What’s the DEAL with Trump’s payroll tax deferral?

On August 8, 2020, Trump announced a deferral of payroll taxes. The measure was met with a lot of confusion and criticism. Coming amid the lack of Covid-19 relief, it seemed a poor substitute for a check or unemployment benefits. After all, it affected the already-employed, not those who were experiencing job loss. What happens when employees change jobs? Moreover, unless the deferral is permanently forgiven, it is just that-a deferral. Moreover, it would have to be paid back, essentially doubling taxes later on. So what’s the deal? To me, it’s political.

When I saw this announcement, my mind immediately went to the political consequences. First, it has to do with the election. If Trump loses the upcoming election, Biden, presumably would be stuck collecting the doubled taxes. If Trump and Republicans win, Congress could permanently forgive the deferred taxes and Trump could take credit. According to Tuovila, writing for Investopedia;

The Presidential Memorandum includes language that hints at the potential for future tax forgiveness. “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” The Trump administration has been pushing for the forgiveness of all deferred Social Security taxes, but that power lies solely with the legislative branch.

Second, and the bigger issue, is that it is an effort to defund, and dismantle, social security. House Ways and Means Social Security Subcommittee Chairman John B. Larson acknowledged this agenda in his “Save our Social Security Now” hearing on September 24, 2020, “and so, when some on the other side of the aisle talk about ‘terminating’ Social Security’s payroll contributions, they are threatening the very existence of this bedrock program.”

Political Involvement Surrounding the Executive Order

There are 2 issues here, although one obscures the other. First is the issue of defunding. As deferral not forgiveness, it allegedly won’t affect the Social Security Trust Fund. Yet, Social Security can’t really run out, Greenspan said this to then-Speaker Paul Ryan in a Congressional hearing;

That social security needed to be funded by workers was a way to “sell” the system.

Second, it’s a matter of perception. FDR knew this when he created Social Security as part of the New Deal. Workers needed to see the tax money leaving their checks, otherwise they might not feel entitled to it later. If they don’t feel they’ve earned it then they won’t insist on having it. Under the Reagan administration earned was dropped from “entitlement” and entitlement changed from a positive term to a pejorative. As FDR said in 1941;

We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program”

I’m still not sure about Modern Monetary Theory, but I will say that reading about it has fundamentally altered my view of the political side of economic issues and allowed me to see this payroll tax “deferral” for what it is.



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