Trump’s Payroll Tax Cut Would Dwarf the 2008 Bank Bailout
WASHINGTON — Almost overnight, President Trump has gone from insisting the economy would not need fiscal help to weather the coronavirus to proposing a stimulus plan that would cost more than the 2008 Wall Street bank bailout or the 2009 stimulus bill aimed at digging the United States out of a deep recession.
The centerpiece of Mr. Trump’s stimulus proposal, which remains a work in progress, is a temporary tax cut that by itself would add nearly $1 trillion to the national debt: a suspension of all Social Security payroll taxes through the end of the year. Some economists have cheered the idea as the right move at a fraught moment when workers are quarantined, schools are closing and large gatherings are being canceled.
But others — including those who have called for aggressive congressional action — say the plan would be an inefficient way of stoking consumer demand at a time of supply shortages and a growing number of quarantines.
Lawmakers on both sides of the aisle have given the proposal a cool reception. Senator Charles E. Grassley of Iowa, the Republican chairman of the Senate Finance Committee, told reporters on Wednesday that he did not see a need for immediate action on a payroll tax cut. Representative Steny H. Hoyer of Maryland, the second-ranking Democrat in the House, said Wednesday that the proposal was a “nonstarter.”
Mr. Trump and his top advisers have pitched the cut as a much-needed lift for consumers and businesses at a time when the spreading virus is beginning to chill economic activity. “The payroll tax holiday is probably the most important, powerful piece of this,” Larry Kudlow, the director of the National Economic Council, told reporters on Tuesday.
Under Mr. Trump’s plan — as described by Peter Navarro, one of his economic advisers — the government would, through the end of the year, stop collecting the 6.2 percent Social Security tax currently taken out of workers’ paychecks and the 1.45 percent tax taken for Medicare. It would also suspend equally large taxes paid on behalf of workers by their employers. Self-employed workers would be relieved of the entire 15.3 percent tax they currently pay.
For workers, earnings that are no longer subject to the payroll tax would now be subject to federal income taxes. Because lower-paid workers have lower marginal income tax rates, they would see a slightly larger percentage increase in their pay than workers with higher salaries. Some extremely high-paid workers would not see an increase at all because payroll taxes are capped by income, and some workers are close to — or have already reached — that limit. This means they are not set to have any Social Security taxes taken out for the rest of the year.
As a general rule, the largest percentage income gains would go to households earning up to $250,000 a year, according to calculations by the Tax Foundation, a nonprofit in Washington. The largest gains in dollar figures would go to households earning more than $123,000 a year, according to an analysis by the Institute on Taxation and Economic Policy in Washington.
How much individual workers would save depends partly on their employers. If an employer’s half of payroll taxes was lifted, they would need to decide whether to pass those savings directly to workers in the form of higher pay. Some economists see both sides of that equation as beneficial at a time of slowing economic activity.
The full payroll tax suspension “would not only increase workers’ take-home pay but would ease cash flow constraints for employers who are likely to face a rough patch in the incoming months,” said Karl Smith, the vice president of federal tax and economic policy at the Tax Foundation, which traditionally supports cutting taxes to spur economic growth. Mr. Smith said he supported the Trump proposal, though the Tax Foundation had not taken an official position.
“The payroll tax would be great,” Mr. Trump said on Wednesday. “Dems are not in favor of it. I’m trying to figure out why.”
Democrats are opposed for several reasons. Many economists, including liberals and conservatives who have called for stimulus measures, say there are much more effective ways to stoke demand and support growth during a viral outbreak. They note that cutting payroll taxes only helps Americans who are still working — and not those who are furloughed by quarantines or laid off amid floundering sales. The benefits would arrive gradually across paychecks instead of in one stimulative burst.
“A payroll tax cut like the president wants wouldn’t help the elderly, non-employed, who are at the most risk from the virus,” Michael R. Strain, an economist at the conservative American Enterprise Institute, wrote Wednesday on Twitter. “It would provide a larger benefit to the well off. And it isn’t targeted on those who need it.”
Claudia Sahm, an economist at the liberal Washington Center for Equitable Growth, said Thursday that lawmakers could still ward off a recession with stimulus, but “a payroll tax won’t do it.” She and Mr. Strain both favor giving cash assistance to Americans.
Cutting payroll taxes “will be too slow, and its effects too small,” Ms. Sahm said. “So small most won’t even notice it. Those who don’t have or will lose their jobs won’t get it at all.”
The political calculations around payroll tax cuts are fraught. The tax feeds the Social Security Trust Fund; while administration officials said they would most likely divert other money to avoid robbing the fund, cutting payroll taxes would further balloon the rising budget deficit.
The Committee for a Responsible Federal Budget estimates that suspending the tax through December would reduce federal revenues by $840 billion; the Tax Foundation said it could top $900 billion. The initial price tag for the 2008 Wall Street bailout was $700 billion, though less than $500 billion was actually spent and taxpayers ultimately recouped most of the funds. President Barack Obama’s 2009 stimulus package cost about $800 billion over the course of several years.
The full cost of Mr. Trump’s proposals, including assistance to affected industries like tourism and sick pay for quarantined workers, is likely to be tens — if not hundreds — of billions of dollars larger than the payroll tax cut alone.
If enacted, such a package would most likely push the federal budget deficit to over $2 trillion for the year. Data released Thursday by the Treasury Department show the deficit — which has grown significantly in recent years in part because of Mr. Trump’s 2017 tax cuts — is on pace to reach nearly $1.1 trillion for the 2020 fiscal year.
The record in nominal dollars for an annual deficit in the United States is $1.4 trillion, during the depths of the financial crisis.