The arguments made in these articles covered many issues that can be grouped into four categories: that payroll-tax cuts stimulate the economy; their inability to stimulate the economy, often because of complaints that the form of particular payroll-tax cuts is too complicated; the unconstitutionality of President Trump’s order; the inability of a payroll-tax cut to provide financial assistance to the unemployed; and the potential threat of such a change for the Social Security system itself. One issue that was raised only a few times but deserves special attention is the tax cut’s future political consequences.
Exploring the depiction of the proposed payroll-tax cuts during the pandemic is one way of examining how the American populace understood these legislative and executive proposals. The focus on key arguments that were repeated underscores the likelihood that the public saw this issue through particular soundbites. In other words, these newspapers did not develop complex understandings of payroll taxation and the implications of any particular proposal; instead, the authors chose particular arguments on which to focus that painted the proposals in their favored light. Understanding these depictions is helpful to anyone who might propose a payroll-tax cut in the future and to those who want to understand how ideas about taxation are framed for the American public.
A. Stimulate the Economy
The primary argument for payroll-tax cuts during the COVID-19 pandemic was the expectation that doing so would stimulate the economy. Economic stimulus was expected to result because of increased demand from workers who would have greater take-home pay from existing employers who could retain employees at a lower tax cost or because of new employment opportunities from employers who could now afford to hire employees for the same reason. However, none of the articles that focused on the payroll-tax cut argued in these terms. For example, discussion of the sick leave and retention tax credits that impacted payroll did not examine the tax component. In fact, none of the articles discussed in depth Congress’s employer-side payroll-tax cut.
Aside from a limited discussion of what drives economic growth, only one article in the New York Times could be said to argue that payroll-tax cuts could stimulate the economy, and even that article did so only indirectly by pointing out (in an article that mentions the payroll-tax cut proposal) that economic growth depends on consumer spending. Seven articles in the Wall Street Journal argued for the economic benefits of payroll-tax cuts, although three were authored by President Trump’s advisor Stephen Moore and one by President Trump’s advisor Arthur Laffer.
This limited discussion of a payroll-tax cut’s ability to stimulate the economy remained superficial. Stephen Moore wrote: “Mr. Trump’s instincts are right: He rebuilt the economy with deregulation and tax cuts. That’s the way to do it again.” For some authors, any tax cut stimulates the economy—one even claimed that tax cuts led to the development of the iPhone and Uber. However, although the fact that tax reduction results in recipients’ greater liquidity goes without saying, the relevant question is what people do with the liquidity and whether it leads to increased economic growth.
In the few articles that discussed the issue of economic growth, some focused on how payroll-tax cuts may stimulate the economy more than other forms of stimulus. Thus, this tax cut had a comparative advantage over other forms of stimulus, namely direct spending. For example, cutting the payroll tax was a way to reduce the cost of hiring workers so more people would be working. This argument could be juxtaposed with the view that the availability of increased unemployment benefits would disincentivize work.
However, reductions of employees’ payroll taxes would not affect their employers’ costs but would, instead, increase the disposable income of workers. For such workers the choice was whether to spend the money, save it, or pay off prior borrowing. Consequently, the desire to stimulate the economy through increased consumer spending may make payroll-tax cuts particularly attractive if the assumption is correct that workers with incomes below the Social Security threshold ($137,700 in 2020) are more likely to spend any increase in income. However, when the Obama administration argued that low-income tax cuts would result in more spending because low-income taxpayers are more liquidity constrained, at least one survey found that wealthier respondents tend to spend a greater share of their savings because lower income groups used the tax cuts to pay down debt.
The economic answer is imperfect. Although life-cycle theories would say people should increase their spending by the tax cut’s annuitized value, there may be no spending response to the extent taxpayers anticipate higher future taxes to offset the current tax cut. According to some experts, people can be put into four groups. “Life-cycle spenders” mostly increase savings or pay down debts and then reduce savings when taxes increase. “Constrained households” spend the tax cut and then reduce spending when it ends. “Spender households” increase spending in response to tax cuts but maintain the spending once taxes increase by reducing savings or debt repayments. “Balance-sheet households” save or pay off debt with the incentive and, when taxes increase, reduce their consumption to maintain their balance sheets. According to surveys, one-third of the persons affected by the Great Recession tax cuts fell into the last group.
