The TCJA, combined with a cynical PR campaign from the GOP and the corporate world, could hit American families hard in the 2019 tax season
Republican congressional leaders and President Trump have made loud claims about how great the recently passed Tax Cuts and Jobs Act (TCJA) will be for typical American families. When will these families be able to conclusively judge the truth of these claims? Not for a long while. The changes from the new tax law took effect on January 1. Companies now have to figure out how much to change workers’ tax withholdings to comply with the new law. To do that, they need guidance from the Internal Revenue Service (IRS).
But this is the same IRS that has seen its budget cut by 18 percent and its workforce cut by 14 percent since 2010. And it’s the same IRS that would send home over half of its workforce if the government shuts down again. While a deal was reached to end the current shutdown, that deal only funds the government through February 8th. All as the 2018 tax filing system ramps up and 2017 tax returns flood into the agency.
Typically, this shouldn’t be much of an issue. A shutdown would usually only push back the timing of withholding changes. The IRS would understandably take more time to issue guidance, and companies would simply implement the new withholdings later in the year.
But the Trump administration has already been pressuring the IRS to aim for speed over accuracy in new withholdings. Further, they would love companies to err on the side of withholding too little and boosting workers’ take-home pay, even if this meant that these workers have to make large payments back to the government in 2019. After all, the salience of the TCJA is as high as it’s going to be, and this administration is not shy at all about putting political expedience over smart policy. And telling workers that the tax cut is already working for them is awfully expedient in a mid-term election year. If the administration continues to focus on speed, then what was already a risk of under-withholding would be augmented by a government shutdown.
The administration has ample ability to apply that pressure, as the Treasury’s current Assistant Secretary for Tax Policy, David Kautter, is also, bizarrely, moonlighting as the acting commissioner of the IRS.
Finally, even after the IRS issues guidance, companies have to implement that guidance. And there’s another considerable risk to watch for here.
Many companies are already firmly onboard the marketing campaign to trumpet the wonder of the TCJA, claiming loudly that each bonus they have sent out stems from corporate tax cuts. Such claims are nothing but PR. (We’ll explain why we know this in more detail in an upcoming blog post.) But the simplest explanation is that this is just not how the economic theory linking corporate tax cuts to wage gains works. To be clear, we don’t believe this theory applies to the current situation, but even if it did, it would not work like this. Can households really trust companies that have proved so willing to lie to workers in the name of defending the TCJA to be scrupulous about withholding the proper amount of tax from workers’ paychecks? After all, under-withholding just means their employees have to mail larger checks to the IRS in 2019. Do we really think companies doing PR work for the TCJA care about that?
The IRS was already understaffed by years of budget cuts and could become severely understaffed by another government shutdown in February. All while they’re under political pressure to keep withholdings as low as possible and get new withholding guidance out the door quickly. And the companies that have already engaged in PR for corporate tax cuts aren’t exactly trustworthy for ensuring withholdings aren’t too large. This combination means that there’s considerable risk that many households under-withhold this year. Households should take this risk seriously, or they’ll be left trying to find money to pay the difference in 2019. In short, the combination of the TCJA and truly cynical partnerships between Republicans and their cheerleaders in the corporate world have made the 2019 tax season a potential time-bomb for typical American families.