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The Tax Lawyer

The Tax Lawyer Fall 2021

Employment Taxes in Crisis: In Practice, Enforcement, and Insolvency

Stephanie Hunter McMahon

Summary

  • More than 75 statutory changes have been made to payroll taxes since they were first enacted in 1935, with almost all changes increasing rates, the taxes’ reach, or the government’s enforcement power.
  • By examining legislative developments and their portrayal in the media, this Article documents the changes themselves, how they were presented by the government, and how the public reacted to the change.
  • Exploring the historical development of payroll taxes focuses on the impact of changes to payroll taxes and, through its exploration, also forecasts the likelihood of future changes to the payrolltax system and Social Security funding.
Employment Taxes in Crisis: In Practice, Enforcement, and Insolvency
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Abstract

When President Trump permitted the Service to defer employees’ Social Security taxes in 2020 as a result of COVID-19, he claimed it was a “modest, targeted action.” The call was not unprecedented. Congress had already deferred the employer portion of Social Security taxes through the end of 2020. Nevertheless, tax holidays for U.S. employment taxes are rare, despite relatively frequent legislative change to payroll taxes. More than 75 statutory changes have been made to payroll taxes since they were first enacted in 1935, with almost all changes increasing rates, the taxes’ reach, or the government’s enforcement power. By examining legislative developments and their portrayal in the New York Times and Wall Street Journal, this Article documents the changes themselves, how they were presented by the government, and how the public reacted to the change. Exploring the historical development of payroll taxes focuses on the impact of changes to payroll taxes and, through its exploration, also forecasts the likelihood of future changes to the payroll-tax system and Social Security funding.

I. Introduction

As the world continues to struggle with COVID-19, the virus has claimed over 720,000 American lives (as of October 16, 2021) and left tens of millions unemployed. After a steep drop in employment in March and April 2020, unemployment rates slowly but steadily recovered until December 2020, when the country lost 140,000 non-farm jobs, to rebound again in the new year. In December 2020, more than 10.7 million were unemployed. This was nearly twice the February number (5.7 million) but significantly less than the April number (23.1 million).

In the face of the hardship and grief caused by the pandemic, among many issues the federal government faces is, first, how to aid those who are personally impacted by COVID-19 either through infection or job loss and, second, how to bolster the U.S. economy so that it rebounds from 2020. Some possible responses might address both of these short-term concerns or further one but frustrate the other. Combined with these concerns, the full impact of the nation’s COVID-19-related unemployment on the funding of the Social Security program, as well as its impact on the long-term health of the program, has yet to be fully measured.

In 2020, Congress enacted several major pieces of legislation aimed at arresting the economic harm caused by COVID-19. One tool in that legislation was to mitigate some employers’ and defer others’ payroll taxes. Additionally, Donald Trump, who was then president, signed an order deferring the employee’s portion of Social Security taxes. These limited measures are worthy of study to evaluate the benefits of this form of tax reduction in a crisis and to determine whether, after almost a century of few such tax reductions, this targeted tax relief may become a new norm.

Currently, employment taxes at the federal level are comprised of those imposed under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). FICA, being the largest payroll tax in the United States, is imposed one-half on an employer and one-half on an employee, and with an equivalent tax imposed on the self-employed. These taxes raise approximately 35% of the federal government’s revenue and finances much of the nation’s social safety net in the form of Social Security, disability, and Medicare benefits.

In its first COVID response as part of the Families First Coronavirus Response Act (FFCRA), Congress enacted refundable credits for paid leave or for qualified wages under the Employee Retention Credit, in both cases reducing required payroll deposits. Wages for those persons were carved out of their earnings for purposes of Social Security taxes, therefore raising no tax revenue, and not treated as wages in the determination of future benefits. The credit offset Medicare’s hospital insurance only. Second, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) permitted employers a payroll-tax credit for 50% of wages paid to employees, up to $10,000 per employee, during any period in which such employers were required to close in response to COVID-19. Additionally, employers could temporarily defer payment of the employer portion of Social Security (but not Medicare) taxes through the end of 2020 to be payable 50% in December 2021 and 50% in December 2022. Because these provisions would, by definition, reduce the amount of tax revenue to be raised, Congress provided that the Social Security and Medicare trust funds would be made whole for direct tax reduction through regular federal government appropriations.