Thus, a basic difficulty for policymakers is to predict what people will actually do with the extra money generated by tax cuts. Because of the ways in which people respond to tax cuts, policymakers generally expect that small reductions in tax liability relative to income will be treated as current income and spent, whereas larger reductions in tax liability will be treated as increased wealth and less likely to be currently spent. The little empirical evidence from the 2011 tax cuts showed there was greater stimulus effect from giving people small amounts of income rather than a lump sum. People were more likely to save larger checks and, possibly as a result of liquidity constraints, biases, or bad mental math, to spend smaller receipts of money. One survey found that workers intended to spend 12% of their pay-period income boost but ended up spending 35%.
Whether that 35% who spent their tax cut is a large percentage or not depends on one’s perspective. Because Congress provided significant amounts of payroll-tax benefits—approximately $112 billion was given to workers in 2011—even 35% of that figure amounted $39.2 billion of stimulus spending. However, if Congress intended that people would spend all of the tax benefits provided, 35% may be disappointing. Despite the economics, this depth of analysis was not reported in the New York Times. The only article that discussed the economics claimed the opposite: that small, gradual cuts “were less effective at stimulating the economy than larger lump-sum payments.”
Concern that recipients of tax benefits would save rather than spend any increased income was especially reasonable during COVID-19, as personal savings rates significantly increased in April 2020, at almost 34%, and remained higher than in the last 35 years through the remainder of 2020. Thus, people saved significant amounts of the stimulus spending. In part because of unemployment insurance benefits and federal transfers to households, disposable personal income from April through the end of 2020 exceeded the pre-pandemic January through March amounts despite significant job losses.
Some articles also discounted the growth argument by pointing out that other forms of stimulus would work better, putting payroll-tax cuts on the losing side of comparative studies of stimulus. One article acknowledged the payroll-tax cuts would give workers more spending money but “there are more efficient ways to accomplish the same goals . . . .” Hinting at the possibly personal motivations that motivated some tax cut supporters, the author pointed out that President Trump owned hotels and golf courses that hire workers, implying self-interest in the advocacy.
In addition to the focus on consumers, some proponents of payroll-tax cuts argued that the tax cut would permit employers to hire employees and ride out the recession. During the Great Recession, the Congressional Budget Office took the position that one of the most effective means to promote economic growth and increase employment would be to reduce the marginal cost of adding employees, second only to increasing aid directly to consumers. The findings were that benefits were increased by reducing the employers’ taxes more than reducing the employees’ portion because of the benefits of greater business liquidity. The Hamilton Project argued that increased business liquidity, especially for small businesses, would help reduce business failures, facilitating a faster and deeper recovery.
What the proponents did not say is also important. They did not urge any limit on how the credit would be applied; one liked the fact that a payroll tax would not pick winners and losers in the economy. Therefore, proponents were not seeking a return to the 1977 legislation in which Congress developed a complex rubric to link tax reduction to an increase in payroll. Additionally, several did not say the proposal was good in its own right but that it might prevent Congress from doing something worse.
B. Not Stimulate the Economy
With the majority of articles taking a negative position on payroll-tax cuts, a significant number unsurprisingly took the position that the tax cuts would not stimulate the economy. In the New York Times, 24 articles argued payroll-tax cuts would not stimulate the economy, with an additional one focusing on the limited power of such cuts because of the complexity of the proposals. In the Wall Street Journal, eight articles took the position that payroll-tax cuts would not stimulate the economy, which is one more than argued for its stimulating effect, with an additional four complaining of the proposals’ complexity. Some arguments were practical and others rhetorical. For example, one author noted that reducing payroll taxes would increase income subject to the income tax, with a possible increase in taxes overall. Another claimed that “a payroll tax cut is the hydroxychloroquine of economic policy. It’s a quack remedy that somehow caught Trump’s eye . . . .”
