“Payroll Tax Holiday” – Stimulus or Pariah?

Categories : Financial, News
May 13, 2020

During economically stressed times, the subject of “economic stimulus” plays a prominent role among inevitable political arguments. Whether the general public agrees with Washington’s elected officials is of little consequence, as Washington will inevitably do what Washington does – print money (electronically) and throw it around. This time it is in the name of Economic Stimulus.

Americans recently witnessed the first rounds of Congressional “Stimulus Spending,” as Trillions (12 zeros) of previously non-existent dollars were created out of thin air, then distributed to a variety of individuals and organizations. Ongoing Stimulus Spending suggestions include a so-called “Payroll Tax Holiday,” such as that implemented by the Obama Administration in 2011 and 2012. In those years, the “Payroll Tax” was reduced by 2% of gross pay (up to the Social Security contribution limit) in order to leave more cash in workers’ paychecks.

Most serious Payroll Tax Holiday proposals today call for suspension of all Payroll Taxes for a period of time, such as the remainder of 2020. Philosophically, Van Wie Financial is against any Payroll Tax Holiday. FICA (Social Security) and Medicare withholding dollars are not Federal taxes, per se. Rather, they are insurance premiums paid by individuals and matched by employers. These premiums are used to calculate individual eligibility and individual lifetime benefits under Social Security and Medicare. When insurance premiums are either not paid or reduced, lifetime benefits are adversely affected.

Also, Social Security and Medicare would themselves be degraded by hastening their estimated upcoming insolvency dates. The resultant dilemma is obvious; either General Revenue tax collections will have to be used to bail out social insurance benefit programs, or tax rates will have to skyrocket. Or both.

There are cogent and valid arguments on both sides of the Payroll Tax Holiday argument. On balance, this short-term “solution” becomes a long-term pariah, as our most popular Social Programs accelerate their paths to bankruptcy. Using General Revenues for Social Security and Medicare bailouts would increase our annual Budget Deficit, thereby adding to our accumulated National Debt. “We the People” quite literally can’t win. A classic dilemma, to be sure.

Whatever happens, there will be ample time and opportunity for finger-pointing as the U.S. economic recovery rebuilds and resumes generating government revenue in large quantities. Prior to the COVID-19 reaction, government revenues for the first half of fiscal 2020 (Oct. 1, 2019 through March 31, 2020) set an all-time record, even after accounting for inflation.

Economically, we need to get back to where we were such a few short weeks ago. Will a Payroll Tax Holiday be implemented, and if so, will it prove effective?” Stay tuned.

We should remember the negative reaction of Americans in January of 2013, when the full Payroll Tax was restored following the 2011/2012 Payroll Tax Holiday. When it ended, workers everywhere were astonished to see a reduction in their own “take-home pay.” Who could reasonably blame them, when keeping food on the table is paramount in life?

Very few Americans understand the true nature of so-called Payroll Taxes. This was recently made evident by Senator Rick Scott (R-FL), in response to Governor Cuomo (D-NY), who claimed that $30 Billion (9 zeros) of New Yorkers’ tax money were sent annually to Washington, only to be forwarded to Florida. Scott pointed out that the funds in question did not belong to New York. Rather, they were individuals’ Payroll Taxes paid in while people were stuck working in New York. When New Yorkers eventually escape by retiring to Florida, Washington returns their premiums in the form of Social Security benefits, which are then taxed at Florida rates, rather than being confiscated by New York’s high tax rates.

As Sen. Scott remarked, “It is not your money.” Refreshing, yet also another stark reminder that Truth in Labeling has never applied to Washington jargon. Were these Payroll Taxes to be called Involuntary Insurance Premiums, perhaps the Payroll Tax Holiday would be a tougher sell to the public. After all, it is their collective futures being put on the line.

Van Wie Financial is fee-only. For a reason.