With the economy continuing to suffer and in the face of a presidential election, on August 8, 2020, President Trump required the Treasury Department temporarily to defer employee-side Social Security taxes at an employer’s election. Having previously sought the relief in response to the last quarter-2019 economic slowdown even as the Democratic House advanced plans to increase the tax, his stated goal in 2020 was a “modest, targeted action” that would “put money directly in the pockets of American workers and generate additional incentives for work and employment.” Additionally, the president called for the Treasury Department to investigate its power to eliminate employee obligations instead of merely deferring the obligations and told voters that, if re-elected, he would seek to reduce the tax.

These changes to FICA are unusual. More than 75 statutory changes have been made to payroll taxes since they were first enacted in 1935, with almost all changes increasing rates. Since World War II, when Congress repeatedly deferred tax increases to hold tax rates constant, taxpayers have only enjoyed reduced FICA taxes in the Great Recession. Several other times, in the face of tax increases several years or decades in the future, Congress has reduced future tax rates, but such moves are relatively unusual. Similarly, Congress has also generally raised the amount of income subject to tax; now the amount of income subject to tax is pegged to increases in the benefit payout structure.

Proposing payroll-tax cuts might seem to be an easy way to gain favor with the American working population. However, this Article explains how this history is more complex. From a review of the portrayal of the 2020 changes in the New York Times and the Wall Street Journal, these changes were often ignored, minimized, or seen as a threat to Social Security benefits. Thus, this Article does not evaluate whether the 2020 changes to FICA in response to COVID-19 were good or bad, successful or not. Instead, this Article examines the changes in light of their historical antecedents and their portrayal in the general press. It focuses on how these policies were presented to the American public.

This Article proceeds in three parts. First, the Article examines the changes enacted and proposed in 2020 and their impact on the FICA regime. The Article then examines these changes through a comparison with historical changes to FICA. As shown in the last part of the Article, the innovation with payroll taxation introduced during the COVID-19 crisis was not recognized as such by the press. By distilling the primary arguments made in favor of and against these changes as portrayed in the New York Times and the Wall Street Journal, the Article focuses on the salience of arguments in the press as an indicator of the information most accessible to the American public.

From a look at the historical use of payroll taxation to act as a stimulus, we can see that the changes and actions in 2020 were significantly different than those that had occurred before. However, the way the issues were presented in the press had little to do with the innovation and its potential improvement in the responsiveness of payroll taxation to an economic crisis. That politicization of the issue meant that the public did not understand or give politicians credit for the changes that were made during the crisis.

II. Employment Tax Response

Since the Secretary of Health and Human Services declared a public health emergency on January 31, 2020, COVID-19 has claimed more than 720,000 American lives (as of October 16, 2021) and has caused the worst year for American GDP since 1946. In response, many proposals were adopted to mitigate the negative impact of COVID-19, only a few of which are discussed below. In addition to legislation that encouraged continued employment despite shutdowns and sick leave, Congress deferred the employer-side Social Security tax, and President Trump permitted the deferral of the employee-side Social Security tax.

A. COVID-19’s Impact on the Economy

In addition to a public health crisis that has claimed more than three times the American lives lost in the Vietnam War, COVID-19 has “devastated the nation’s economy.” The demand, supply, and financial shocks resulting from social distancing and lockdowns necessary to reduce infection rates, precipitated a severe contraction of the economy. The nation was in a recession in March 2020. Following an economic peak a month earlier that began in June 2009, the fall in GDP relative to the business cycle was worse than that in any prior economic recession at least since 1980.

Not all parts of the economy felt COVID-19’s negative impact as bitterly or as long, but the recession was widespread throughout the country, with unemployment increasing in every state. Although almost half of national COVID-19 deaths in April 2020, the first full month of the pandemic, were in New York and New Jersey, every state but Wyoming had a decline in its employment-to-population ratio sufficiently large to be statistically significant. Especially early in the pandemic, increased mortality rates did not correlate well with COVID-19’s negative economic impact.

As for sectors of the economy, after an initial negative impact on spending, retail spending has since recovered but industrial production and other parts of the economy lagged. One study found that affluent areas drastically reduced spending in March 2020, resulting in high unemployment of low-income workers, particularly those in affluent neighborhoods, and that attempts to stimulate demand or provide liquidity to businesses did not help. High unemployment, quarantining, and general uncertainty resulted in swings in household spending, with an 8.7% decline from February to March 2020, followed by an increase in some sectors, and, overall, a downswing in the first quarter that was almost, but not quite, recovered by the end of the year. The largest decline was in services, but clothing also decreased by 86% and motor vehicles and parts by 35% between February and April 2020. These numbers foretold a bleak recession affecting some members of the country more than others.