Many of these articles argued that employers simply would not respond to the tax cut or that those that would respond were not the ones suffering most from the pandemic. In addition, the government might lose revenue without increasing employment if employers did not respond with employee retention or hiring. Moreover, any attempt to focus on new hiring would likely target the greatest tax aid to industries and individuals with the least need, possibly leading to greater savings of any tax benefits. One letter to the editor expressed approval of payroll-tax cuts in normal times but noted that “these are far from normal conditions.” One author noted that, in order to increase employment, demand for output must increase because capital stock is relatively fixed in the short run. According to this argument, incremental tax cuts do not, by themselves, generate an increase in demand.
Many tax specialists shared this view. Even the generally pro-business Tax Foundation admitted that deferral “may not be the most effective tool for responding to a growing economic downturn.” When the economy is weakest, employers have little ability to use new hires in the short-term. Moreover, if Congress did choose to focus on hiring as it did in 1977 and the Great Recession, laying off people in response to dire economic circumstances makes it less likely that businesses can meet any growth requirement Congress might add.
These arguments often focused on the temporary nature of the proposed cuts, which was thought unlikely to alter the long-run substitution of labor for capital. Thus, much of the defeatist talk regarding the economic impact of payroll-tax cuts focused on its temporary status. This was particularly true of President Trump’s deferral of employee-side Social Security taxes, which was once described as a “zero-interest loan” rather than a tax cut. People worried about the implications for 2021 when they would have a “surprise tax bill.” In a world of uncertainty, deferral is not for the risk averse because of the fear of taking on a future tax burden. People can understand and plan for tax cuts; deferrals have much less value.
A similar concern was that this form of stimulus would be too slow to address the pressing pandemic need. Noting that the country was experiencing its worst economic quarter in nearly 75 years, even Secretary Mnuchin said “time is of the essence.” Instead of the slow-acting payroll-tax cuts, many advocated for “showering individuals and businesses with significant financial support,” preferring direct aid to tax preferences. Ignoring the Obama administration’s tax holiday, a New York Times editorial called it “a proposal so patently misguided that it forced Senate Republicans into the rare position of opposing a tax cut.”
Many others complained about the payroll-tax cut’s complexity, especially with President Trump’s deferral suggestion. Complaints harkened back to those made in 1977. The 1977 income tax credit was viewed as a “largely ineffective subsidy,” in part because of its complexity by tying the credit to additional employment. Some data showed the businesses that knew of the program increased employment three percent faster than businesses that did not know about it, albeit acknowledging the scholars may have “overstate[d] the program’s employment effect.” Others were less sanguine. Emil Sunley, the Deputy Assistant Secretary for Tax Policy at the time, wrote: “The impact of the credit on jobs was slight. In many firms those who make hiring decisions did not understand the firm’s tax status. In addition, some time passes between the employment decision and the determination of eligibility for the credit.”
President Trump’s deferral suggestion was similarly complex, largely because of its status as a short-term deferral and its timing, being announced just four days before it was to take effect. Unlike the situation in 1977, businesses were often vocal in their opposition because the complexity was particularly stark for them, as they faced “a series of costs, uncertainties and headaches.” Employers faced “difficult legal and logistical questions about how to respond to the president’s payroll-tax holiday order” given the fact that programming their HR computers normally takes six months, long after the holiday was to end. The fact that large business groups opposed the deferral and indicated that they would delay any adoption of the measure also made it a difficult sell. Because needed guidance was not immediately available, a “broad business backlash” developed to President Trump’s order, with the U.S. Chamber of Commerce and 30 industry groups expressing opposition. That opposition was not necessarily tied to the idea of payroll-tax cuts but rather was based on the execution as it unfolded.
