A pair of economists are pressing policymakers to quickly act on a payroll tax cut to help deliver relief to American households from the economic effects of the coronavirus, but others in the profession are less enthusiastic.
“We know what to do to address a series of supply, demand, and financial shocks that are currently cascading through the economy,” Joe Brusuelas, chief economist for RSM US LLP, said on a March 9 National Association for Business Economics webinar. “What’s really called for here is a set of policies that will inject cash into household balance sheets, whether that’s through direct payments or a temporary payroll tax holiday.”
Congress is considering actions to counter the economic effects of the coronavirus, and President Trump said late March 9 that a payroll tax cut is among recommendations his administration plans to make to Congress.
David Wilcox of the Peterson Institute for International Economics agreed with Brusuelas. The Federal Reserve’s interest rate cut the week of March 2 was helpful as a way to send a message, but “monetary policy is at best a secondary player here — I put it at about priority number 31,” he said on the webinar.
The important thing for policymakers to keep in mind is the need to move quickly and not wait for all options to be designed before beginning to implement some measures, according to Wilcox. Policymakers should proceed on “multiple channels,” and as specific policy responses become ready for implementation, Congress should move to enact them, he said.
A payroll tax cut is a “known element of the fiscal playbook” that can be designed and implemented very quickly, and policies like that “should be moved forward as rapidly as possible,” Wilcox said.
In a March 3 blog post, Wilcox proposed that Congress prepare a 2 percentage point payroll tax cut, which for a family earning $60,000 a year would amount to an extra $600 in that family’s take-home income. That proposal could be designed with a trigger that would cause the rate to kick in if the unemployment rate rises by more than half a percentage point.
“By bolstering confidence, even the promise of added cash in consumers’ pocketbooks — if it’s needed — could help mitigate the severity of the downturn,” Wilcox wrote.
Brusuelas added that if the coronavirus outbreak worsens and more fiscal measures are needed, Congress should be careful not to just offer proposals that amount to “another form of crony capitalism” or that only benefit large firms. Rather, it should ensure that small and medium-size businesses are also the recipients of federal aid.
Not So Fast
As policymakers hunt for fiscal tools to head off fears of a recession, Alan D. Viard of the American Enterprise Institute says raiding payroll tax revenue shouldn’t be one of them.
A payroll tax holiday would “threaten the program’s fundamental principles,” he explained in a March 6 blog post. Congress designed the Social Security program to be a self-supporting program paid for by payroll taxes, and even if Congress transfers general revenue into the Social Security Trust Fund to make up for the payroll tax holiday loss in revenue, it violates the principle of fiscal discipline that underpins the program by making clear that spending by the program need not be limited to the payroll tax’s revenue.
“Although a temporary general revenue transfer would be less harmful than a permanent transfer, it should still be avoided. Any necessary fiscal stimulus can be provided through policies that do not affect Social Security,” Viard wrote.
Jason Furman, former chair of the White House Council of Economic Advisers, has likewise knocked the idea of a payroll tax holiday as having “significant drawbacks.” In an editorial for The Wall Street Journal, Furman wrote that the spread-out time frame of the benefit would be too slow to have a substantial effect on the economy, and that distributionally it would provide more benefit to high-income taxpayers and less benefit to low-income taxpayers.
Instead of using the payroll tax as a vehicle for delivering household stimulus, Furman suggested Congress authorize a straightforward $1,000 payment to every U.S. adult and an additional $500 per child.
William Gale of the Urban-Brookings Tax Policy Center isn’t against the concept of a payroll tax cut as a response to COVID-19, but he cautioned that it wouldn’t be sufficient by itself.
“It doesn’t help people who lose their job or people who don’t have a job,” Gale told Tax Notes. “It doesn’t help the worker who needs to take sick leave but doesn’t have sick leave at their job.” However, he acknowledged that a payroll tax cut does have the “considerable advantage” of using an existing federal program to deliver the stimulus, rather than losing time to create a new one from scratch.