, chief economist at JP Morgan, observes. “It remains quite unclear whether employers will actually change withholding schedules, particularly if it could lead to financial uncertainties in 2021.”
“If businesses are reluctant to reduce withholding because they may be liable to pay the tax later, they might escrow the withheld amounts rather than pay the Treasury, and assure their employees that if the payroll tax liability is eventually forgiven by an act of Congress, the business would cut the appropriate check to their employees,” Itai Grinberg, a tax policy professor at Georgetown University Law Center, tells the Times.
Perhaps even more important is that the economic benefit is likely to be negligible. “I don’t think it helps the economy,” remarked Isaac Boltansky, director of policy research for a DC-based investment bank. Some groups, like AARP, the American Association of Retired Persons, even suggest the deferral could harm the economy by scaring older Americans who rely on Social Security into thinking lawmakers will reduce retiree benefits to enable the deferral to be converted into tax forgiveness.
“Social Security is more crucial than ever as Americans face the one-two punch of the coronavirus’s health and economic consequences,” AARP wrote Saturday. “But this approach exacerbates people’s already-heightened fears and concerns about their financial and retirement security.”—Steve Dubb