Much of this concern was practical. For example, if the taxes could not be withheld, how was the tax to be remitted to the government when due and how would terminated employees pay the tax on their own when due? Although the Service eventually clarified that employers had discretion whether to defer withholding, in the beginning employers had significant uncertainty over its application. This concern was shared by tax experts. For example, Carlton Smith worried that some states, like Texas, require employers to pay employees the wages they are due on a regular basis. Otherwise, employees can file a complaint. Therefore, employers who are not required to withhold but do so out of an abundance of caution, either for liability concerns or to shield employees from 2021 withholding-tax increases, risk state-law exposure. This kind of practical concern regarding deferral seemed to gain the most attention with the press.
The overall doubts as to whether a payroll-tax cut would stimulate the economy provided an opportunity for political attacks on the president, consistent with trying to drive a wedge between him and his party. Deriding the “grandiose notion of a payroll tax holiday” when President Trump called for a complete suspension of payroll taxes that would cost more than $800 billion, many articles pointed out that the notion “has been panned even by conservative economists.” President Trump’s attempt to circumvent Congress “resulted in confusion and uncertainty . . . ,” part of a “patchwork of moves.” The focus on divisions between the president and his party were rife through these discussions as congressional Republican leaders refused to put President Trump’s proposal in their legislation.
Politics also made the concept of payroll-tax cuts less popular for Democrats in 2020. “While payroll tax cuts are popular with many Democrats because they tend to benefit middle-class workers, such a move is unlikely to be taken up in an election year by the Democrat-led House.” That the pandemic and resulting economic slump came during a presidential campaign year meant that politicians could use the economic consequences as part of their campaigns.
C. Concern for the Unemployed
Associated with concerns that payroll-tax cuts would not stimulate the economy was the complaint that payroll-tax cuts would not help those in greatest need. A payroll-tax cut, by definition, only helps those who are employed. In the New York Times, 18 articles focused (at least in part) on concerns for the unemployed and how this group would not benefit from payroll-tax cuts. In the Wall Street Journal, nine articles focused on concerns of the unemployed. During COVID-19, some preferred the alternative of direct spending for fear that the payroll-tax cut did little for the unemployed.
Most of the articles that raised this issue expressed a needs-based perspective. In other words, the most persuasive argument was that this aid would not reach those in need. By their nature, payroll-tax holidays do not help those who are hurt the most (the unemployed) and those who are most likely to spend the money, which has race, gender, and class implications. By August 2020, with a national unemployment rate still at 8.4% (although down from a peak of 14.7% in April), 13.6 million people were unemployed. As discussed earlier, some groups, namely women, non-white workers, lower wage earners, and those with less education, bore the brunt of this economic contraction. Thus, the need to spread stimulus broadly was an important issue for many.
This focus on those suffering most from the economic downturn was not new. For example, the Tax Policy Center noted that the 2009 Making Work Pay Credit did a better job than the 2010 payroll-tax holiday in providing tax relief to lower income Americans. The concern was not only that the economy be revived but also that those who suffered especially severe setbacks receive aid.
Therefore, for those motivated to help the newly unemployed, President Trump’s apparent focus only on current workers was problematic. One article noted that the president likely thought this position would win him their votes. Articles depicted his tone as one that blamed those who were unemployed on their lack of effort. The payroll-tax cut was to be “an incentive for people to come back to work” and, also, for employers to hire. With the goal of his proposals to help hourly wage earners, a countervailing argument was that it “would put only a trickle of extra cash into workers’ bank accounts. For those people who lose their jobs as a result of the outbreak, a payroll-tax cut wouldn’t help at all.”
On the other hand, one article dismissed the concern for the unemployed, arguing that the unemployed often lived with others who were employed. Underlying this claim, the right-leaning Committee to Unleash Prosperity was said to find that payroll-tax cuts could increase employment by 2.7 million jobs and stimulate GDP in the fourth quarter by 1.2%. Thus, the argument tacitly suggested that the unemployed would be directly and indirectly benefited by payroll-tax cuts.