As a whole, workers suffered the brunt of the recession. The economic crisis resulted in severe declines in employment, with racial and class implications. The Brookings Institute declared that the “labor market devastation caused by this pandemic has been the quickest and most severe in recent U.S. history.” The official unemployment rate peaked in April 2020 at 14.7%, but the rate including forced part-time workers and discouraged workers was 22.8%. In April, U.S. leisure and hospitality service had a 39.3% unemployment rate, and by August 2021, the jobs had not fully returned. Small businesses, employing nearly half of private sector workers, have also been disproportionately affected; across all industries aggregate revenue fell by roughly 40% following the declaration of emergency in March 2020.

Women, non-white workers, lower wage earners, and those with less education suffered most of the employment contraction. These employment gaps continued through December 2020. Although the numbers are stark in each of these subgroups, it is especially worth noting the racial make-up of the numbers. In April 2020, 44% of blacks and 61% of Hispanic Americans surveyed said their households experienced a wage or job loss, as compared to 38% for whites. These findings worsen when considered in combination with gender. For example, Latinx women workers had an unemployment rate of 20.2% in April 2020, compared with 16.7% for Latinx men, and 15.0% for white women. Moreover, 73% of black adults and 70% of Hispanic adults surveyed said they do not have sufficient savings to cover three months of expenses, compared to 47% of white adults.

Resulting long-term shifts in the labor market may not yet be fully understood and, during the first year of the crisis, caused tremendous uncertainty. The prime-age (25–54) members of the labor force but not working (either unemployed or employed but not at work) increased to 12.8% in April 2020, and only fell below 6% in December. For many of these workers, an unanswerable question was whether they would participate in the labor market in the future. Many temporary layoffs became permanent and, with the continued closure of many businesses, large numbers of people could not find new jobs. In September 2020, policymakers were aware that the percentage of unemployed persons for 27 or more weeks was 32.5%, up from 19.2% in February. The number of long-term unemployed for 27 weeks (or more) jumped over 121% to 3.5 million between August and October 2020, and the number continued to rise as of April 2021, or 43% of the unemployed. Of those wanting a job, a January 2021 survey found that 50% of the unemployed were pessimistic about finding a job in the near future. These other reasons may include illness, child-care responsibilities, or issues with transportation.

Despite the persistent problem of unemployment and underemployment, the personal savings rate significantly increased in April 2020 at 34%, and remains higher than the pre-pandemic period. In part because of unemployment insurance benefits and federal transfers to households, disposable personal income from March to July 2020 exceeded pre-pandemic levels even with the job losses. Although this signals a healthier financial position for many Americans, it suggests that stimulus benefits and transfers were saved rather than spent. Moreover, these sources of savings unlikely will continue even though the Congressional Budget Office, the Federal Reserve, and the Wall Street Journal’s survey of more than 60 private sector economists estimate that unemployment rates will remain over 4%—and the CBO says over 7%—through 2022.

B. Congressional Cuts of 2020

In 2020, Congress took several steps to redress COVID-19’s impact on the American economy; however, as discussed below, the changes enacted affecting payroll taxation were moderate. This moderation might have partially resulted from partisan politics. As early as March 9, President Trump reiterated his August 2019 call for payroll-tax reduction, in particular calling on Congress to suspend the payroll tax on both employers and employees through the end of 2020. A stated objective was to help those firms facing a liquidity crisis and considering layoffs; however, the application of the tax cut would be far-ranging. The estimated cost was $950 billion. Thus, the political stage was set for payroll taxes to play a part in the COVID-19 response but with its own political baggage as an election-year issue.

Congress’s first change to payroll taxes was a tangential result of enacting refundable tax credits for paid sick leave and expanded family and medical leave to help businesses retain and pay employees. FFCRA required employers to pay employees affected by COVID-19 and provided employers with tax credits for doing so, which reduced required payroll deposits. In particular, FFCRA required employers to provide employees with two weeks paid sick leave at regular pay or two weeks at two-thirds pay if, because of COVID-19, the employee was unable to work in order to care for quarantined family members or because of a lack of child care. Additionally, certain large employers were required to provide employees (employed for at least 30 days) an additional ten weeks of two-thirds paid expanded family and medical leave in response to the lack of child care. Although the mandate was originally set to expire on December 31, 2020, Congress extended the credits through September 30, 2021.

Despite the limitations applicable to the definition of qualifying wages, including a cap on the amount of wages that would be credited, Congress provided these credits as a dollar-for-dollar reimbursement through employment tax credits. Practically, employers could claim the credits on their returns but also by reducing their federal employment tax deposits and even requesting advance payments. Because these wages were carved out of Social Security, the credit included Medicare’s hospital insurance only.

