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Trump Payroll Tax Action Won’t Work, Could Endanger Social Security and Budget

President Trump’s executive action to allow the deferring of payroll tax payments will provide little or no near-term economic stimulus. Meanwhile, its potentially chaotic new rules will create significant compliance burdens for businesses, and workers may not see larger paychecks — and those who do could face surprise tax bills in a few months.

Moreover, permanently cutting payroll taxes, as Trump says he will later pursue, would endanger Social Security’s financing and sharply increase long-run budget deficits.

In an August 8 presidential memorandum, Trump directed the Treasury Secretary to let employers defer withholding and paying the 6.2 percent employee share of Social Security’s payroll tax from September 1 through December 31, 2020. The deferral would be available to workers earning less than $2,000 a week (or about $104,000 a year). Although the memorandum doesn’t specify the date by which the deferred taxes must be paid, current law lets the Treasury delay tax deadlines by up to a year during certain emergencies. We estimate that this policy would allow for deferring up to about $100 billion in Social Security payroll taxes. Trump promises to seek forgiveness of the deferred taxes, but that would require legislation.

Deferring employee payroll tax payments for a few months will accomplish little for several reasons.

First, logistical challenges will likely create confusion for employers and impede implementation. Employers and payroll providers must await detailed Treasury guidance before they can implement the new policy. Also, payroll systems aren’t equipped to adjust payroll tax withholding mid-year or to vary the rate by weekly income level, and many employers may be unable to make the necessary changes by September 1.

Second, employers may find that temporarily reducing withholding raises too many questions and isn’t worth the effort. Deferral doesn’t relieve employees of the obligation to pay the payroll tax or employers of the requirement to withhold it from paychecks and send the proceeds to Treasury. It simply delays the payment by several months. Employees and employers may prefer to continue paying or collecting payroll taxes in small amounts each pay period rather than in one or more large lump sums next year.

If employers suspended withholding, they would have no way to collect the taxes from workers who were no longer employed when those taxes became due. Employers would still be liable for the taxes, however, which would make them reluctant to defer withholding. For workers who remain employed, employers would have to withhold the tax from paychecks after the deferral period ends — which would prove an unwelcome surprise for many employees. Few employers or employees would be willing to assume that policymakers will later forgive the deferred taxes, as Trump proposes.

“It’s not clear employers broadly will adopt this,” says a spokesman for ADP, a large payroll processing firm. “It’s not clear employees will want to take it even if they qualify.” Similarly, the U.S. Chamber of Commerce has told Treasury, “Not only is the payroll [memorandum] surrounded by uncertainty as to its application and implementation, it creates a substantial tax liability for employees at the end of the deferral period.”

Third, even if reduced withholding raises workers’ take-home pay, it would provide little boost to the economy. Since the deferred payroll taxes would soon come due, employees would tend to save rather than spend them, so they won’t stimulate much additional consumer spending.

Fourth and finally, even if policymakers ultimately forgive the deferred taxes, a payroll tax cut suffers from a fundamental flaw: It doesn’t benefit the people most in need — those without jobs, who don’t owe payroll taxes.

Announcing the deferral and other actions, Trump said, “If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax. . . . I’ll extend it beyond the end of the year and terminate the tax.” Critics assumed that meant that he would terminate the entire payroll tax. Although some Administration officials have said that only the deferred payroll taxes would be forgiven and turned into a tax cut, Trump has since reiterated his call for “ending that tax.”

A four-month payroll tax deferral would have little effect on Social Security’s trust funds, as long as the taxes were promptly repaid or policymakers enacted legislation to replace them with general revenues. But making permanent payroll tax cuts or terminating the tax would pose a serious threat both to Social Security and the budget.

Social Security’s payroll tax raises federal revenues that total about 4.3 percent of gross domestic product, or about a quarter of all federal revenues. Terminating the payroll tax would almost double long-run budget deficits. Moreover, without a dedicated source of funding based on earnings, Social Security would no longer be viewed as an earned benefit and would become more vulnerable to cuts.

Rather than pursue an ineffective payroll tax deferral that would do little more than create confusion for workers and businesses and bypass those who most need the help, policymakers should focus on what’s really needed: bipartisan economic relief legislation that provides strong help for families and the economy.