To support reductions in employer-side taxes enacted by Congress, businesses were expected to respond through a combination of reducing prices, increasing wages or other forms of compensation, retaining the savings as profits, or using more labor. Higher sales from reduced prices would spur production, increasing hours and hiring. Higher wages could lead to more spending or savings, even though wages are slow to adjust in the short-term. Higher profits might help those who own businesses and improve the business’s cash flow. Finally, the use of more labor would be similar to higher wages. In each form, the economy was expected to benefit overall.
One aspect of the concern over the unemployed was a class-based argument as to which class of taxpayers would benefit the most from a payroll-tax cut. On one hand, a payroll-tax cut may be “salve for employers and high earners, but won’t cure the financial woes that ail unemployed, lower income, and working-class Americans.” The direct benefit of an employee-side tax cut would go to those with coveted steady employment and to those earning up to $250,000 per year, with the greatest benefit going most to those earning between $123,000 and $250,000. Thus, the tax cut’s distributional impact, even for those who retained jobs, was to higher income earners, if not the highest income earners. On the other hand, others argued that the overall regressivity of payroll taxes meant that the benefits would go to lower income groups. One article even pointed out that, in addition to resulting in two to three million more jobs, thereby reducing the number of unemployed, the tax cut would particularly help black workers, bringing race into their argument.
Some articles argued that the lack of aid to the unemployed would result in a reduced stimulus for the economy. Pointing out that those in need (especially the unemployed) were unable to spend, the tax cuts would fail to stimulate economic demand. Moreover, authors often paired President Trump’s preference for this form of tax cut with his desire to permit tax deductions for those with entertainment expenses. The latter deductions are often claimed by the wealthy, making the pairing unusual. The coupling in the press was likely purposeful, to belie any attempt to woo labor to the president’s side. Using humor, one article noted the limited economic impact of President Trump’s proposals: “Cutting payroll taxes on workers who can’t work? Letting businesspeople deduct the full cost of three-martini lunches they can’t eat?”
D. Unconstitutional
Several articles questioned the constitutionality of President Trump’s order permitting employers to defer employees’ Social Security taxes; no articles raised this concern with respect to other proposed payroll-tax cuts. Presidential action with respect to lawfully created taxes raises threats to the separation of powers between the branches of the federal government, as Congress is to create legislation (and, specifically, tax legislation is to originate in the House of Representatives) and the president is to enforce those statutes. In the New York Times, 17 articles, and in the Wall Street Journal, three articles, discussed constitutionality or stressed the need for congressional action to enact tax cuts. These larger issues were raised by tax specialists outside the press. For example, tax academics raised the issue that the Constitution says tax legislation must originate in the House of Representatives, not in the executive branch.
Noting that only Congress can change a lawfully enacted tax, one underlying concern in the popular press for those who opposed this action was the appearance, and the result, that the president would be permitting taxpayers to evade a tax. “The legality of such a move is dubious, but President Trump has not been shy about pushing the boundaries of his authority.” Economist Paul Krugman wrote that the payroll-tax cut “is pretty wild stuff from a legal and constitutional point of view. Can presidents just stop collecting duly legislated taxes whenever they feel like it?” Concern with the separation of powers and the president’s role as enforcer of legislation was perhaps worsened by the fear that President Trump was trying to “pressure Congress into forgiving” the taxes once they were deferred and thereby force Congress’ hand in a way not contemplated in the Constitution.
Claiming executive orders for tax deferral are “legally dubious measures,” one author clearly did not want President Trump to exercise this authority, although part of the concern was the precedent he would be setting. This issue has farther-reaching implications than the deferral of one particular tax provision. Any assertion that the executive branch could change the revenue side of the budget equation at will would be a radical change of the budgeting rules accepted by Congress. Some conservatives opposed to executive power worried that President Trump’s orders would later be used as precedent by progressive presidents.