Then, on March 27, Congress passed the CARES Act, which gave employers a payroll-tax credit for 50% of the wages paid to employees during any period in which such employers were required to close in response to COVID-19. Creditable wages were capped at $10,000 per employee. Called the Employee Retention Credit, employers could not benefit from both this credit and the FFCRA credit for the same wages, although an employer could qualify for both credits on different wages. The credit was amended and extended through December 31, 2021.

Additionally, the CARES Act permitted employers to temporarily defer deposits of the employer portion of Social Security (but not Medicare) taxes through the end of 2020. The deferred deposits were subsequently payable 50% in December 2021 and 50% in December 2022. The failure to make the deposit on a timely basis normally results in a failure-to-deposit penalty. In addition, employers who are not required to make deposits (generally, because their employment tax liabilities do not exceed $2,500) must pay when they timely file their tax form; the failure to do so normally results in a failure-to-pay penalty. Those penalties were not eliminated but were, instead, tolled until the new dates.

With each of these three provisions, the amount of FICA taxes collected was significantly reduced. The estimated lost revenue for the credits in the FFCRA was $104.9 billion, the Employee Retention Credit in the CARES Act was $54.6 billion, and the deferral of employer Social Security was $12.3 billion. To ensure the relevant trust funds did not suffer as a result of reduced revenue, Congress used appropriations from general funds to make the Social Security and Disability Trust Funds whole.

Because Congress intended that the money be immediately available to businesses and consumers, the logistics of these provisions demanded quick action by the Service. The Service issued FAQs to address implementation issues for credits claimed before April 1, 2021, which raised concerns regarding their legal authority. Taxpayers typically file Form 941 in order to report and pay payroll taxes, and the Service needed to quickly assess the statutory changes and amend the form. However, because Form 941 was not updated in the first quarter 2020 to reflect the change in law, those employers who elected to defer deposits reported a discrepancy between the amount of their liability and their deposits. The Service said it would send a notice identifying the discrepancy and provide a means to inform the Service about the deferral.

Although these legislative enactments (the credits and deferral provisions) were a significant part of the government’s COVID-19 response, they received little attention in the mainstream press. Instead, the Wall Street Journal and New York Times both focused on the president’s broader request for payroll-tax reduction. Nevertheless, at least some businesses chose to defer their payroll taxes—with SAIC and Staffing 360 Solutions saying they were using the deferral to bolster cash flows. To the extent businesses used these credits to retain employees and maintain production, they were operating as Congress intended.

C. Presidential Deferral 2020

President Trump had advocated for the reduction of payroll taxes to stimulate the economy well before COVID-19. However, that earlier advocacy gained little traction. His position highlighted the political incompatibility of a Republican president advocating for a tax cut traditionally favored by Democrats in the face of what was, in all likelihood—and certain to alienate congressional Republicans—a need to use general revenue to make up Social Security’s budgetary deficit. This initial proposal died a quick death and, without COVID-19, that would likely have been the end of President Trump’s advocacy of a payroll-tax reduction.

In early March 2020, President Trump’s proposal for payroll-tax reduction was repackaged as a means of addressing the economic devastation being created by COVID-19. However, as discussed above, Congress did not adopt a general payroll-tax holiday. Unlike his reaction in 2019, the president responded with renewed calls for greater payroll-tax reduction. Thus, in 2020 President Trump adhered to a proposal that he had not fully supported just a few months earlier.

Before addressing FICA, President Trump addressed the more pressing issue of tax filing. With COVID-19’s devastating effects broadening its reach in February and April 2020, the country looked to the April 15 tax filing deadline. Delaying that requirement within the bounds of the permissible statute would be a test for deferral of taxation. On March 13, 2020, President Trump issued an emergency proclamation designating the pandemic a federal emergency and, by making the pandemic a federally declared disaster as of March 1, the Treasury Department could provide relief from tax-filing deadlines. The Code permits the Secretary of the Treasury to postpone deadlines under certain circumstances for up to one year, and Treasury Secretary Steven Mnuchin exercised this power and deferred the filing deadline until July 15, 2020. Initially, the extension applied only to amounts up to $10 million for each consolidated group and C corporation and $1 million for other taxpayers (including all individuals), but the limits were ultimately waived. Pointedly, the Treasury Department stated that no extension was provided for the payment or deposit of any other type of federal tax.

