(Photo: Bloomberg)
President Trump reportedly pitched a payroll tax holiday through November's election to Senate Republicans on Tuesday. Trump's payroll cuts, reported by several media outlets, would be part of a larger stimulus package to counter slowing consumer demand and equity market turmoil amid the spread of new coronavirus cases in the U.S.
But the idea has had a cool reception from Congressional Democrats, who are reportedly looking to advance legislation that would focus on expanded paid leave for those that are sick, extended unemployment insurance, and free testing for the virus.
And Senate majority leader Mitch McConnell, R-KY, is resistant to the idea of a payroll tax holiday, according to reporting in the Washington Post. In 2009, McConnell, as minority leader in the Senate, proposed a two-month payroll tax holiday to counter the aftermath of the financial crisis.
|Payroll holiday history
In 2011, Congress passed a payroll tax holiday under the Obama administration in an effort to provide added stimulus as the economy continued to recover from the financial crisis. It was ultimately extended through 2012.
Employees' contribution to Social Security taxes went from 6.2 percent to 4.2 percent. Employers, who also chip in 6.2 percent to fund Social Security, did not see their portion reduced. The self-employed, who pay both the employee and employer share of the tax, saw their rate drop from 12.4 percent to 10.4 percent.
Last year, as the Trump administration was contemplating a payroll tax holiday, economists at the University of Pennsylvania's Wharton School modeled a 2 percent cut in workers' share of the tax for one year.
The model assumed the lost revenue to Social Security would be replaced by money from Treasury's general fund, as it was under the Obama administration.
Under dynamic scoring, which accounts for taxes raised from economic activity resulting from the stimulus, a one-year 2 percent payroll holiday would result in a $141 billion loss in revenue, spread over two years.
Wharton's modeling also projected a 0.3 percent boost in GDP for one year, while long term, the holiday would have a modest negative impact on GDP due to the increased debt.
The short-term boost to GDP would come from increased labor, Penn's economists said. With greater take-home pay, more hourly workers would choose to work overtime. And more workers would enter the workforce.
Households in every income quintile would see higher take home pay. Those in the bottom 90 percent of income earners would see the largest increase in take-home pay, in terms of percentage of income; the wealthiest Americans would see the smallest increase.
For instance, earners in the third quintile of income would see a 1.7 percent increase in take-home pay. The lowest wage earners would see a 1.5 percent increase. The wealthiest 0.1 percent of earners—the so-called top 1 percent of the 1 percent—would see a 0 percent increase in take-home pay.
|Trump reportedly floats full exclusion
Details of a new payroll tax holiday are spare, but Trump reportedly floated a full exclusion holiday through the election, meaning both the employee and employer payroll obligations would be relieved.
Analysis from the Congressional Budget Office and the Committee for a Responsible Federal Budget shows a cut in the employee share of the payroll tax would cost $70 billion to $75 billion for each percentage cut.
Cutting the employer share would cost $55 billion to $60 billion per percentage cut—that cut would result in likely higher take-home pay, and more taxable income.
By that math, the lost revenue to Social Security's coffers would be staggering if a full payroll tax exclusion were extended through November.
For eight months, the loss in revenues from the employee portion of the tax would be up to $310 billion. And the loss from the employer share would be up to $248 billion.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