One aspect of President Trump’s exercise of his powers was his rhetorical goals. The president was reported to be trying to make employers bear the brunt of the tax if employees were not able to pay the tax in 2021. “It is also not clear that the White House would have the legal authority to shift the tax burden in such a manner.” The depiction was that the executive branch’s Treasury Department had yet “to issue guidance making it clear that companies will be on the hook for deferred taxes, further delaying crucial information for businesses.” The guidance, when it came, imposed the tax on employees; however, one author still complained that the Service provided insufficient guidance to employers with respect to employees who terminated their employment during the deferral period.
Concerns also arose that congressional opposition to the White House over this issue would cause stimulus negotiations to unravel, especially when Democrats and the White House were not close to a deal and negotiators were dug in on critical issues. Even apart from the constitutional issue, many articles highlighted the divide between the president and his party’s congressional members. By July, when President Trump threatened to veto a stimulus bill that did not contain a payroll-tax cut, one Wall Street Journal article thought the cut was not going into the bill. Nevertheless, the president “continued to dangle the possibility that he could circumvent Congress and take executive action” on payroll-tax reduction. Questioning the president’s power, an author noted that the threat may be a Trump negotiating tactic with Democrats and “to get around the objections within Mr. Trump’s own party on the payroll-tax issue.” Threatening unilateral action, some worried that the use of executive orders for this purpose would be litigated regarding the president’s taxing authority and that only the lawyers would benefit.
The significance of the issue was magnified because the president threatened to repeal of the Social Security tax through executive action, not just its deferral, although this posture might have been simply rhetorical flourish. On the issue, the president’s statements were inconsistent with those from within his administration. In other words, President Trump spoke strongly of repealing the payroll tax, whereas members of his administration said they were only speaking about the short-term situation. This inconsistency increased concerns regarding the constitutionality of such actions because different issues are raised with a deferral, which is statutorily permitted, compared to a more permanent disregard of the tax, which is not. One noted that executive orders tend to be contentious “when they act as a substitute for legislation, which Mr. Trump’s order does . . .” but, although payroll deferral is “an unusual move, [] it is within the administration’s authority during presidentially declared disasters.”
Practically, the constitutional issue meant that President Trump could not guarantee much of anything. His call on Secretary Mnuchin to exercise what authority he had did not guarantee action or ensure that employers who complied with the president’s wishes would not find themselves later punished for failure to withhold and pay over these taxes. The president evidently believed that he could order the Service not to force employers to withhold and remit payroll taxes and, if re-elected, he could lobby for the issue but, depending upon the resolution of the constitutional issue, might have been unable to extend tax relief beyond the one year granted in the statute. Thus, the constitutional issue had real world consequences.
E. Harm Social Security
Reducing payroll taxes necessarily reduces direct funding for the entitlements for which these taxes are earmarked. Each of the payroll-tax cuts (or carveouts) during COVID-19 affected Social Security taxes, and some also decreased Medicare taxes. Many articles raised concern for the economic health of these entitlements’ trust funds and the perception that payroll-tax cuts threatened their funding. In the New York Times, 12 articles raised this concern; in the Wall Street Journal, five articles did so. In April 2020, the Social Security Trust Fund reported it would be depleted by 2035 not taking into account COVD-19; several groups conducted studies to guestimate exactly when the trust fund will run out.
Concern for Social Security resonated with many American voters. One article ironically noted that the president “jumped on the idea of a payroll-tax cut. Undoubtedly under the theory that what this nation needs most of all right now is less revenue for Social Security.” In an article claiming the presidential deferral is “legally dubious,” one author complained: “If Mr. Trump tried to make a payroll tax permanent, it would have a drastic effect on the funding of Social Security, which he has previously vowed not to cut.”
This cost to the trust funds was not insignificant. Estimates as to the high cost of payroll-tax cuts were raised in the New York Times and Wall Street Journal before it became clear Congress was unlikely to adopt the provision. One August report found that the cost of the four-month employee-side tax holiday was projected to cost the trust fund $167 billion and, if applicable to both employers and employees, $540 billion because of prior application of employer relief. The earlier reports of revenue loss were over $800 billion.
