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Is a payroll-tax suspension the way to alleviate economic uncertainty?
President Donald Trump thinks it could be part of the solution as the stock market lurches amid concerns that the spread of COVID-19, the disease caused by the novel coronavirus, is hurting both businesses and consumer spending. On Tuesday, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.58% recouped more than 1,100 points after shedding 2,000 points a day earlier.
Trump pledged “very substantial relief” for payroll taxes on Monday, speaking after the biggest one-day stock market selloff since 2008. However, Democratic lawmakers and even some Republicans have balked at the idea. A payroll tax cut, they say, wouldn’t help the unemployed and offers slim relief for workers. Would suspending the payroll tax work?
Trump previously considered reducing payroll taxes in August in order to head off an economic slowdown, but eventually turned away from the idea. However, the coronavirus outbreak and fears of a looming oil-price war between OPEC and Russia appears to have put the item back on his agenda. As lawmakers debate options for a financial plan, here are key questions to consider:
What are payroll taxes?
The money taken in payroll taxes go to three things: Social Security, Medicare and unemployment insurance. Every pay period, salaried workers pay 6.2% of their gross annual income up to $137,700 for Social Security. Their employer also pays a 6.2% tax. Overall, employers and employees pay a 12.4% combined Social Security tax.
Workers pay 1.45% for Medicare taxes and employers pay 1.45%. Combined, they pay 2.9% in Medicare taxes. Workers making $200,000 a year and above (or married couples making $250,000) pay an additional 0.9% in Medicare taxes. Employers also pay 6% on the first $7,000 of a worker’s wages; they may also have to pay state unemployment taxes, depending on the state.
Payroll taxes produced $914 billion in tax revenue for Social Security during fiscal year 2019, according to the Congressional Budget Office. The taxes also generated $278 billion for Medicare and $41 billion for unemployment insurance, the office said.
Payroll taxes produced $914 billion in tax revenue for Social Security in 2019. They generated $278 billion for Medicare and $41 billion for unemployment insurance.
Payroll taxes are separate from income taxes. Americans paid $64 billion less in income taxes during the first year of the Trump tax cuts, Internal Revenue Service figures show. The tax-code overhaul did not change rules on payroll taxes.
The Trump administration is considering whether to push back the April 15 income tax filing deadline as the coronavirus outbreak continues, according to the Wall Street Journal. The decision isn’t final and Treasury Department officials are still determining the date of any new deadline, the newspaper said.
How much more money could I get?
Researchers at the University of Pennsylvania’s Wharton School of Business calculated what it would mean if workers paid 4.2% in Social Security taxes instead of 6.2% for just one year.
A household making up to $133,330 a year would pay $2,435 less with a 2% payroll tax reduction, a Wharton School of Business study concluded.
A worker making up to $14,160 a year would pay $165 less in tax, the researchers concluded . A worker in the top 0.1% of earners, making $3.2 million a year, would pay $3,165 less in tax. In the middle, a household earning up to $133,330 a year would pay $2,435 less in tax, they added.
The federal government would forego between $141 billion and $151 billion on the one-year tax holiday, while gross domestic product would climb 0.3%, but the boost would be short-lived before gross domestic product edged down by 0.04% in 2050, according to the study’s estimates.
Another estimate from the Urban-Brookings Tax Policy Center said 121 million workers would benefit from a 2% cut in payroll tax, providing an average annual sum of $1,043. But wealthier families would see the biggest gains, the analysis said.
Who would benefit from a payroll-tax cut?
Payroll taxes take a cut out of wages, so any cut would apply to payrolls. As of February, there were 152.5 million workers on payrolls, according to the Bureau of Labor Statistics. These workers could see a bump in their paychecks, said Nathan Rigney, lead tax analyst at the tax-preparation company H&R Block /zigman2/quotes/207406664/composite HRB +1.33% . Workers on paid leave would see a paycheck increase, but not those on unpaid leave, he said.
Gig workers — 9.5 million people who take on temporary assignments — could get some tax relief, but it could take a while, Rigney noted. They are essentially paying both the employee and employer sides because they’re their own boss, he added. These workers often don’t pay off their estimated payroll taxes until tax season, he said. “If gig workers are really diligent and calculate their taxes on a monthly basis, they could notice the benefits, but many don’t.”
Would such a move work now?
The idea has supporters, like Rep. Jim Jordan, a Republican from Ohio.
But others say it’s much better to start cutting checks. “A one-year payroll tax cut of 2% of income would provide up to a $5,508 tax cut to a high-income couple, only $500 to a single parent getting by on $25,000 a year, and nothing for a worker placed on leave without pay,” Jason Furman, chairman of the White House Council of Economic Advisors during the Obama administration, wrote on Twitter /zigman2/quotes/203180645/composite TWTR +0.23% .
/zigman2/quotes/203180645/composite TWTR +0.23% /zigman2/quotes/203180645/composite TWTR +0.23% In 2011-12, the Obama administration cut the payroll tax to 4.2% from 6.2%. “I was a key part of the negotiation that resulted in the payroll tax cut in 2011 and 2012. I continue to think it was the best we could do at the time given the political constraints. But it was far from optimal then and would be even further from optimal now,” Furman added.
“Also, it is not accelerated enough — it just drips out with each paycheck so it is spread out over time,” he said. “Right now time is of the essence. I would much rather get people money sooner. Maybe they save it. Maybe they have flexibility to miss some work. Maybe they spend it.”
Trump hopes that payroll-tax cuts will put more money in the hands of consumers who will — in theory — spend it. However, Furman believes that suspending or cutting the payroll tax would simply put more money in the pockets of the rich.
‘While a payroll-tax cut for employees likely doesn’t make sense, a payroll-tax cut for employers could.’
Nicole Kaeding, vice president at the National Taxpayers Union Foundation
Others agree with Furman. “The idea behind a payroll-tax cut is that individuals are not buying goods and services because of a financial constraint. That’s not quite what’s going to happen here,” said Nicole Kaeding, vice president of the National Taxpayers Union Foundation. “Individuals might buy less goods and services — not because of financial constraints, but because they’ve been told to go home.”
As COVID-19 spreads, it would be more effective to focus on helping businesses, especially small businesses, Kaeding said. “While a payroll-tax cut for employees likely doesn’t make sense, a payroll-tax cut for employers could,” she said. “It could provide needed short-term liquidity by lowering their tax liability. It also reduces their incentive to lay off workers.”
Trump’s proposal may never get off the ground. Treasury Secretary Steven Mnuchin, who is heading up the government’s economic response to the coronavirus outbreak, held a meeting Tuesday with House Speaker Nancy Pelosi (D-Calif.) to kick-start discussions on a financial plan. “There’s a lot of interest on a bipartisan basis to get something done quickly,” Mnuchin said, according to The Wall Street Journal . A payroll-tax cut, the paper added, was not one of the preferred options.