Opinions: Trump's inadvertent tax hike

[mahatmakanejeeves]

Opinions

Trump’s inadvertent tax hike

Opinion by Catherine Rampell
Columnist
August 10, 2020 at 2:00 p.m. EDT

President Trump’s payroll tax deferral is supposed to reduce taxes and make employees cheaper to hire. It may do precisely the opposite, which Trump would know if he had real tax experts or economists advising him instead of just people who play them on TV. ... For months, Trump has obsessed, inexplicably, over a payroll tax cut. Democratic lawmakers haven't been interested, nor have their Republican counterparts, for good reason: It's expensive and would do little to stimulate the economy right now. A payroll tax cut offers cold comfort to the millions of Americans who are unemployed and therefore not on payrolls.

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Astoundingly, even the White House advisers whose lifelong raison d’etre has been cutting taxes (cough cough, Larry Kudlow) somehow failed to realize they may have created a tax hike next year. That’s because of how this policy could interact with other provisions of the tax code. ... As misguided as an outright payroll tax cut would have been, Trump’s payroll tax deferral is definitely dumber.

Under Trump’s memorandum, payroll taxes that normally would be automatically withheld from employees’ paychecks every pay period don’t have to be withheld through the end of 2020. Still, the taxes must eventually be remitted to the Internal Revenue Service. That means a balloon payment will come due in 2021. So, who will be left holding the bag? ... There are three possibilities.

{snip}

This brings us to Scenario #3: Employers — including cash-strapped small businesses — are left holding the bag. And at this point, the tax bill could actually get bigger. Here’s why:

Come 2021, if and when employers pay the IRS for the payroll tax debts their employees never paid, under U.S. tax law such payments would be treated as income to each affected employee. ... Because the payments for employees’ unpaid taxes now get treated as employee income, employers would have to remit additional income and payroll taxes — essentially, they have to pay taxes on taxes, bizarre as it may sound. ( Accountants refer to this as “grossing up.” ) Employers can try to recoup the cost of these additional expenses from their employees . . . but good luck if those employees have already moved on to other jobs.

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This means the best-case scenario is: nothing happens. Which sounds like the prayer Americans mutter every time Trump attempts a half-baked policy like this one.

Catherine Rampell
Catherine Rampell is an opinion columnist at The Washington Post. She frequently covers economics, public policy, politics and culture, with a special emphasis on data-driven journalism. Before joining The Post, she wrote about economics and theater for the New York Times. Follow https://twitter.com/crampell

[Delmette2.0]

1. Tell me if I have this right.

1. Employees who don't have FICA deducted are liable for extra income taxes

2. Employers who don't pay their portion of FICA don't receive the wright off as a business expense. And they are liable for the employee portion that was not witheld.

[Igel]

2. I don't think the run up to scenario #3 is reasonable.

If the employers are to deduct the money from the employee's wages--which is what the memorandum says the deferral applies to, employee wages--then they're merely the pass-through mechanism. If deduction's been deferred, then it's still owed by the person who owes it--that's the employee.

If the employee's not working there, not the employer's problem.

As for the tax software not being written to accommodate this, there are often tweaks made to forms and software the last minute. Have an additional line where the gross wages is multiplied by the proper amount, then on the next line list the amount of FICA deducted, and subtract line x + 1 from line x. Carry that forward.