President Trump has proposed to eliminate payroll taxes that fund Social Security and Medicare through the end of the year to provide the economy with a shot of adrenaline. The idea is to put after-tax take-home pay in the hands of people who are likely to spend it right away to help staunch the economic pain caused by the COVID-19 pandemic, but in practice it wouldn’t make much sense.
Payroll taxes include the Social Security tax, which is 12.4 percent of earned income up to a maximum of $137,700 for 2020. Employers and employees each pay half. The Medicare tax, also evenly split between employers and employees is 2.9 percent of earned income with no maximum. Married couples filing jointly who make $250,000 or more and individuals who make over $200,000, pay an additional 0.9 percent.
The payroll tax cut idea is not new. In 2011 and 2012, the Congress and President Obama reduced the employee share of the tax from 6.2 percent to 4.2 percent and filled the resulting gap in the Social Security Trust Fund with general revenues.
While Trump has fixed his sights on getting the payroll tax holiday into the next coronavirus stimulus bill, it is unclear whether he can get Republicans, much less Democrats, to go along with such a proposal. Democrats argue instead for expanded unemployment insurance and aid to state and local governments.
Congressional Republicans have also been slow to endorse the payroll tax rollback, claiming it is too early to argue what should go into the next stimulus bill. They are also concerned with adding to a budget deficit that is forecast to balloon to $3.7 trillion this fiscal year.
Cutting payroll taxes does not make sense because it would do little for the more than 40 million Americans who have applied for unemployment in the last three months, especially lower income people in industries like tourism and hospitality. If you don’t have a job, a payroll tax cut does you not good at all. Even among those who are working, such a tax cut would be highly regressive. High-income people would get far more than low-wage workers.
Cutting payroll taxes would not help business cash flow, since the CARES Act already allows many firms to defer paying payroll taxes until 2021 and 2022. Many economists say a payroll tax holiday alone isn’t enough to bolster consumer spending, a prime driver of the economy, and spur companies to begin hiring.
Supporters of Social Security and Medicare also oppose the president’s proposal. They claim any payroll tax cuts that reduce revenue flowing into the trust funds would threaten Social Security’s ability to continue paying benefits to 64 million Americans who depend on them for their economic survival. Seniors directly affected by taking their money from the trust fund will not see a dime of relief since most of them are not working.
There are alternatives to the payroll tax cut that would provide more direct economic stimulus. One way to keep workers on payrolls and help businesses stay afloat would to be expand the existing employee retention tax credit that was part of the CARES Act. This provision provides eligible employers a tax credit against employment taxes equal to half of qualified wages. There is bipartisan support to increase the credit from 50 percent to 80 percent of wages and benefits. It would be raised to cover $45,000 of wages and benefits instead of the $10,000 currently offered.
Other proposals that merit consideration, such as an infrastructure package, a tax credit to incentivize domestic manufacturing, and another round of stimulus checks to directly address the pandemic-induced economic downturn.
Hopefully the parties will overcome their ideological differences and compromise on additional injections of public resources. The downside is that acting in a fiscally responsible way may significantly affect each party’s presidential candidate. Now is not the time to prioritize election prospects over staring down a depression.
