Posted on March 29, 2020
Policymakers in recent days have enacted a number of tax policy changes to quickly get funds to businesses and individuals as emergency relief from the effects of containing the spread of the novel coronavirus. The most significant legislation is the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. I’ll focus here on the provision of that law that significantly affects the amount of taxes withheld from paychecks by businesses and remitted to the Treasury.
- The main provision affecting withholding remittances allows businesses to delay paying their share of Social Security taxes through the end of the calendar year, with those payments instead due a year or two after that.
- I estimate that the law change will reduce total tax withholding over the next nine months by about 16 percent, which is relative to the amount that would have been paid without the law change. Those effects on withholding are much bigger than from any other law changes of the past 15 years that we assess on this website.
- We’ll need to correspondingly adjust our measurement of observed withholding growth in order to measure withholding on a constant tax law basis and get an idea of how wages are changing.
- By my reckoning, the Joint Committee on Taxation’s estimate of the revenue effects of the provision roughly implies that no such employer taxes will be remitted for the rest of the calendar year. Although I don’t expect that all firms will elect to delay the payments, I expect they very largely will.
- We’ll be tracking data over the year to assess the effect of the provision in retrospect. Because delaying the payments is voluntary for businesses, that adds uncertainty to estimates of the effect on tax revenue.
More details follow:
The provision with the biggest effect on withholding will allow all employers to delay paying their share of the Social Security tax for the rest of the calendar year. (The tax, which is assessed at a 12.4 percent rate on employees’ wages, is split equally between the employee and employer.) About 17.5 percent of total withholding remittances stems from the employer half of the Social Security tax–the part affected by the legislation. The firms will be required to pay half of the deferred amount by the end of December 2021, and the other half by the end of December 2022. That’s a significant delay.
The Joint Committee on Taxation (JCT), the Congressional estimator of proposed tax law changes, estimates that the provision will reduce federal revenues by about $350 billion in fiscal years 2019 and 2020 (basically the months from April through December, which cross the federal fiscal year), and then increase revenues by nearly the same amount, almost $340 billion, over the subsequent two fiscal years. (A small part of the estimate also includes an equivalent delay for self-employed individuals who pay their Social Security taxes via estimated payments, not withholding.) By my reckoning, the JCT estimate lines up closely with just about the total amount of employer-paid Social Security taxes that would, without the law change, be paid in the next nine months. That is, as best as I can tell, it looks like the estimate assumes that roughly all firms take advantage of the allowed delay.
I think we can estimate the revenue effect of the provision with much precision except for the so-called “take-up rate”—that is, the proportion of firms that elect to use the delay. Participation in voluntary federal programs typically falls far short of complete. However, in this case businesses have their accountants and payroll processors monitoring things closely, and so participation will presumably be very high. Many firms need the funds badly, and the firms will be assessed no interest on the deferred withholding. There may even be political pressure down the road to extend the delay further or even, in the face of big required payments and the negative effects on the overall economy at that time, to forgive the payments altogether. It would be far from the first time that policymakers pushed off big payments by taxpayers that could weaken the economy.
I’m estimating that firms normally paying about 10 percent of withholding will not take advantage of the delay (so about 90 percent will), lowering the effect on total withholding from 17.5 percent (the share of total withholding subject to delay) to closer to 16 percent—though, sparing you at least some details, the precise amount depends on how much wages fall in the downturn. We should be able to track data over the year to assess that estimate: we can see how the Treasury Department estimates the monthly amounts of such withholding in the Monthly Treasury Statements (released a week and a half after the end of the month) and how the agency adjusts monthly transfers to the Social Security Trust Funds to make up for the lost revenue—given that the legislation explicitly holds the trust funds harmless. And we’ll also look at federal outlays for certain refundable payroll tax credits allowed by recently enacted legislation for smaller firms that maintain the size of their workforce or provide mandated sick and family leave to their employees. Those provisions interact with the payment delay and reinforce the likelihood that there will be little in employer Social Security taxes paid over the rest of the year.