President Trump wants to give a $100 billion boost to the U.S. economy by hitting the “pause” button on workers’ payroll taxes.
That would leave more money in people’s paychecks. But the move — which Trump ordered over the weekend — is only temporary. And that could produce headaches down the road for workers, employers and the Social Security system.
Trump announced the payroll tax suspension on Saturday as part of a series of moves designed to sidestep Congress after talks on a more comprehensive bill to provide coronavirus relief broke down. He directed the Treasury Department to stop collecting the 6.2% payroll tax from workers making up to $104,000 a year. The move is supposed to take effect next month.
“This will mean bigger paychecks for working families as we race to produce a vaccine,” Trump told reporters assembled at his golf club in Bedminster, N.J.
Critics say this particular relief measure is misguided since it benefits only people who are lucky enough to have a job still. What’s more, because the tax relief is only temporary, workers are expected to repay the taxes next year.
“What good does that do people if they just get a temporary payroll tax cut and have to put that somewhere to save it to repay the money in a balloon payment a couple of months from now?” asked Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “That’s really done very little to improve the economy.”
Trump insists his goal, if he’s reelected, is to cut the payroll tax for good.
“If I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax,” Trump said. “I’m going to make them all permanent.”
But while the president can delay the collection of taxes, only Congress can eliminate them altogether. There’s no guarantee lawmakers would do so. And if they did, that would be a severe blow to Social Security, which the delayed payroll taxes pay for.
“Social Security is already facing immense pressures in terms of the finances,” MacGuineas said. “Getting rid of the revenue source that funds the program would make the finances of it much, much worse.”
White House economic adviser Larry Kudlow argued that the administration would simply borrow money if necessary to make up for any shortfall in Social Security.
Still, the payroll tax suspension seemed to have little support outside the White House and a small circle of presidential advisers. It never gained much traction in Congress. And the U.S. Chamber of Commerce made clear it’s not something its members were asking for.
“The people who love the payroll tax cut are the American people,” said conservative pundit Stephen Moore — an adviser to Trump’s campaign who was briefly floated as a nominee for the Federal Reserve.
Moore, who co-founded the anti-tax Club for Growth, has been one of the most dogged advocates for payroll tax relief.
“Virtually all Americans who are working are going to see a nice boost in their paychecks,” he said of the deferred tax collection. “That puts money in the economy and incentivizes people to work. I think that’s a very positive effect.”
Employers are supposed to stop withholding the payroll tax on Sept. 1, but for many it won’t be that easy. Companies need guidance from the IRS on exactly who is eligible to have their taxes suspended and how to keep track so those taxes can eventually be repaid.
“It’s going to be a mixed bag of employers,” said Pete Isberg, vice president of government relations for ADP, which handles payroll for hundreds of thousands of employers. He said while some companies will be able to adjust their computers quickly to stop withholding payroll taxes, “some will be able to do it in October or November. And some may just never do it.”
Isberg said companies also want some reassurance that they won’t be on the hook for their workers’ taxes, if Congress doesn’t forgive the bill. They’ll also have to try to explain to employees why take-home pay is or is not going up in September, and how that could be reversed early next year.