Trump’s Federal Tax Deferral Debacle Reminds That Good Tax Policy Is Important
Some former Trump administration appointees who are no longer employed by the government have recently been surprised by tax bills from their former employer associated with last year’s payroll taxes. Former President Donald Trump seemed to genuinely believe he was going to put some extra money in people’s pockets. Instead, he highlighted the differences between good and bad tax policies – differences that can have costly consequences.
The decree did not and could not abolish the tax, it only deferred it. In general, only Congress has the power to impose or remove taxes.
Last August, in the midst of the Covid-19 crisis, Trump published a decree – against the advice of tax specialists on the right and on the left – directing the secretary of the treasury to allow all employers to defer withholding from the wage share of social security contributions for employees earning less than $ 4,000 during a bi-weekly pay period.
What did this mean? This meant that an employer could choose to do not retain the employees’ share of 6.2 percent taxes owed for approximately nine bi-weekly pay periods from September 2020 to January. This is a potential total deferral of over $ 2,000 in payroll taxes.
The trap ? The executive decree did not and could not eliminate the tax, he only deferred it. In general, only Congress has the power to impose or remove taxes.
After the decree, the IRS issued guidelines allowing employers to withhold those dollars in the first four months of 2021. But Congress and Trump – in December 2020 – promulgated in law a provision allowing employers to withhold those dollars throughout 2021. This means that federal employees will have to pay extra with each paycheck, but spread over the year.
For the most part, perhaps on the advice of their own in-house experts, large employers mostly rejected Trump’s opportunity. This makes sense for several reasons, including the fact that the employer is responsible for ensuring that these taxes are withheld in 2021. If an employee retires after withholding tax, the employer may have difficulty recovering. those dollars. Additionally, it can be costly (not to mention administrative headaches) for large companies to change their accounting systems for a short period of time.
Unfortunately for government employees, the government, including the military, took Trump on his idea in 2020. And the people appointed by Trump – many of whom no longer work for the federal government – do not have the option of repaying the money gradually. For these former federal employees, they have to pay a lump sum.
An unexpected change in your paycheck – or a big bill from the IRS at tax time – is never a pleasant surprise. Trump’s executive order, while presumably well-intentioned, ultimately hurt many public servants’ expectations and their budgets. But it is also instructive. Tax policy isn’t sexy, but it remains vitally – so drily – important.
First, social security is popular because the idea of a retirement safety net gives workers a sense of societal security. But it is also popular because of the way it is restrained.
It turns out that paying taxes in small amounts over a period of time provides a better experience for most taxpayers. We don’t feel like the cost is that high when it’s slowly taken out of our paychecks instead of being owed all at once.
Some tax specialists have also asked state governments to adopt these principles to property taxes. The argument is that if city authorities were to have property taxes withheld monthly, as banks do for people with mortgages, people would have an easier time making these payments and the government would be more assured of receiving the taxes owed. .
No one likes paying taxes, but the experience can be better or worse depending on how we think about it. The main lesson here is that poorly designed tax policy can harm the lives of citizens. The good news is that it is possible to do better.
With Tax Day just behind us, one possibility should have more weight: a return ready. The return ready was a pilot program in California in 2004 with a free pre-filled tax return based on taxpayer returns W-2 and previous years. He saved taxpayers time and money and was less error prone than other preparation methods. Californians especially liked and California adopted it, in part, in their CalFile system, but he never took widely.
It is good tax design that makes life easier for people. For most people, there is almost no reason to have to file a tax return every year. The government knows everything it needs to know to pay your taxes well.
The GOP and Trump intuitively backed this idea in 2017 when they proposed they could table a tax return on a postcard. While the postcard tax return didn’t fly, the idea behind it, to simplify paying taxes, is good and is within our grasp.
So while I’m sorry that many government workers were on a tight budget early in 2021, I hope we can learn what not to do in the future – and maybe even look for some ways to modernize our tax system in the future.