Thereafter, President Trump continued his call for payroll-tax cuts but found little congressional support. As reported in the Wall Street Journal, his monthslong insistence on a payroll-tax holiday received only a “lukewarm reception from economists and lawmakers in both parties.” Although some commentators in the Wall Street Journal wrote in favor of the plan, it failed to gain traction in either the Wall Street Journal or the New York Times.

Despite largely negative press coverage of the idea, with the economy continuing to suffer and in the face of a presidential election, on August 8, 2020, President Trump required that the Treasury Department use the limited power granted in the Code to defer the “withholding, deposit, and payment of the tax” imposed by sections 3101(a) and 3201 on compensation for September 1 through December 31, 2020. The order applied only to the employee portion of employment taxes for Social Security, or 6.2% of the employee’s wages; the order did not affect the 1.45% employee Medicare tax imposed by section 3301. Because self-employment taxes are subject to a different part of the Code, they were not impacted by the presidential order. As a measure targeted to lower income taxpayers, it applied only to those whose bi-weekly compensation was less than $4,000 on a pre-tax basis. Exactly how that was to be calculated for particular workers was not defined.

President Trump claimed the deferral was a “modest, targeted action” that would “put money directly in the pockets of American workers and generate additional incentives for work and employment.” The president also called for the Treasury Department to “explore avenues, including legislation, to eliminate the obligation” as opposed to merely deferring it. Doing so would, of course, require congressional action. Moreover, he repeatedly told voters that, if re-elected, he would seek to reduce the tax.

Much of the public ignored the deferral proposal President Trump called for, and press coverage was almost uniformly negative. Unlike its general support for proposals to reduce employment taxes, the U.S. Chamber of Commerce worried that the “uncertainty raised by these issues . . . only exacerbates the challenges faced by payroll processors and compliance departments.” Few employers (including the U.S. Postal Service) opted to defer those taxes. In response, President Trump required that the many payroll departments of the federal government defer these taxes to the maximum extent.

In response to President Trump’s order, the Service was obliged to issue guidance quickly to ensure that employers understood the practical requirements for deferring payroll taxes for their employees. On August 28, three days before the potential deferral period commenced, the Service issued Notice 2020-65 providing guidance to employers on proper deferral, laying the burden of unpaid taxes ultimately on the employer. The guidance responded to the conflicting needs of speed and information for taxpayers but with a result that reduced the likelihood employers would defer the taxes. The fact that employers were unlikely to take up President Trump’s call forestalled debate over the form of the guidance. Service guidance only has value if it has sufficient authority to bind the government, but Notices, like FAQs, are lesser forms of guidance that are not given significant deference. Therefore, the guidance would be problematic for reliance purposes.

Because Congress did not adopt President Trump’s preference to waive deferred taxes, especially after Joe Biden was elected president, the deferred taxes became due on May 1, 2021, and any failure to pay those taxes would result in the accumulation of interest, penalties, and additions to tax. Before that deadline, however, Congress extended the time for repayment until December 31, 2021, at an estimated revenue cost of $16 million. In response, the Service issued Notice 2021-11 and modified Notice 2020-65 to further defer the imposition of interest, penalties, and additions to tax but not to eliminate them.

III. History

Historically, tax holidays for FICA taxes are rare, despite relatively frequent legislative changes to payroll taxes. More than 75 statutory changes have been made to payroll taxes since such taxes were first enacted in 1935, with almost all changes increasing rates, their reach, or the government’s enforcement power. Figure 1 illustrates the increase in the FICA tax rate since 1937. The sole rate decrease occurred during the Great Recession, discussed below.

Figure 1—Total FICA Tax Rates

Total FICA Tax Rates

Total FICA Tax Rates

In addition to changes in the tax rate, Congress can increase or decrease the impact of FICA taxes by adjusting the amount of wages subject to the tax. Those wages are often called the earnings base or wage cap and, as shown in Figure 2, the limit been increased over the life of the tax. It has never been decreased. Since 1982, the base has increased at the same rate as average wages in the economy.

Figure 2—Annual Wage Cap

Annual Wage Cap

Annual Wage Cap

This history of expanding rather than reducing FICA taxes parallels Congress’s preference to broaden the reach of Social Security and Medicare and, by necessity, the taxes that fund these benefits. The few times in which FICA taxes have been reduced, either through a credit to the income tax or more directly in the Great Recession, are notable because of their rarity. Nevertheless, many commentators in 2020 did not seem aware of the unusual character of the tax cut that was proposed. To better understand the 2020 proposals and the political and economic value of FICA tax cuts, these changes should be considered in their historical context.

