Trump wants to cut payroll taxes to cope with coronavirus fallout. Would that help the economy?
Looking for big help thanks to a cut in the Social Security and Medicare tax? Don’t count on it right away.
President Donald Trump has long sought a reduction or temporary halt to the payroll tax. Workers and employers each pay 6.2% for Social Security until their income reaches $137,700, and 1.45% in most cases for Medicare. The highest earners pay another 0.9% in Medicare tax.
The administration Tuesday said it is considering sending cash payments to taxpayers within the next two weeks to prompt a quicker stimulus. But Trump would not rule out a payroll tax at some point.
“We’re looking at payroll tax, and we’re looking at various other forms of getting money to people. And the payroll tax is something that I’ve always liked,” Trump said. “The problem is it does take a period of time — you know, months — before they really see something.
There’s little enthusiasm for a payroll tax cut outside the White House. It just doesn’t seem to fit what’s needed now or for quite awhile.
“This (crisis) is driven by a fear of disease,” not a sudden slump in consumer spending, said Howard Gleckman, senior fellow at the Urban Institute-Brookings Institution Tax Policy Center.
Advocates maintain that the cut would show up immediately in paychecks, providing a quick, ongoing stimulus.. But there’s little appetite, particularly among Democrats, for a payroll tax freeze. “It doesn’t target at the people who most need the help,” Senate Democratic Leader Chuck Schumer of New York said Tuesday.
.Experts see several problems:
▪ It wouldn’t get to people who need it most.
“It’s not going to reach people who are out of work or are receiving disability,” since they are not working and paying the tax anyway, said Chye-Ching Huang, senior director of economic policy at the Center for Budget and Policy Priorities, a progressive Washington research group.
Nor would a payroll cut be a huge help in high-income, high-tax states such as California, since such a cut would be minimal.
“A significant part of the payroll tax cuts would go to people who are still employed and have enough resources. Past experience tells us that they would put it away for potential future job loss rather than increase demand today by spending it,” said Jerry Nickelsburg, UCLA Anderson forecast director.
California had a lot of hope for a healthy economy in the months ahead until the coronavirus outbreak, notably because the recent U.S.-China trade agreement spurred optimism. That’s gone, said Nickelsburg. The UCLA forecast Monday predicted that the state would be hit harder than the rest of the U.S. by the recession.
“Fewer goods than expected this time of year are coming into the ports, and the logistics industry is already feeling the pain,” he wrote in an assessment of the state economy.
▪ While instant cuts are politically popular, they often don’t have a huge impact on consumer behavior.
President George W. Bush and Congress tried to soften the economic slump of 2008 by approving rebates for lower and middle income taxpayers of up to $1,200 per family. But the Great Recession continued.
The broader economic stimulus package aimed at easing the pain of the recession in 2009 included President Barack Obama’s “Making Work Pay” tax credit of $400 per individual and up to $800 for married taxpayers filing joint returns during 2009 and 2010. Lower and middle to upper middle income taxpayers could claim the break.
In 2011-12, payroll taxes were cut 2 percentage points to 4.2%.
A 2% cut today would give someone earning $137,700 a total of $2,754 a year. But a person earning $40,000 would get $800.
The payroll tax cut has appeal because it’s easy to explain and roughly 70% of wage earners pay more in Social Security and Medicare taxes than in income taxes.
But the 2011-12 cut had little impact on demand. The nonpartisan National Bureau of Economic Research found that 65% of taxpayers used the savings “to improve their balance sheets” by saving or paying down debt, rather than spending.
▪ A big economic threat today is the threat of dwindling supplies, not demand.
“This can be a supply problem,” said Gleckman. “If people can’t go to work, nothing is being produced,so there would be nothing on shelves to buy.”
“Supply disruptions can lead to more widespread reductions in demand. Production workers who get laid off or have their hours cut due to a shortage of parts, for example, will spend less than they did before the layoff,” wrote Chang and Chad Stone, chief economist at the Center on Budget and Policy Priorities.
Recent moves by the Fed to bring interest rates down and spur borrowing, combined with a payroll tax break for employers, could be of some help, wrote Garrett Watson and Huaqun Li of the nonpartisan Tax Foundation.
It “may give firms room to prevent layoffs or a reduction in investment they would otherwise be forced to make,” they wrote.
But they conclude that “temporary tax policy should be viewed skeptically, as there is a large literature suggesting that temporary changes in tax policy do not spur long-run changes in saving and investment decisions.”
But Nickelsburg told McClatchy he saw little immediate benefit from a payroll tax cut. “People would not be inclined to spend money right away and increase demand for goods.”
What’s important now, said Gleckman, “is get the disease under control and convince people you did.”
This story was originally published March 17, 2020 at 4:29 PM with the headline "Trump wants to cut payroll taxes to cope with coronavirus fallout. Would that help the economy?."
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