Trump’s ridiculous payroll tax gambit
President Trump has apparently decided on a desperate campaign gambit: delaying the collection of payroll taxes. In an executive order signed this past weekend, he instructed the Treasury Department to halt collection of the Social Security payroll taxes for employees making less than roughly $104,000 through the end of the year. He further promised that if he is re-elected, he will push Congress to make the deferral permanent.
This is a completely goofy idea — a classic Trumpy mixture of impulsiveness and incompetence that might blow up in our faces down the road.
First, some details. Social Security is a welfare program mainly for retired and disabled people funded by a 12.4 percent payroll tax on workers' first $137,700 in annual income. In accounting terms, half of this is paid by employees, usually automatically withheld from paychecks each pay period, and the other half by employers (though in reality all of it is labor compensation in the eyes of employers and hence ultimately comes out of workers' paychecks). Trump wants to defer the employee side of this from September 1 through the end of the year.
The first problem here is that people with jobs are far down the list of Americans who need help right now. There are tens of millions of people unemployed — who recently suffered a gigantic cut to their benefits thanks to Republican refusal to extend super-unemployment — and about four job-seekers for every job opening. Meanwhile, hundreds of business are going bankrupt every week because the pandemic is still raging across the country and people still aren't going out to bars, restaurants, and so forth. State and local governments are slashing jobs by the hundreds of thousands due to collapsing tax revenue.
A payroll tax cut, by contrast, would put more money into the pockets of people who are still getting paid. It might help a little at the margin by increasing their spending and thus supporting jobs, but given how the savings rate has jumped to record levels during the pandemic, probably most of the extra cash would not go anywhere except into bank accounts.
However, workers might not actually get that money. Trump cannot actually change tax laws — he can defer collection of tax under his emergency powers, but he can't remove the legal obligation for the tax. Workers may well end up being slapped with a bill for four months of back tax in April, further decreasing the likelihood that the money will be spent. And as Richard Rubin writes at the Wall Street Journal, many employers are leery that they'll end up on the hook for four months of payroll tax withholdings at the beginning of next year, and so might still sock the money away instead of giving it to workers. It would also be a gigantic pain in the neck to implement, requiring a major re-programming of the systems that currently automatically deduct the employee-side tax from workers' paychecks. Depending on the rules, "many employers might not even bother if they have a choice," Rubin writes.
Finally, this move could pose a threat to Social Security. The various benefits of this program are funded by the payroll tax and the Social Security trust fund, which currently has about $2.9 trillion in it. With tax funding cut by nearly half, the trust fund will be exhausted much more quickly, which may require a huge cut in benefits under current law — especially if Trump does get the tax cut made permanent, though that seems quite unlikely.
Now, in principle there is no reason why Social Security benefits couldn't be paid through borrowing for the indefinite future. Treasury Secretary Steven Mnuchin argues that's what would happen if the trust fund were exhausted — the difference would simply be made up through general revenue funds. But other legal experts disagree, and austerians fixated on slashing the welfare state would surely sue to try to starve as many grandmas and disabled folks as possible. Additionally, as a general matter, we should want to preserve a high level of tax. Some people incorrectly take the conclusions of Modern Monetary Theory to mean that taxes are never needed to fund (or compensate for) government programs, but in reality infinite borrowing is only possible during times of recession, which should be avoided whenever possible. America badly needs an increase in Social Security and many other welfare benefits besides; we cannot have them without a social democracy-sized tax level.
It's unclear just why Trump fixated on this idea. Perhaps it is just the latest thing to get stuck in his brain and repeated 10 million times, as happens from time to time. Perhaps the supply-side cranks still remaining in his administration have been pushing it as both a tax cut and a backdoor way to force through unpopular Social Security cuts. Perhaps it is a tendentious campaign gimmick trying to portray Joe Biden as being in favor of tax increases on the middle class.
Whatever the reason, it's ineffective at best policy that carries a large risk of major side effects. That's what you tend to get with a with a game show know-nothing as president.