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President Trump's decision to halt the collection of payroll taxes – bypassing a deadlocked Congress – could add an additional $40 billion a month to the paychecks of Americans, JPMorgan Chase said in a new research note.
Trump on Saturday signed an executive action deferring the payroll tax collections from Sept. 1 through Dec. 31 for individuals earning less than $104,000 annually, or less than $2,000 per week.
Currently, all employees and employers pay a 6.2% payroll tax on wages capped out at $137,700. Right now, an employee earning $50,000 per year would pay $3,100 in payroll tax. That money is used to fund programs like Social Security, health care, unemployment compensation and workers’ compensation. Workers also pay a Medicare tax of 1.45%.
During the period that payroll taxes are paused, Americans can expect to see a bigger paycheck. Larry Kudlow, a senior White House economic adviser, estimated during an interview with CNN that the deferral could save the average American about $1,200 over four months beginning in September.
The maximum benefit that Americans could see during that four-month period is about $2,149. In a note to clients on Monday, JPMorgan Chase estimated the postponement of the tax could free up about $30 billion to $40 billion in liquidity per month across American households.
"However, it remains quite unclear whether employers will actually change withholding schedules, particularly if it could lead to financial uncertainties in 2021," JPMorgan Chase economist Michael Feroli wrote in the note. "Moreover, there remain questions about the constitutionality of this order, and those questions will reinforce caution on the part of employers."
Trump has pledged to pursue a permanent cut to the payroll taxes, but without legislation, those payments will still be required by the delayed due date.
“If I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax. I’m going to make them all permanent," Trump said during a news conference in Bedminster, N.J. on Saturday. “In other words, I’ll extend beyond the end of the year and terminate the tax,” Trump added later. “And so we’ll see what happens.”
In all, Feroli estimated that Trump's four execution actions would inject up to $100 billion into the U.S. economy – substantially less money than lawmakers were considering. While the price tag remained a point of contention between Democrats and Republicans, the stimulus package was expected to cost at least $1 trillion.
However, negotiations between the two sides stalled out last week, putting at risk aid for families, businesses and the U.S. economy, including a fresh round of $1,200 stimulus checks, extra unemployment aid for millions of out-of-work Americans, $100 billion to help reopen schools and relief for cash-strapped state and local governments.
Critics, including Democrats and some Republicans, say that temporarily pausing payroll taxes is an ineffective way to boost the nation's beleaguered economy because it does nothing to aid the millions of out-of-work Americans who are currently not receiving a paycheck.
”This fake tax cut would also be a big shock to workers who thought they were getting a tax cut when it was only a delay,” Sen.Ron Wyden, the top Democrat on the Senate Finance Committee, said in a statement. “These workers would be hit with much bigger payments down the road.”
After nearly two weeks of talks that have yielded no substantial progress, Trump acted unilaterally, issuing executive orders to provide $400 in weekly unemployment aid to unemployed Americans ($100 of which would come from states), extend student loan relief and discourage evictions.
However, some of his proposals would likely face legal challenges. The Constitution gives Congress the power of federal spending, and critics say Trump does not have the legal authority to issue executive orders allocating how much money should be spent on the pandemic.