Some former Trump administration officials who are no longer in the government were recently surprised by tax bills from their former employer related to payroll taxes from last year. Former President Donald Trump really seemed to believe he was going to put extra money in people’s pockets. Instead, he highlighted the differences between good and bad tax policies – differences that can have costly consequences.
The implementing regulation did not and could not abolish the tax, but only postpone it. In general, only Congress has the power to collect or abolish taxes.
Last August, in the midst of the Covid-19 crisis, Trump – against the advice of tax experts from right and left – issued an executive order instructing the Treasury Secretary to allow all employers to withhold the employee’s share of social security contributions for employees who Earn less than $ 4,000 in a fortnightly pay period.
What did that mean? This meant that an employer could choose not to withhold the 6.2 percent employee’s share due for approximately nine bi-weekly pay periods from September 2020 through this January. That’s a potential total deferral of over $ 2,000 in payroll taxes.
The catch? The implementing regulation did not and could not abolish the tax, but only postpone it. In general, only Congress has the power to collect or abolish taxes.
Under the executive order, the IRS issued a policy allowing employers to withhold those dollars for the first four months of 2021. But Congress and Trump passed a provision – in December 2020 – that allows employers to withhold those dollars for all of 2021, meaning federal employees must pay each paycheck extra, but spread over the year.
For the most part, perhaps on the advice of their own in-house experts, large employers mostly turned down Trump’s opportunity. This makes sense for several reasons, including the fact that it is the employer who is responsible for ensuring that these taxes are withheld in 2021. When an employee retires after taxes are deducted, those dollars can be difficult for the employer to get back. In addition, 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, Trump picked up on his idea in 2020. And Trump’s political commissioners – many of whom no longer work for the federal government – don’t have the option to repay the money gradually. They have to pay a lump sum for these former federal employees.
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A surprise change in your paycheck – or a large IRS bill at tax time – is never a pleasant surprise. Trump’s executive order, while presumably well intentioned, has ultimately really hurt the expectations of many government officials and their budgets. But it’s educational too. Tax policy is not sexy, but it remains vital – albeit dryly – important.
First, social security is popular because the idea of a safety net for retirement gives workers a sense of social security. But it’s also popular because of the way it’s held back.
It turns out that paying taxes in small sums over an extended period of time is a better experience for most taxpayers. We feel like the cost is not that high if it is slowly pulled from our paycheck instead of falling due in a lump sum.
Some tax experts have even requested that state governments adopt these principles for property taxation. The argument is that if local authorities withheld property taxes on a monthly basis, as banks do on mortgage loans, people would be able to make those payments more easily and the government would be more certain of getting taxpayers’ money due.
Nobody likes to pay taxes, but the experience can be better or worse depending on how we shape it. The main lesson here is that poorly designed tax policies can really harm citizens’ lives. The good news is that it is possible to do better.
With Tax Day right behind us, one possibility should be more popular: a quick return. The completed tax return was a pilot program in California in 2004 with a free pre-filled state tax return based on a taxpayer W-2 and filings from previous years. It saved taxpayers time and money and was less prone to error than other preparation methods. Californians liked it the most, and California partially adopted it in their CalFile system, but it never got widespread.
This is good tax design that makes people’s lives easier. For most people, there is almost no reason to file an income tax return every year. The government knows everything it needs to know to get your taxes right.
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The GOP and Trump intuitively supported this idea in 2017 when they suggested filing a tax return on a postcard. Even if the tax return didn’t come up on a postcard, the idea behind making tax payments easier is good and within reach.
While I’m sorry that many government officials experienced budget strains in early 2021, hopefully we can learn what not to do in the future – and maybe even look for ways to modernize our tax system in the future.