A. 1977 Changes

The 1970s were a period of high inflation, reaching 13.5% by 1980, and low economic growth, the latter despite the “easy-money” policies of the Federal Reserve that fueled inflation. The second half of the decade was also marked by a concern that the 1972 adoption of automatic cost-of-living adjustments to Social Security benefits threatened the financial integrity of the Social Security system. Finally, unemployment was high at over eight percent in 1975, seven percent in 1976, and six percent (often seven percent) throughout 1977. As one part of an economic stimulus response, Congress enacted a tax credit against the income tax to help reduce the cost of wages.

In 1977, a Democratic Congress enacted a New Jobs Tax Credit against the income tax “to put Americans back to work.” This credit should not be thought of as a change in payroll taxes, although it has been referred to as such. The credit amount against an employer’s income taxes was set at 50% of the first $4,200 per new hire, with the $4,200 in reference to contributions to the federal unemployment insurance, or FUTA. To determine new hires, Congress required a payroll increase of more than 2% from the prior year.

The result was a credit intended to subsidize incremental hiring. Therefore, it was paid to employers and was structured to give greater subsidy for unskilled and part-time labor than for skilled or full-time labor. The amount was limited to either 50% of the excess total wages over 105% of the previous year’s total or 50% of the excess of wages covered by federal unemployment insurance in 1977 or 1978 over 102% of the FUTA wages from the previous year. The credit could be no more than the smaller of 25% of FUTA wages or $100,000. Coverage was only for one year despite being created as a two-year program.

The provision was not a major aspect of the legislation and went unmentioned in President Jimmy Carter’s remarks on signing the bill. Its small value, coupled with the delay in taxpayer receipt until an income tax return was filed and the limitation that the credit applied only for new hires, made the credit of negligible value to many employers. The fact that the credit was also seen as a temporary measure and given little publicity by the Service doomed it from the start.

The Conference Committee’s report shows the slight difference between the House and the Senate versions—more attention was paid to the practical workings of the credit and how it would be calculated, likely in part to control its cost. The estimated cost of an earlier version of the provision proposed by the Senate was $0.5 billion in 1977, $1.2 billion in 1978, and $1.6 billion in 1979. One concern was that a broader, unrestricted four percent credit would “cost about $2.4 billion in revenue and reduce wage costs by approximately 0.25 percent.” Without targeting, such a credit was unlikely to result in increased employment in the “immediate short run” because of the greater incentives caused by weak or uncertain sales prospects, its potential temporary nature, and its small relative size (although the Congressional Budget Office concluded that might change 6 to 18 months after enactment).

Thus, the 1977 provision was a limited income tax credit that had no effect on payroll taxes. Additionally, the amount of the credit was not tied to Social Security taxes, as were the 2020 deferrals, but to unemployment taxes. The unemployment tax wage base was significantly smaller in 1977 at $4,200 than the Social Security tax base in 1977 of $16,500, providing a much smaller amount of credit. By 2020, the unemployment base was $7,000 whereas the Social Security wage base was $137,700. One reason for using unemployment rather than FICA as the applicable measuring rod was likely due to the lesser cost of the credit using FUTA as the baseline.

One hope for this form of tax reduction was that it would be less inflationary than traditional economic stimulants. By increasing demand through reducing costs, the expectation was that there would be less upward pressure on prices. However, as the Congressional Budget Office pointed out, employment tax cuts have limited power to cut wages because the labor market responds by increasing the wages of skilled labor, which inevitably results in inflationary pressures.

The credit was not considered successful at the time and was allowed to lapse in 1978. The New York Times blamed this result, in part, on the credit’s failure to go through “most of the computerized economic models” and reported that “it is hailed by some as the most important innovation in tax policy in a generation, and denounced by others as a cumbersome, unfair and a waste of the taxpayers’ money.”

The part of payroll taxes that received much more attention in 1977 was a change to the benefit formula adopted in the Social Security Amendments of 1977, which was expected to reduce benefits by approximately five percent on average by reducing the growth rate of the automatic cost-of-living adjustments introduced in 1972. These changes contained tax increases and base broadening over the next decade, prompting the New York Times to call the Social Security Amendments a “massive tax bill” that was an “economic disaster.” That the nation focused on the FICA increase rather than related payroll-related decreases to the income tax underscored the lack of political power of the New Jobs Tax Credit in 1977.

B. Great Recession Changes

More directly similar to the 2020 proposals, although with important differences, were payroll-tax cuts enacted during the Great Recession. Similar to the other periods in which Congress has offered tax credits as a stimulus, the Great Recession was marked by low economic growth and high unemployment. Over a series of years and as part of several economic stimulus packages, as discussed separately below, Congress reduced both employer and employee-side payroll taxes as steps to redress these problems.

