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A Bipartisan Payroll Tax Solution Amid Coronavirus Crisis

Posted on Mar. 17, 2020

As part of President Trump’s declaration of a national emergency amid the COVID-19 outbreak, he directed Treasury to provide tax relief. Return filing deadline extensions are certain, and he has continued to support eliminating payroll taxes.  

Not all Democrats have pushed back against the latter idea, which could be a good thing given that this pandemic will wreak havoc on employers and employees. So far, the Families First Coronavirus Response Act excludes payroll tax cuts, but Democrats said they would consider them as part of future legislation. 

Dispelling Payroll Tax Reduction Concerns

Reducing payroll taxes could improve the country’s economic outlook, so let’s look at what the taxes are. Employers and employees each pay a 1.45 percent Medicare tax on covered wages, for a total of 2.9 percent. They also each pay a 6.2 percent Social Security tax, for a total of 12.4 percent. Those taxes total about 15.3 percent, which is what self-employed workers pay. Individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes. The bulk of payroll taxes go toward Social Security, which is phased out for earnings this year in excess of $137,700 (the cap).

Some politicians and economists have hesitated on whether to back slashed payroll taxes because of concerns over an increased national deficit. Others have had misgivings about administrability, especially for employees with multiple employers. Still others have worried that these policies could benefit mostly large corporations and the wealthy.

The thing to remember is that the government should add to the national debt if doing so would combat this unprecedented global economic crisis. Moreover, administrability could be addressed via individual tax returns. Returns are meant to compile information about a taxpayer’s relevant income from whatever source and could easily reconcile excess tax reductions for those with multiple employers and even the $1,000 immediate payments now being considered by the administration. Further, the third option below reduces payroll taxes only for the portion collected for Social Security and is limited to $68,850 of wages, half the current $137,700 cap suggested in the second option.   

Three Payroll Tax Break Options

Republicans and Democrats should be able to agree on one of the following three options to change the tax laws for collecting Social Security and Medicare payroll taxes. Although minor modifications could be made, these options focus on the big picture. 

If you’re worried about the ability of individuals to pay for the excess costs stemming from childcare and quarantine costs, for example, as well as employers' ability to remain afloat during the uncertain times ahead, option 1 would offer considerable relief. While options 2 and 3 target individuals and lower-income earners, respectively, many believe that the taxpayers who employ Americans need the most help to prevent layoffs during the tough times ahead, and option 1 is for them.

Payroll Tax Break Option 1

 

Employer

Employee

Totala

Notes

Social Security

6.2% / 0%

6.2% / 0%

12.4% / 0%

Capped at $137,700

Medicareb

1.45%

1.45%

2.9%

No Limitc

 

 

 

15.3% / 2.9%

 

aAlso generally applicable to self-employed.

bNo change — includes keeping the 0.9% for higher-income earners.

cHigher-income earners continue to be taxed.

Yes, it’s that simple. Those reductions would grant employers an essential boost and help over 177 million U.S. wage earners who pay Social Security taxes.

If the potential loss of tax revenue from both employers and employees is too daunting for Congress to contemplate, lawmakers should focus on relief for low- and middle-income employees.

Payroll Tax Break Option 2

 

Employer

Employee

Totala

Notes

Social Security

6.2%

6.2% / 0%

12.4% / 6.2%

Capped at $137,700

Medicareb

1.45%

1.45%

2.9%

No Limitc

 

 

 

15.3% / 9.1%

 

aAlso generally applicable to self-employed.

bNo change - includes keeping the 0.9% for higher-income earners.

cHigher-income earners continue to be taxed.

Option 3 would minimize concerns raised by those at the Urban-Brookings Tax Policy Center, which are generally the same as those that were raised regarding the 2011 payroll tax holiday. Then, workers received a tax break that was equal to 2 percent of earnings up to the Social Security cap in 2011, or $106,800. That smaller tax break was based on the economic concerns relating to the eurozone, but this stimulus would be aimed at warding off global economic catastrophe. This option would target only lower-income families.

Payroll Tax Break Option 3

 

Employer

Employee

Totala

Notes

Social Security

6.2%

6.2% / 0% up to $68,850 (1/2 of Cap)

12.4% / 0% up to $68,850

6.2% beyondd

Capped at $137,700

Medicareb

1.45%

1.45

2.9%

No Limitc

 

 

 

15.3% / 12.2%

 

aAlso generally applicable to self-employed.

bNo change - includes keeping the 0.9% for higher-income earners.

cHigher-income earners continue to be taxed and not all payroll taxes are eliminated for covered wages.

d3.1% assumed.

Conclusion

Social Security funding is by no means limited to payroll taxes. While these proposals would reduce taxes collected from one source, they could be offset by decreased accelerated depreciation for assets, such as those acquired from overseas. Even now it’s expected that taxes collected from other sources will be used to fund Social Security and Medicare, and that would be even more likely if Democratic proposals are adopted.

Tax reductions are a powerful fiscal tool, and payroll tax reductions could have a nearly instantaneous effect on businesses and wage earners at appropriate income levels through the Social Security cap of $137,700. The country’s need for immediate help requires bipartisan attention and action. It would be irresponsible for any member of Congress to disregard the options with the most immediate impact. 

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