Politico: It does seem that Trump can unilaterally impose a payroll-tax holiday

Politico: It does seem that Trump can unilaterally impose a payroll-tax holiday

Well, more of a yes, but. Donald Trump wants a payroll-tax holiday as part of the Phase 4 COVID-19 relief package, but neither party in Congress seems enthusiastic about that idea. Economists Stephen Moore and Phil Kerpen argued for Trump to issue an executive order to stop the collection of the taxes, and claim he has the authority to make it stick:

President Trump needs to reset the debate on the latest coronavirus relief bill. Senate Republicans have scuttled their best pro-growth idea—a payroll tax cut—and instead released a $1 trillion spending bill. Last week Mr. Trump acknowledged that compromising with Speaker Nancy Pelosi is a fool’s errand, because the House won’t agree to anything that boosts growth and job creation. The Democratic plan includes a six-month extension of the $600-a-week unemployment bonus and $3 trillion in new spending. It would sink the economy and imperil Mr. Trump’s re-election.

The president needs to pull an end run, and there’s a legal way to do that. He should declare a national economic emergency and announce that the Internal Revenue Service will immediately stop collecting the payroll tax. This is technically called a deferral of the tax payments.

Note the word deferral, though. Stopping the collection of taxes doesn’t end the obligation to pay them, however. All this might do — assuming Trump can do it — is to defer the payments, meaning taxpayers might end up owing a big chunk of cash at the end of the year. Moore and Kerpen argue that this will create a massive amount of pressure on Congress to forgive those obligations at some point:

Mr. Trump could also pledge to sign a bill—now or after the new Congress takes office on Jan. 3—to forgive those repayments. That would make the election a referendum on middle-class taxes. Mr. Trump can give Americans a tax cut now, and sign it into law later.

This bold act would flip the political tables. Democrats can’t credibly call it a tax cut for the rich. Mr. Trump could cap it at, say, $75,000 of income, so the vast majority of the benefit would go to straight into the wallets of middle- and lower-income workers, almost all of whom pay more payroll than income tax.

Voters would instantly see the 7.5% boost to their paychecks. Mr. Trump could then run against the $3 trillion House spending bill. It would be right out of the playbook of Harry S. Truman, another incumbent president who faced a big deficit in the polls and was told he couldn’t win re-election. Late in the summer of 1948, Truman stopped negotiating with what he called the “do nothing” Republican Congress and started campaigning against it. He won—and so could Mr. Trump.

That does look doable, Politico notes this morning, even if it’s a gamble. The problem is that workers might not see the benefits, because they might not want to go all-in on the same bet:

Several tax experts told Morning Tax that Treasury would be perfectly within its rights to hit the pause button on payroll tax collections (because of Section 7508A in the tax code), and that Congress would be perfectly within its rights to tell workers they don’t have to make up any balance.

But there might be an even further catch: Treasury doesn’t look like it has any way to mandate that the companies withholding the payroll taxes actually forward any savings on to their workers, according to Daniel Hemel, a University of Chicago law professor. What Kerpen and Moore are proposing, Hemel wrote in an email, “only gets extra money into *employers’* hands temporarily. It doesn’t (without more) get extra money into *employees’* hands.”

In other words, this might not be quite the stimulus the authors imagine. Or to put it somewhat differently: “Cautious employers will continue to withhold payroll taxes from their employees’ paychecks because if the subsequent tax forgiveness bill does not go through, employers face potential liability for the full amount of payroll taxes (even their employees’ portion),” Andy Grewal, a University of Iowa law professor, wrote in an email. “What the authors want requires legislative attention.”

That’s quite a roll of the dice, either way. What happens if Congress refuses to play along, especially if Trump uses it to block House Democrats from getting anything for their own priorities? They might end up glad that their HR departments hung onto the withholding:

“He does have the authority to postpone the collection of the payroll tax under the Internal Revenue Code,” said Michael Graetz, a professor of tax law at Columbia University and author of The Wolf at the Door: The Menace of Economic Insecurity and How to Fight It. “But it’s only the authority to postpone and not forgive.”

“He doesn’t have the authority to forgive the taxes,” said Graetz. “Only Congress can do that.”

There’s a more basic problem with this idea, which is that it aims stimulus at the wrong cohort, and through the wrong mechanism. The payroll tax holiday will benefit people who are already working, when the main crisis in consumer spending is with people who are out of work. That is why Congress passed the problematic federal bonus of $600/week to unemployment benefits — to keep them paying their bills and making necessary purchases. People who are still working aren’t the best targets for stimulus at the moment — and to the extent they are, direct stimulus in the forms of checks is better than reducing withholding for a temporary period of time.

That requires some compromise, which appears in short supply at the moment. This might just be a threat to break a deadlock in negotiations, but it will likely take more than that to get past the main issues — aid for states and liability protections for businesses:

House Speaker Nancy Pelosi, D-Calif., Senate Minority Leader Chuck Schumer, D-N.Y., Treasury Secretary Steven Mnuchin and White House chief of staff Mark Meadows will meet at 3:30 p.m. ET on Tuesday, NBC News reported. Prior to the huddle, the Trump administration officials will attend the Senate Republican policy lunch.

The parties have come close to a consensus in only a few areas, such as extending funding for Paycheck Protection Program loans for small business, an administration official told CNBC on Monday night. Mnuchin has said Democrats and the GOP agreed on the need to send another direct payment of up to $1,200 to Americans.

But neither side has budged on plans for extending extra federal unemployment insurance or offering relief to budget-crunched state and local governments, among other topics. Negotiators have failed to crack the impasse even after the $600-per-week jobless benefit and a moratorium on evictions from federally backed housing expired. The end of both policies puts millions of Americans at risk of poverty or homelessness during an economic collapse.

As the stalemate drags on, it appears unlikely Congress can pass a rescue package before the end of next week. Pelosi told Democrats on Monday she does not expect an agreement until next week, according to Politico.

The longer this drags on, the worse it will get for those already unemployed, and those who get laid off as eligibility for the PPP loan/grant program ends. Neither of those situations will be helped with a payroll tax cut, which makes it a bad bet considering the stakes involved.

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