These arguments were often overtly political: favoring a Democratic candidate over President Trump. One outspoken author claimed the payroll-tax cut could undermine Social Security and Medicare but “this is a tantrum from a president temperamentally incapable of owning up to his own mistakes.” Therefore, although the president may have expected the public to have a positive reaction, as reported in the New York Times it gave Democratic candidates the ability to claim he was attacking Social Security.
Not everyone accepted the argument that these tax cuts threatened Social Security. One claimed that “the Democratic complaint that this jeopardizes Social Security and Medicare is dishonest.” When mentioned at the Democratic convention that President Trump’s proposal would eliminate half of the Social Security tax, a fact checker concluded that was an exaggeration because the president was only discussing four months of tax. Another author concluded that the Social Security Trust Funds would be made whole as they were in 2012 and, of greater concern, the pandemic had already reduced Social Security’s solvency by reducing the number of jobs and therefore payrolls. Moreover, some Republicans sought to use Democratic opposition to the tax cut as a political statement in the November elections, arguing that Democrats were voting against a tax cut for labor.
Nevertheless, Social Security was one means to drive a wedge between congressional Republicans and the White House. For some Republicans it raised fears over the cost of the unfunded Social Security system. For example, Senate Finance Committee Chair Chuck Grassley (R-IA) stated he would only support elimination of the employee-side tax if it were coupled with larger Social Security reform to preserve the solvency of the program. Nevertheless, the fact that the tax was tied to a popular benefit (one they would not risk cutting itself) made the tax cut hard for many Republicans to endorse.
The depiction of the threat was particularly salient because many Americans are pessimistic about Social Security’s future. With 83% doubting they will receive current levels of benefit when they retire and 42% doubting they will receive any benefits, many today worry even with current levels of taxation. This is despite support for the program: 74% do not want benefits reduced in any way. In a poll before the 2020 election raising over a dozen major issues, more than half of respondents ranked “Preventing Social Security benefits from being cut” among the top three, the only issue to be so consistently highly ranked; only six percent ranked it as one of their three lowest priority issues. Therefore, to be politically viable, payroll-tax cuts will need to be separated from Social Security benefits.
F. Future Impact
Few articles discussed the political longevity of the proposed tax cuts beyond 2020. One did question: What if the payroll taxes were “never turned back on and both systems become vote-getting redistribution programs?” Although there was an understanding by several journalists that making up the deferred tax would be financially difficult for workers, no one discussed the political cost of letting it lapse. Thus, few articles during COVID-19 considered the long-term implications of the payroll-tax cuts that were adopted. This lack of concern about the future of tax-cutting is a serious omission, as shown by the discussion below of the Great Recession era payroll-tax cuts in which the expiration was not seen as a return to the normal tax rate but as a tax hike.
When discussing the future in 2020, many articles questioned whether an extension of FICA tax cuts would occur. Discussions arose that President Trump would seek to have deferred taxes forgiven if re-elected and, after he had lost the election, that Republican members of Congress would seek to forgive the deferred taxes because some taxpayers would face double withholding in 2021. Thus, a short-term concern over the economic difficulties confronting some taxpayers motivated this discussion. However, one author noted that forgiving those nondeferred taxes would be unfair to those who had paid their tax.
One reason for the narrow focus on the current year might have been a concern about preventing larger changes to the tax system. Some argued that this federal tax cut was less objectionable than larger tinkering with the system. For those who made such arguments, they noted that the longevity of other changes would have future consequences and that those alternatives might grow the size of government so that the payroll-tax cut was really the least bad alternative. In their words, it would reward work rather than grow government. Thus, the comparative nature of potential tax changes might have outweighed any concern about the future implications of this particular tax change.
However, policymakers should be concerned that the expiration of tax holidays and tax cuts are often seen, not as a return to “normal,” but as a tax hike. Already, even as journalists described the tax holidays as short-lived, some pushed for the deferral’s extension to make it the new normal. More generally, the lapse of tax cuts that are framed as temporary measures, likely for budgeting purposes because they are cheaper to fund under the Budget Control Act, feel to taxpayers like a tax increase. Thus, a significant downside of these forms of tax cuts is the negative political repercussions once the crisis has passed.
