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Payroll Tax Holiday Is a Terrible Idea

Payroll Tax Holiday Is a Terrible Idea
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By Tuesday, 17 March 2020 01:35 PM Current | Bio | Archive

A proposal has been floated to suspend the federal payroll tax for six months to a year as a means of countering a coronavirus-induced recession. This proposal is reckless and ill-advised, and should not be adopted.

Since my 16th birthday I have worked. For the last 48 years, every pay period the United States government has taken payroll taxes from my wages, and a matching amount of payroll taxes from my employer.

For 20 those years I have been my own employer, paying both ends of federal payroll taxes on my wages. For 2020, the Social Security withholding tax rate is 6.2 percent of taxable wags, and the employer matching rate is 6.2 percent, for a combined Social Security tax rate of 12.4 percent of the taxable wage base. For 2020, the Social Security wage base is the first $137,700 in taxable wages. Congress increases the Social Security wage base annually.

In exchange for these taxes, the United States government promises to pay an Old Age and Survivors Income (“OASI”) benefit to Americans or their survivors. The United States government also is obligated to pay Social Security disability income (“DI”) benefits to disabled Americans. To meet its obligations under the two programs, the U.S. government funds and OASI trust fund and a DI trust fund.

Most Americans depend on OASI benefits for financial support in their retirement years. The U.S. government’s obligation to pay Social Security retirement benefits is a solemn promise which the U.S. government should make sure it honors. The U.S. government’s word must be its bond, especially its promises to pay Social Security retirement benefits.

The U.S. government funds an OASI trust fund to meet its obligation to pay Social Security retirement benefits, and a DI trust fund to meet its obligation to pay Social Security disability income. The two trust funds are funded by Social Security payroll taxes. The two trust funds are invested in interest-bearing U.S. government securities.

The OASDI Board of Trustees in their 2019 annual report to Congress projected that, based upon current funding and expense levels, the Social Security retirement trust fund will be exhausted in 2034, and the Social Security disability trust find will be exhausted by 2052.

The Board of Trustees observed that program costs, the payment of benefits, are projected to increase faster than program revenues through 2040 “primarily because the retirement of the baby-boom generation will increase the number of beneficiaries much faster than the number of covered [payroll tax-generating] workers increases, as subsequent lower-birth-rate generations replace the baby-boom generation at working ages.”

Population demographics are not the only reason for the actuarial deficit in the OASI and DI trust funds. Over the years the Congress and the President have dipped into the OASI and DI trust funds as needed for non-Social Security political, fiscal exigencies.

The Board of Trustees estimated that maintaining the financial solvency of the OASI and the DI trust funds throughout the 75-year period ending in 2093 would require: (1) immediately and permanently increasing payroll taxes funding the two programs by 2.70 percentage points, from the current 12.4 percent of taxable wages to 15.1 percent of taxable wages; (2) immediately and permanently reducing scheduled benefits under the two programs by about 17 percent, applied to all current and future beneficiaries, or by about 20 percent if the reduction were limited to those who become initially eligible for benefits in 2019 or later; or (3) any combination of (1) and (2).

If substantial action is deferred until the OASI and DI programs are exhausted in 2035, maintaining the programs’ solvency through 2093 would require for several years, maintaining the solvency of the Social Security programs for the 75-year period ending in 2093 would require (1) permanently increasing payroll taxes funding the two programs by 3.65 percentage points, from the current 12.4 percent of taxable wages to 16.05 percent of taxable wages; (2) permanently reducing scheduled benefits under the two programs by 23 percent, starting in 2035; or (3) some combination of (1) and (2).

In the Tax Cuts and Jobs Act of 2017, Congress raised the Social Security normal retirement age from 65 to 66 and four months. From the time I worked as a busboy at age 16, I have kept my end of the Social Security bargain, dutifully paying payroll taxes into the Social Security trust fund. Now, as I am approaching the Social Security normal retirement age, Congress is moving the goal line. Projected sharp reductions in scheduled Social Security benefits are not fair to me or other beneficiaries who will suffer them. Increases in Social Security tax rates are not fair to the future generations who will have to bear them.

The Social Security retirement trust fund should have been held inviolate to meet the government’s solemn obligation to pay Social Security retirement benefits. In failing to assure the long-term solvency of the Social Security trust fund, Congress is failing to honor its bargain with the American people.

Now, as the COVID-19 slows and threatens our economy, a proposal has been floated for holiday from Federal payroll taxes for six months to a year. The idea is to get more disposable income to people, and avert a recession. This is a terrible idea. It will further undermine the solvency of a Social Security trust fund that is already actuarily deficient, and doubtful of meeting scheduled benefit obligations. It is the kind of short-term, reckless thinking that is responsible the Social Security trust fund’s present, perilous condition.

For the above reasons, many members of Congress have expressed resistance to a payroll tax holiday. The president should heed the counsel of these members. We need to assure the Social Security trust fund’s ability to pay scheduled retirement benefits, not further destabilize it by cutting off its tax revenues for six months or a year.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.

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StephenJDunn
A proposal has been floated to suspend the federal payroll tax for six months to a year as a means of countering a coronavirus-induced recession. This proposal is reckless and ill-advised, and should not be adopted.
payroll, tax, holiday, terrible, idea
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Tuesday, 17 March 2020 01:35 PM
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