Tax Notes logo

Economic Analysis: Emergency Tax Deferrals to Massively Boost Cash Flow

Posted on Mar. 24, 2020

Senate Republicans have proposed deferral of the employer portion of Social Security taxes and one-half of self-employment tax. That would provide businesses with an estimated $732 billion in extra cash over the next two years.

Using its existing authority, Treasury has issued notice that it will allow deferral of individual and corporate income tax payments, including estimated taxes. That will provide individuals with an estimated $364 billion of cash over the next three months. Corporations will be provided an estimated $112 billion in cash flow over the next three months.

These deferrals of tax are in effect loans to taxpayers. The timing of repayments is strict. But there is no interest on these loans. And unlike other cash-flow-enhancing provisions that are part of the federal government’s emergency response to the coronavirus outbreak, the loans are not targeted to distressed sectors or small business. Nor are any conditions imposed on qualification for the deferrals.

Explanation of the Estimates

Section 2301 of the draft legislation circulated by Senate Republicans on March 22 would provide postponement of payment of the employer portion of payroll taxes. That encompasses the 6.2 percent Social Security tax paid by employers on employee payroll and one-half of the 12.4 percent payroll tax paid by self-employed individuals.

The tax payments would be postponed until the end of 2021, approximately one year and nine months from now and the presumed effective date of these provisions. One-half of the postponed payments would be due in 2022 and the other half in 2023.

Data from Treasury’s Financial Management Service indicate that in calendar year 2019, the total employer portion of Social Security tax and one-half of the corresponding tax paid by self-employed individuals totaled $465 billion. Grossing that figure up to correspond to 21 months yields $814 billion of postponed employer payroll taxes under the proposed legislation. Assuming — and we hope very much to be wrong — that unemployment increases to 10 percent for the entire period (and taxable wages decline accordingly), postponed employer payroll taxes would be $732 billion. If unemployment is less, total postponed taxes will be more.

IRS Notice 2020-18, 2020-15 IRB 1, provides “relief for taxpayers affected by the ongoing coronavirus disease 2019 pandemic.” Specifically, the due date for federal income tax payments due on April 15, 2020, has been automatically postponed until July 15, 2020. There is no limitation on the amount of payments that may be postponed. The relief applies to income taxes paid by individuals and corporations. It appears to apply to estimated payments by individuals and any tax due when filing an annual return. It does not apply to other taxes, such as payroll or excise taxes.

According to Treasury data in 2019, individual tax payments (excluding withholding) for the months of April, May, June, and July were $364 billion. Also, in 2019 corporate tax payments for the months of April, May, June, and July were $11 billion. (See figures 1 and 2.) If these payments are assumed to remain unchanged in 2020, Notice 2020-18 will inject a total of $476 million of short-term liquidity into the economy.

Figure 1. Individual Income Tax Receipts, Calendar Years 2018 and 2019
Figure 2. Corporate Income Tax Receipts, Calendar Years 2018 and 2019
Copy RID