1. Focusing on Employees

As a first step, Congress enacted an employee income tax credit, the Making Work Pay Tax Credit, that was substantially different than the 1977 and 2020 legislation. In effect for 2009 and 2010, the Making Work Pay Credit was a refundable income tax credit equal to 6.2% of earned income up to $400 for single filers and $800 for joint filers that was phased out for single filers with income between $75,000 and $95,000 and double that for joint filers. Moreover, not only was the Making Work Pay Credit made available directly to employees rather than employers, Congress also had the Service change withholding tables so that the tax savings were passed on to employees over the course of the year. The result of this change was a greater immediacy of the tax benefit. Hoping to fund economic recovery, Congress placed the tax benefit in the hands of workers sooner rather than later.

The Obama administration sought to make the Making Work Pay Credit permanent in its proposed 2011 budget, but the credit was replaced by an employee-side payroll-tax holiday of 2% of the 6.2% employee-side Social Security tax. Thus the tax cut was changed from an income tax cut to a FICA tax cut. This structure permitted a significant increase in the amount of the credit as compared to that under the 1977 law and represented a fundamental shift in payroll taxation.

The 2009 version was not without its detractors. Comparing 2008 direct stimulus payments and the 2009 Making Work Pay Tax Credit, one study found that the 2009 credit implemented through reduced withholding had about half the impact in increasing spending as did the 2008 direct payments. There were important differences between the two, including the amount of publicity the government gave each: with significant publicity for the 2008 stimulus payments and almost none for the 2009 change. Moreover, the study noted that “none of the policies implemented in 2008 and 2009 to increase disposable income was very effective on a per-dollar basis in stimulating spending in the near term.”

Some tax policy theorists complained about the 2011 change from an income tax credit to a payroll-tax cut. Having greater impact for higher income taxpayers, the change “raised taxes for some low-wage workers, and nearly doubled the amount of lost revenue.” The Congressional Research Service and the Treasury Inspector General for Tax Administration noted that some low-income workers found their withholding increased in 2011 as a result of the change or that they owed more in tax. To allay the charge that the cut would threaten the Social Security funding base, Congress made up for lost revenue by using general revenue funds as a replacement.

On December 23, 2011, the employee payroll-tax cut was extended for the first two months of 2012, and then on February 22, 2012, it was extended through the end of 2012. The temporary payroll-tax cut then expired. Many people may have been surprised that it lapsed if only because they never recognized its existence in the first place. In an early 2011 survey, only 27% were aware of the 2011 decreased FICA rate.

2. Focusing on Employers

As a second form of stimulus tied to payroll taxation, Congress enacted an employers’ payroll-tax holiday in the Hiring Incentives Restore Employment Act of 2010 (HIRE). This payroll holiday covered employers’ entire 6.2% Social Security contribution (but not Medicare) from March 19, 2010, through December 31, 2010, but only for new hires of people who had recently been unemployed. To qualify, workers had to begin employment between February 3, 2010, and January 1, 2011. As with the employee-side payroll-tax reduction, Congress used general federal revenue to replace the revenue lost to the Social Security Trust Fund from the employer-side tax holiday.

Not all new hires would qualify for the credit. This narrow payroll-tax reduction only applied to the hiring of people who had been employed for 40 hours or less during the preceding 60 days, and employees had to sign an affidavit attesting to that fact. Employers were also eligible for a $1,000 retention credit for each of those workers retained for at least one year.

When a new worker was hired who signed the affidavit, the tax holiday began. Although there was no floor on the number of hours the employee had to work before the credit became available, Congress denied the holiday to an employer who hired the employee to replace another employee unless the one who left did so voluntarily or for cause. However, if a factory was closed due to lack of demand, the credit was available for hiring employees when business picked up.

This provision responded to a Congressional Budget Office report that concluded that in order to promote economic growth and increase employment, one of the most effective measures 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 employers’ taxes rather than reducing the employees’ portion.

3. How 2020 Was Different

Congress’s 2020 payroll-tax cuts and President Trump’s deferral made significant incremental changes from what had occurred in the past. Consistent with the past, Congress limited recipients of the tax cuts, created complex provisions but with accelerated receipt, and made these tax cuts short-term benefits. However, Congress and the president also broadened employer-side tax benefits (thereby simplifying them operationally), gave greater flexibility to employers over their employees’ benefits, and created a structure that could work for more targeted relief in the future. Although the 2020 changes had roots in past experience, Congress increasingly felt confident extending more timely tax benefits using FICA as the tax cut mechanism.