Academic and scholarly articles often find that the lapse of a temporary tax holiday is viewed by taxpayers as a tax increase in studies considering the public perception of such legislative changes. The 2011 and 2012 payroll-tax cuts affected nearly 155 million U.S. workers and gave the average household earning $50,000 an additional $1,000. The expiration of that cut was depicted as a “tax hike,” and one survey found that two-thirds of respondents were aware of the increase and 79% planned on cutting consumption as a result, with a much larger response than those who increased spending as a result of the tax cut. On average, one could expect an average household earning $50,000 per year to spend an extra $380 per year during 2011–2012; however, they perceived they would cut their spending in response to the lapse of the tax cut by $720 per year. Presenting the return of payroll-tax rates to their 2010 levels as a tax increase, one survey found that for every dollar less of income resulting from a payroll-tax increase, even one that was the expiration of a tax holiday, consumption was expected to decline by $0.90, with results consistent across race, gender, and financial characteristics.
A hidden lesson from earlier tax holidays is the fact that when a tax holiday is granted, the return to “normal” is likely framed and perceived as a tax increase. This perception of the expiration of tax cuts as a tax increase can have significant economic consequences. The psychological side of tax policy suggests that once people have experienced larger paychecks, smaller pay-checks even though post-COVID will trigger loss aversion and, thus, political capital likely will be required to return taxes at their pre-cut levels. In fact, tax cuts enacted to stimulate spending might have a deleterious impact on the economic recovery when they are allowed to lapse. That negative result might even be greater than the boost the tax cut initially produced.
This fear, coupled with a delegitimization of tax-withholding requirements, poses significant risks to future compliance for both employment and income taxes. Cutting withholding amounts but not the underlying tax—or using attacks on withholding to force a cut in the tax—would have serious consequences because tax withholding is a very effective means of ensuring tax collection, as shown by the high compliance rates in the United States. To delegitimize the process and put it under potential political attack (as advocated by some after World War II) risks a fundamental tool for national compliance. Whether we like it or not, Congress needs people to respect the tax-withholding system.
V. Conclusion
Until the last decade, despite the United States experiencing many economic downturns, payroll-tax cuts were not used as an economic stimulus. As shown in this Article, even with earlier attempts to mitigate the cost of payrolls, these taxes themselves were untouched. When such taxes were cut in the Great Recession, the benefits were muted economically and, as illustrated by their short lives, politically. That muted benefit of payroll-tax reduction was also seen in the COVID-19 era. As portrayed in the press, these changes were not winners on the economic front or for the politicians who supported them.
Thus, changes to payroll taxation may be appropriate, but the history of these changes and how they are portrayed in the press shows that times of economic crisis are not the best time to push for them. Temporary alterations to the tax’s rate appear to bring minimal economic stimulus and even less political favor for their proponents. Because so few people are aware of their tax bracket and because many persons might not even recognize small changes in their paychecks, it is unsurprising that these minimal benefits may be spent or saved without a large impact on the spender or the market.
What was not tried in 2020, but what Congress will hopefully consider in the near term, is the funding of the Social Security and Medicare programs and an increase of the FICA tax base, rather than a cut of its tax rates. This would increase the entitlements’ funding, likely without significant negative impact because of Americans’ apparent disregard of payroll taxation and the fact the greater impact would not fall on lower income workers. Although the wage base has increased at the same rate as average wages in the economy, meaning that a relatively consistent 94% of the population is below the cap and all of their wages are subject to the tax, with recent increases in earnings inequality a growing percentage of earnings is not subject to FICA. As of 2017, only 84% of covered earnings is below the cap because of rising top-earner salaries compared to that of other earners. One hope is that the lackluster response to the COVID-19 experiment with payroll-tax cuts should make it feasible for politicians to confront the larger issue with payroll taxes: a need for revenue but for the burden to be distributed fairly.