President Trump's tax holiday begs a key question: Will you have to pay the money back?
Indian Country Today
Fun fact: What’s the biggest tax burden that impacts working people? It’s not the income tax, it’s the payroll tax. This is a 12 percent tax that comes out of every paycheck, half paid by the employer and half paid by the employee.
In fact, as data from the Tax Policy Center shows, 90 percent of all of us, on average, pay more in payroll taxes than we do in income taxes. This one tax accounts for 36 percent of all federal revenue and in theory pays for Social Security, Medicare, and unemployment insurance.
This is where this story, and the policy questions ahead, get complicated. What does deferred mean? The president does not have the authority to waive the tax, just postpone it. So there could be a point in a few months where both companies and individuals are on the hook for that tax all at once. (In Indian Country the average income is $40,000 per year, and that would roughly translate into a payroll tax of a little more than $200 a month.)
“If I’m victorious on November 3rd, I plan to forgive these taxes and make permanent cuts to the payroll tax,” Trump said at a news conference in Bedminster, N.J. on Aug. 8 “I’m going to make them all permanent. I’ll extend beyond the end of the year and terminate the tax … and so we’ll see what happens.”
A presidential memo starts the deferment Sept. 1, but Trump said he’d like the holiday to be retroactive to Aug. 1. People who earn less than $104,000 a year are eligible.
The idea is that companies will add this tax back into people’s paychecks and there will be more money to spend, boosting the economy.
Trump has long been an advocate for using the payroll tax as an economic stimulus — something that even Republicans in Congress have not been keen to do.
There are a variety of problems.
First, a payroll tax cut does nothing for those unemployed, some 16 million people right now.
Second, money from payroll taxes are supposed to fund Social Security and Medicare. This is a demographic bomb because the loss of these funds comes at the moment when the Baby Boom is about to retire. (Some 10,000 boomers turn 65 every day and within a decade all will reach that age.)
And, third, will it even work? A study by Penn Wharton said a payroll tax holiday “would have little net impact on the economy in the short run and would reduce the size of the economy by 0.1 percent in 2030 and 0.2 percent in 2050 due to additional debt.”
The study found: “Households in the bottom 20 percent of the income distribution would receive only about 2 percent of the tax cut.” On top of that, many low-income households have “neither wages nor self-employment earnings and thus pay no payroll taxes under current law.” This would include those on receiving unemployment insurance.
The Center for Budget and Policy Priorities said for these reasons, a "payroll tax cut would constitute poor and inefficient economic stimulus.”
A better approach would be to help state and tribal governments with revenue shortfalls.
The White House has not been clear about what taxes are involved, only directing the Secretary of the Treasury to come up with regulations.
So can people opt out? What’s the accounting? Will tribes and other employers be responsible for collecting from employees should the tax holiday only end up being a temporary loan? How much lead time will there be? Those are mechanical questions, the how, of a payroll tax cut.
But there is a much larger question: What’s the impact on Social Security over the long run?
Howard Gleckman, a senior fellow at the Tax Policy Center of the Urban Institute and the Brookings Institution, says this is Trump the disrupter at work. “Donald Trump has disrupted nearly every major institution of government, save one,” Gleckman wrote. “Trump vowed to leave Social Security untouched. And he has, somewhat uncharacteristically, kept that promise. Until now.”
The problem remains that Social Security is already underfunded. “The Social Security fund is expected to be unable to pay all its obligations by 2035 (probably sooner when the effects of the current economic slump are taken into account),” Gleckman wrote.
Yet Trump is promising to get rid of the payroll tax temporarily now, and permanently in a second term.
“His only new explicit tax promise seems to be to repeal (or at least permanently cut) Social Security—and maybe Medicare—payroll taxes. It’s an odd choice given the enormous popularity of the programs, especially among older voters who are critical to his reelection,” Gleckman said. “Eighty percent of those 65 and older (and three-quarters of all Americans) oppose Social Security benefit cuts—a certain outcome if the program’s funding is eliminated or even reduced.”
Mark Trahant, Shoshone-Bannock, is editor of Indian Country Today. Follow him on Twitter, @TrahantReports,
Indian Country Today is a nonprofit news organization. Will you support our work? All of our content is free. There are no subscriptions or costs. And we have hired more Native journalists in the past year than any news organization ─ and with your help we will continue to grow and create career paths for our people. Support Indian Country Today for as little as $10.