Taken together, recent separate emergency actions by Treasury and Congress will defer an estimated $800 billion of payroll and income tax payments. These postponements are automatic, and the amounts postponed are unlimited.
These deferrals of tax, approximately equal to 3.5 percent of GDP, are in effect interest-free loans to taxpayers. They will provide much-needed cash flow to businesses with plummeting sales revenue and to individuals with lost wages.
Unlike other federal emergency measures designed to inject liquidity into the economy, there are no borrower qualifications, such as being in a distressed industry, and there are no limitations on uses, such as prohibitions of layoffs, executive pay hikes, or stock buybacks.
Notice 2020-18, 2020-15 IRB 1 (released on March 20), provides “relief for taxpayers affected by the ongoing coronavirus disease 2019 pandemic.”
Specifically, the April 15, 2020, due date for federal income tax payments has been automatically postponed until July 15, 2020. This relief applies without limitation to income taxes paid by individuals and corporations. It applies to estimated payments by individuals and any tax due when filing an annual return.
The relief also applies to installment payments due on April 15, 2020, for section 965 transition tax on untaxed foreign earnings (not included in our estimate). It does not apply to taxes other than income taxes, such as payroll or excise taxes.
According to Treasury data for calendar year 2019, individual tax payments (excluding withholding) for the months of April, May, June, and July were $364 billion.
Also, in 2019 corporate tax payments for the months of April, May, June, and July were $111 billion. (See figures 1 and 2.)
If these payments are assumed to remain unchanged in 2020, Notice 2020-18 will inject a total of $476 million of short-term liquidity into the economy from now until the midsummer, with that entire amount scheduled to be repaid on July 15.
Medium-Term, Payroll Tax Deferral
Under section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748), payments by employers and self-employed individuals of the 6.2% tax on wages for Social Security are postponed until after 2020.
Half of these deferred taxes will be due in 2021 and the other half in 2022. (As of this writing, the CARES Act is expected to be signed by the president on March 27.)
As noted, postponed taxes provide critical liquidity for hard-hit employers — such as those in restaurant, entertainment, retail, and passenger transportation businesses.
However, many risk-averse individuals and businesses with strong balance sheets are seeking a safe harbor.
Paying taxes in advance to the government of the United States — yes, you read that right — can be an attractive alternative to investing in Treasury bills. Rates on Treasury bills are close to zero and even negative. (As of this writing, the yield on 10-year Treasury notes was 0.813 percent; the yield on three-month Treasury bills was -0.028 percent.) Some European taxpayers were already prepaying tax before the coronavirus outbreak. And tax administrators were trying to prevent it.
Data from Treasury’s Financial Management Service indicate that in calendar year 2019, the total employer portion of Social Security tax and one-half of the corresponding tax paid by self-employed individuals totaled $465 billion.
Calibrating that figure to correspond to the 9 months of what the statutory text calls the “payroll tax payment period” yields $349 billion of potentially postponed employer payroll taxes under the proposed legislation. Of course, we normally expect payrolls and payroll taxes to grow. These are not normal times.
On March 26 the Department of Labor reported that nationwide unemployment insurance claims for the week ending March 21 were 3.38 million.
These claims alone would increase the national unemployment rate from 3.5 percent to 5.5 percent. Based on Labor Department national occupational employment data for 2018, we tentatively surmise that about 13.6 million Americans work in restaurants, 10.2 million in retail, and another 3 million in travel, entertainment, and other nonessential businesses that require close contact with customers (for example, barbers).
Unfortunately, these figures — which do not include factory or air transport workers — suggest the new and startling unemployment claim figures may be only the beginning of a larger increase in unemployment for at least the next few months.
If, for purposes of conservatively estimating the size of payroll tax deferral, we assume taxable payroll levels for the remainder of 2020 will on average equal 90% of their 2019 levels, total deferred payroll taxes would be $314 billion.
Under the new legislation, $157 billion of that postponed payroll tax would be due without interest or penalty in 2021, and another $157 billion would be due in 2022.
The exact timing of those postponed payments is left up to Treasury. None of this will affect the Social Security Trust Fund because the Treasury general fund will make up the shortfalls.
Combining our estimate of $476 billion of short-term income tax relief with our estimated $314 billion of medium-term payroll tax relief yields a total of $790 billion of postponed tax payments.
As of this writing, the Joint Committee on Taxation has not provided an estimate of the payroll tax postponement legislated by Congress. Because it is not prompted by legislation, an official estimate of the effect of Notice 2020-18 is unlikely to surface.
As a delivery mechanism for injecting liquidity into the economy, postponement of tax payments is a mixed bag. The big plus is that instead of sending payments back and forth between the private sector and the federal government, the private sector just keeps cash due to the federal government.
Besides administrative ease, the positive impact on cash flow is rapid.
However, the immediate positive impact is limited. In the case of payroll tax relief, it is spread out over the following 9 months, beyond what we all hope will be the end of the crisis period.
Also, the relief is in many respects haphazardly targeted. Individuals who are self-employed benefit greatly from postponement of an April 15 estimated payment. Employed individuals who withhold gain little. For individuals who overwithheld, there is no benefit at all.
Income tax postponement does not target businesses most in need. Businesses with curtailed sales revenue (like restaurants) will get the least benefit while high-flyers (like businesses providing online services) get the most.
In 1992 President George H.W. Bush reduced income tax withholding to provide a $25 billion temporary stimulus to the economy.
In the current situation, Treasury has sort of done the opposite by leaving withholding unchanged and postponing other income tax payments. Except for that episode, and much smaller-scale relief provided during national disasters, the federal government — to the best of our knowledge — has not modified the timing of tax payments to provide humanitarian relief and fiscal stimulus.
Nobody was thinking about tax postponement a month ago. But it is likely to be a big issue for years to come.
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