On one hand, unlike the Great Recession’s (as well as the 1977 income tax cuts’) focus on new hires, which added to the provision’s complexity, the employer-side employee retention tax cut in 2020 had a narrower focus and thus less complexity. In 2020, thresholds were tied to the COVID-19 context with a goal of employee retention rather than new hiring. Consequently, entitlement to the 2020 cut contained current year limitations that were likely susceptible to abuse or to changing employer behavior because of the short-term economic situation in which they were imposed. Moreover, these latter limits likely proved less complicated operationally than those measured against prior years’ employment levels.

Additionally, unlike the Great Recession’s employee-side two percent across-the-board tax cut, in 2020 the only employee-side relief was optional at the behest of employers and, therefore, was a more complicated method of tax relief. Thus, employers were given the power to determine temporary employee tax relief. Furthermore, the congressional changes made in 2020 largely ignored the Great Recession’s focus on employee payroll taxation, instead using other measures to put money in workers’ pockets.

On the other hand, Congress’s 2020 changes continued the Great Recession’s approach by using FICA tax cuts directly, rather than the earlier linkage of employment taxes to employers’ income tax returns. This also continued a shift from the 1977 linkage to employment through FUTA to the larger FICA tax base. Combined, this shift provided a greater opportunity for tax relief. Although the income tax is often a larger tax burden than payroll taxes for many businesses, linking a tax cut to FUTA imposes significant limitations on credited amounts because FUTA generally imposes a smaller tax liability than FICA. Credits based on FICA amounts result in a larger potential benefit to employers.

To finance this shift to FICA tax reduction, which was unnecessary in 1977, Congress had to consider the impact on the Social Security and Medicare trust funds. In both cases, Congress chose to find alternative funding sources rather than permit the reduction in trust fund tax receipts. Thus, Congress used general appropriations to address any revenue shortfall. This change shifted the tax burden from wages to the general taxpaying public.

Finally, 2020 continued the move begun during the Great Recession to accelerate tax relief. Whereas in 1977 taxpayers did not enjoy the tax relief until they filed their year-end income tax returns, in the Great Recession and in 2020 the relief was accelerated through adjusted withholding or tax payments. For example, in the Great Recession, by changing the income tax withholding tables or the type of tax credited, Congress accelerated taxpayers’ benefits. In 2020, with employer-side payroll-tax reduction, Congress accelerated tax benefits from annually to at least quarterly and permitted taxpayers to request an accelerated payment of the credit. Thus, the timing was shortened, largely equating these tax cuts to stimulus spending.

Throughout these measures a consistent note was present: the significant limitations and rules for claiming the tax benefit. The focus, therefore, was less on tax relief than the way in which the relief acted as an economic stimulus. In all three periods, Congress used the form of tax relief to increase or maintain employment. In part as a result of this focus on short-term stimulus and employee retention, the provisions were framed as temporary measures in each of these instances. Even though both Presidents Obama and Trump wanted to extend their pet projects, these forms of deferral and tax cuts were short-lived.

IV. Pros and Cons from the Press

Because the 2020 legislative changes and presidential order represented a new type of tax cut, the press had significant freedom in framing its description. This Part examines the ways in which the 2020 proposals were discussed in the New York Times and the Wall Street Journal. By evaluating the strength and development of different arguments for and against payroll-tax reduction, this Part examines the political salience the proposals held for voters. Ultimately, as tax cut measures, these proposals did not garner much attention or much support. Consequently, payroll-tax cuts will unlikely have sufficient political payoff to become a new norm as tax-cutting measures.

As shown in Figure 3, of a total of 105 articles published between August 2019, when then President Trump first proposed payroll-tax cuts, and February 2021, half of the coverage merely reported the existence of a proposal without taking a position. This is unsurprising given the large size of the legislative packages containing many of these proposals.

Figure 3—Total News Coverage

Total News Coverage

Total News Coverage

It is also not surprising that, as between the two publications, coverage was imbalanced. As shown in Figure 4, the New York Times, with 57 articles, did not have a single article supporting a payroll-tax cut, whereas the Wall Street Journal, with 48 articles, had 15% of the total (or 33% of those that took a position on the issue) favoring a payroll-tax cut.

Figure 4—News Coverage by Media Outlet

NYT News Coverage by Media Outlet

NYT News Coverage by Media Outlet

WSJ News Coverage by Media Outlet

WSJ News Coverage by Media Outlet

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.