When President Donald Trump signed those four executive actions from his private golf club in Bedminster, N.J. on Saturday, one of them set off a shockwave of alarms among economists, Democrats and Social Security advocates.
Trump announced a payroll tax holiday as part of his attempt to cut through the stalemate between congressional Democrats and Republicans and the White House on stimulus package negotiations.
To pause payroll taxes, the Trump administration is employing a section of the tax code that allows the Treasury Department to postpone certain tax-related deadlines during a federally declared disaster. It’s the same authority used earlier this year to delay the April 15 tax-filing deadline until July 15.
The Memorandum on Deferring Payroll Taxes instructs the Treasury Department to allow employers to defer payment of certain payroll taxes from Sept. 1 to the end of the year for Americans earning less than $100,000 per year, which amounts to an interest- and penalty-free deferral of payroll taxes for four months.
Trump has long been keen on cutting the payroll tax, which funds Social Security and part of Medicare. He made it clear he wanted the payroll tax cut included in the final version of the next stimulus bill and had threatened not to sign a bill reaching his desk if it did not include a payroll tax cut.
A payroll tax cut would waive some or all of the FICA taxes (Social Security and Medicare) included in payroll, which amount to 7.65% of a typical employee’s paycheck. Employers contribute a matching amount.
The President has repeatedly said he believes cutting the payroll tax would stimulate the economy by providing workers with larger paychecks and businesses with lower payroll costs which could help them continue to pay employees and potentially hire/rehire more employees.
Lacking support from Republicans and facing total opposition from Democrats on the issue, Trump relented and the provision was cut from the proposal Republicans rolled out to Democrats as negotiations began in earnest three weeks ago.
But it came back with a vengeance on Saturday. And eliminating the tax altogether essentially became a campaign promise.
President @realDonaldTrump: If I am victorious on November 3rd I plan to make permanent cuts to the payroll tax pic.twitter.com/7N0D0o4A18
— Team Trump (Text TRUMP to 88022) (@TeamTrump) August 8, 2020
“If I’m victorious on November 3rd I plan to forgive these taxes and make permanent cuts to the payroll tax, so I’m going to make them all permanent,” Trump said during a press conference announcing the executive actions on Saturday (and later tweeted out by his campaign). “If I win, I may extend and terminate. In other words I’ll extend it beyond the end of the year and terminate the tax. And so we’ll see what happens,” Trump continued.
It is significant to note that while deferring the payroll tax payments (instead of eliminating them) falls within Trump’s presidential authority, he could not unilaterally eliminate the accrued debt without the approval of Congress.
Without future congressional action to extend the payroll tax holiday or retroactively eliminate the payroll tax, the deferred tax would have to be paid once the holiday expires, likely as part of annual income tax filings next April 15.
“This fake tax cut would also be a big shock to workers who thought they were getting a tax cut when it was only a delay,” Sen. Ron Wyden (D-OR), ranking member of the Senate Finance Committee, said in a statement. “These workers would be hit with much bigger payments down the road.”
Because of this, opponents of the measure point out that many employers will decide to hold on to the payroll tax money, defeating the purpose of employees bringing home larger paychecks.
Critics cry foul
Los Angeles Times Pulitzer Prize-winning columnist Michael Hiltzik says Trump could be using this as a campaign tactic. “Trump plainly sees this stunt as a way to blame Democrats for that tax bill, not to mention the apparent tax increase when the deferral ends and payroll taxes revert to their full level. Democrats ‘will have the option of raising everybody’s taxes and taking this away,’ [Trump] said at the signing ceremony. In other words, he’s offering voters a bribe—in effect, ‘elect them and you’ll have to pay what you owe; elect me and you’ll get a pass.’”
I don’t know if anyone else has said this, but payroll tax cuts are the hydroxychloroquine of economic policy. They won’t do anything to solve the employment crisis, but will have dangerous side effects. Yet Trump remains obsessed with them as a cure 1/
— Paul Krugman (@paulkrugman) August 9, 2020
Nobel Prize-winning economist and New York Times columnist Paul Krugman tweeted Sunday that “payroll tax cuts are the hydroxychloroquine of economic policy. They won’t do anything to solve the employment crisis, but will have dangerous side effects. Yet Trump remains obsessed with them as a cure.”
Consumer and Social Security advocates were also quick to voice their opposition.
“Donald Trump once promised that he would be ‘the only Republican that doesn’t want to cut Social Security.’ We now know that what he meant is that cutting Social Security doesn’t go far enough for him: He wants to destroy Social Security,” said Nancy Altman, President of Social Security Works. “His promise to ‘terminate’ FICA contributions if he is reelected is a full-on declaration of war against current and future Social Security beneficiaries.”
The Senior Citizens League notes the payroll tax holiday only applies to people who are working and collecting a paycheck. “Most importantly for seniors, if the taxes were not repaid, it would move the Social Security Trust Fund more quickly toward insolvency,” TSCL said in a statement. “TSCL is strongly opposed to any cut in the payroll tax and we have lobbied aggressively against one,” noting that Social Security beneficiaries could face a 21% benefit cut in 15 years that would eventually increase to 27%, based on the 2020 reports from the Social Security and Medicare Trustees.
“Cutting the payroll tax permanently, which President Trump said he would seek to do if he is re-elected, would bring insolvency even closer and make the whole situation so much worse.”
William J. Arnone, CEO of the National Academy of Social Insurance, said in a statement the memorandum “may set the stage for destabilizing vital pillars of our nation’s long-standing social insurance infrastructure by depriving Social Security and Medicare of funding. It may be used to erode the economic security of millions of Americans, without bringing meaningful relief for unemployed workers or employers.”
He said the Trump Administration and Congress should move forward on the next pandemic response package, but added, “What we don’t need are back-door attempts to dismantle the nation’s social insurance infrastructure under the guise of ‘tax relief.’”
Predictably, Democrats, including presumptive presidential nominee Joe Biden, also chimed in with critiques of the payroll tax holiday.
Biden said the “half-baked” orders “short-change the unemployed and trigger a “new, reckless war on Social Security.”
House Ways and Means Committee Chairman Rep. Richard Neal (D-MA) accused Trump of “brazenly circumventing Congress to institute tax policy that destabilizes Social Security.”
The payroll tax is, of course, Social Security’s primary revenue source.
According to the most recent Social Security Trustees report, the payroll tax provided $944.5 billion in revenue for Social Security in 2019 while it paid out $1,048 billion in benefits.
The keep the program solvent if the payroll tax were eliminated, those revenues would have to be made up with general funds from Congress that would reasonably necessitate cuts in other areas.
Regarding the tax deferral vs. elimination issue, Treasury Secretary Steve Mnuchin said on Fox News Sunday that Trump is “going to go to the American people and tell them that when he’s reelected he will push through legislation to forgive that so, in essence, it will turn into a payroll tax cut,” adding the lost revenue would be offset by an automatic contribution from the general fund to those trusts funds.
“The President in no way wants to harm those trust funds,” Mnuchin said. “So they’d be reimbursed just as they’ve always been in the past when we’ve done these types of things.”
According to Hiltzik, the four-month deferral would cost Social Security approximately $333 billion in real-time income. “Even if the money is ultimately repaid, Social Security will have lost an estimated $9 billion in interest on that revenue, permanently,” Hiltzik said in his column.
Social Security Works President Altman says is Trump is reelected and eliminates the payroll tax, the Social Security trust fund, which currently holds $2.9 trillion in assets, would be completely depleted within four years.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
