In pitching a payroll tax cut to ease the economic anxieties related to the coronavirus, President Trump is following in the footsteps of President Barack Obama, who cut payroll taxes in the wake of the financial crisis to increase demand and boost the recovery.
Yet Obama’s payroll tax cuts saw only mixed success, and veterans of his administration say they would have done the stimulus differently if they could.
“I continue to think it was the best we could do at the time given the political constraints. But it was far from optimal then and would be even further from optimal now,” tweeted Jason Furman, a professor at Harvard University and a former economic adviser to Obama who was involved in the negotiations in 2011 and 2012 that resulted in the employee payroll tax being reduced to 4.2% from 6.2%.
The problem with a payroll tax cut, Furman said, is that it would not necessarily benefit the people most vulnerable in the coronavirus outbreak. He gave the example of a one-year payroll tax cut of two percentage points: That measure would provide up to a $5,508 tax cut to a high-income couple, but only $500 to a single parent making $25,000 a year, and no relief for workers placed on leave without pay.
Furthermore, he noted, a payroll tax cut might not reach people desperate for money in time. It “just drips out with each paycheck, so it is spread out over time,” he wrote. “Right now, time is of the essence. I would much rather get people money sooner.”
Trump’s proposal is much larger, as he discussed with Republican senators Tuesday the possibility not just of cutting the tax but of zeroing it out through the election. Furthermore, he has said that he would like to provide alternative assistance to hourly wage earners, those who wouldn’t get paid if they were sent home as part of a quarantine.
But it’s unlikely that congressional Democrats would go along with such a plan. Its cost might make them balk, as it would amount to nearly $1 trillion, according to the Tax Foundation. Others might not wish to redirect funding away from Social Security, which is supported by payroll taxes. In the case of Obama’s payroll tax cut, which reduced taxes by more than $100 billion each year, the legislation directed other federal revenues to make up the difference to Social Security.
Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee, said on Tuesday that “a payroll tax cut can be an effective tool, but it’s not the best answer, in this case. A payroll tax cut would do little to help workers without paid sick days or those who have lost shifts and tips.”
The Institute on Taxation and Economic Policy, a left-of-center nonpartisan tax policy organization, found that Obama’s payroll tax cut didn’t benefit the lower and middle class very well. The study showed that the portion of the payroll tax cut that went to the richest 20% of households was 47% in 2011 and 46% in 2012.
Instead, a Congressional Research Service report from August of last year recommended “well-targeted direct government spending may be still more cost-effective, and a payroll tax reduction only directly helps those who are working.”
Another alternative to a payroll tax cut would be a tax rebate, which President George W. Bush employed in 2008 in the form of paper checks mailed to affected people. A study of Bush’s economic stimulus showed that it led to the typical family increasing spending by 3.5% after their rebate arrived and that it boosted overall nondurable consumption by 2.4% in the second quarter of 2008.
