Cutting payroll taxes is the wrong medicine

Trump’s dubious move to cut Social Security taxes won’t revive the virus-infected economy

Published August 12, 2020 7:55AM (EDT)

US President Donald Trump  (Photo illustration by Salon/Getty Images)
US President Donald Trump (Photo illustration by Salon/Getty Images)

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Donald Trump moved Saturday to drop the payroll tax for the rest of the year to revive our economy, a proposition most economists and even Senate Republicans reject.

Trump initially held back as negotiators for the White House and Democratic leaders ran into an impasse over a new coronavirus pandemic aid package. Then he offered a legally questionable executive order to eliminate the payroll tax to be seen as the last-minute hero.

It is unclear how dropping six months of payroll tax would help, and whether Trump can take the action by himself.

As presented, the payroll tax cut would be part of executive orders that would pay state-paid unemployment benefits through the end of the year, extend eviction and student loan protections — orders short on exactly the detail that has derailed the compromise talks. Where the states get the money was not explained.

Normally, that authority resides in the Congress and its constitutional power over spending. There will be lawsuits and messiness to follow, which seems to be fine by Trump, who already dangled a permanent payroll tax cut if he's re-elected. Trump believes the law is as Trump wants, and objectors can see him in court.

But let's set aside the questionable authority here. Cutting the payroll tax feels like the wrong tool for the problem at hand.

What virtually every other leader says is that in a time of pandemic and economic emergency, we need direct aid to individuals and businesses to stay afloat and a quick infusion of lots of cash. Eliminating payroll taxes for six months does neither, amounting to too small a total to be a stimulus, representing a drawn-out approach, and further harming both Medicare and Social Security in a health emergency.

What do we know?

Here's the conclusion of the Center for Budget and Policy Priorities: "A payroll tax cut would constitute poor and inefficient economic stimulus. Other stimulus measures that would be highly effective and for which there is great need — such as aid to help states cover their $650 billion in revenue shortfalls and avoid deep cuts to state services, strengthened nutrition assistance, extended unemployment insurance, and measures to maintain and bolster health coverage and care — should not be held hostage to a poorly conceived payroll tax cut proposal."

A New York Times analysis said, "Most economists, even conservative ones, do not rank a payroll tax cut anywhere close to the top of their list for best ways to support and stimulate the American economy as it struggles to climb out of the recession."

Team Trump argues that by reducing the cost of employing someone, and increasing the amount of money workers take home, the cut will make both hiring and job-seeking more attractive. So, how much would that be?

Payroll taxes are on a sliding scale but average 7.6% of weekly pay for workers and the same for employers. That money goes mostly to Social Security up to $137,700 in income, with less for Medicare.

Of course, if you're out of work, there is no benefit here. Aren't those out of work the people we want to help? Rather, the perceived benefit is all to incent employers to speed hiring. But for six months in the middle of a pandemic? How does this make sense? Besides, Congress already passed a bill this year that delays —but does not eliminate — the employer side of those taxes, meaning companies will not have to start paying their liabilities for this year until next year.

Overall, eliminating the payroll tax would favor high earners.

Suspending the taxes would cost the government about $400 billion from August through the end of the year, according to estimates from the Committee for a Responsible Federal Budget in Washington.

Senate Finance Chairman Chuck Grassley, a Republican from Iowa, warned this week that a payroll tax cut would create a "public relations problem," arguing that direct payments to families would prove more meaningful to individual voters.

A fix missing the problem

Despite Trump's obsession with cutting the payroll tax, it seems the paper-and-pencil exercises show there is no quick, effective infusion of money in the economy nor substantial direct help for individuals.

Obviously, the pandemic itself remains the biggest disincentive to the economy. Nothing in the executive orders Trump promises helps expand testing or equipping businesses, schools, child-care facilities or anyone else with tools to deal with the effects of the disease.

Business' main problem is the lack of customers for their products — both because of social distancing measures and because many customers' incomes have fallen dramatically as unemployment has risen. Businesses will not hire (or retain) more workers or invest in more equipment than they need to produce the goods and services they actually can sell.

At the end of the day, in more normal times, I would want to keep the payroll tax just to make sure we have functioning programs for the health and welfare of seniors, services which otherwise would require a congressional bill to restore if the tax is cut.

In the time of the pandemic, using this payroll tax as a major vehicle for aid seems way off the mark.

By Terry H. Schwadron

MORE FROM Terry H. Schwadron

Related Topics ------------------------------------------

Dcreport Payroll Taxes Politics Social Security U.s. Economy