(Bloomberg Opinion) — President Donald Trump announced on Monday that his administration would no longer oppose stimulus measures to support the economy as financial markets reel from the coronavirus outbreak. On Tuesday he reportedly told Republican senators that the centerpiece of his stimulus proposal would be a payroll-tax holiday through the November election, along with relief for affected industries.
Senate Republicans don’t seem enthusiastic about a cut in the payroll tax, which is the amount withheld from paychecks for Social Security. Senate Majority Leader Mitch McConnell is reportedly opposed, and other conservative GOP senators surely feel the same.
There’s a better way to go. More on that in a moment. First, here are some drawbacks to cutting the payroll tax.
It wouldn’t help workers who’ve lost their jobs because they aren’t getting paychecks. For them, there’s no withholding to cut. It wouldn’t help the elderly — a group especially at risk from the virus — many of whom are out of the labor force. It would provide a larger benefit for the well-off. A person with an annual salary of $100,000 would receive a $2,000 benefit from a 2% payroll tax cut that lasted a year. Somebody earning $30,000, by comparison, would receive $600. The benefits would arrive drip by drip, a little in each paycheck. That wouldn’t do enough for households affected by the coronavirus, which are likely to need a sizable infusion of cash to meet necessary expenses. The timing would be challenging. Because the tax cuts would be tied to payroll deductions, it could be harder to get people the money they need when they need it. Such a cut would reduce the revenue available to the Social Security program, which would almost surely result in a transfer to that program from general tax revenue. Doing this would reduce the fiscal discipline inherent in Social Security: that its spending is limited to the amount of money it receives from dedicated taxes. Undermining this fiscal discipline would threaten the public’s understanding of the program — that they pay into a pension plan while working, and draw benefits when retired — and invite other budget mischief in the future. A cut in the payroll-tax rate of 2 percentage points would cost between $140 billion and $150 billion over a year, according to the Committee for a Responsible Federal Budget. There’s no real evidence that the U.S. economy needs a fiscal stimulus of that magnitude at this point. It wouldn’t be targeted at the people who need the most help: low-income Americans and others who are economically vulnerable to the coronavirus, living in areas with severe outbreaks.
What would be better? Direct, targeted financial assistance. That would mean sending checks to low-income households in areas with a severe coronavirus outbreak, or who are otherwise economically vulnerable to the virus.
These payments would help the nonworking elderly along with workers, would not offer a larger benefit to higher-income Americans, would arrive quickly and in a lump sum, would be less expensive than cutting payroll taxes for all workers, and would be focused on those who really need assistance.
This assistance could begin immediately for low-income households in Seattle, New Rochelle, New York, and other areas where low-income Americans are sure to have trouble paying bills and buying necessities.
It would be better to wait to enact a payroll tax cut until there is a clearer need for fiscal policy to support the overall economy. Even then, the drawbacks would sting. Direct cash payments would be preferable as a form of macroeconomic stimulus, just as they are a better way to help Americans directly affected by the virus and the slump.
Republicans might be more willing to work with Trump on cash payments to low-income households in high-risk areas because they would add relatively less to federal deficits and debt. Many Republicans are also skeptical of the efficacy of a payroll-tax cut to boost the economy and calm markets. But the point of cash payments to the vulnerable is different — it is to help the neediest people most affected by the virus. Democrats, who are skeptical of tax cuts and who are calling for more targeted measures, would probably be warmer to this, as well.
Other ideas to help low-income Americans hit hard by the virus should be considered. And as I wrote last week, Congress should have a plan in place and ready to go in case the overall economic growth rate drops to the point that fiscal stimulus is needed.
But for now, let’s focus on people who need the most help making it through the crisis. Just send them checks.
To contact the author of this story: Michael R. Strain at [email protected]
To contact the editor responsible for this story: Jonathan Landman at [email protected]
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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