Congress is under pressure to pass a major tax cut to address not just the immediate dislocations caused by the coronavirus pandemic but also the hit to medium-term commerce that would result if fear becomes self-reinforcing and leads to a pullback in spending and investment plans.
President Trump is calling on Congress to enact a payroll tax holiday, which would amount to a roughly $807 billion tax cut, according to the Penn Wharton Budget Model — far bigger, in annual terms, than his 2017 tax cut. “Only that will make a big difference!” he tweeted Friday.
A tax cut that size would be a fiscal stimulus on the scale of President Barack Obama’s 2009 stimulus bill, which was enacted in response to the biggest financial crisis since the Great Depression.
The point would not be to undo the damage caused by sick people unable to show up for work. That is what economists refer to as a “supply-side” shock, one that the government cannot address through fiscal policy. Indeed, it is likely better in the long run for commerce to slow down in the short term to prevent the further spread of the virus.
Instead, the purpose would be to prevent the additional slowdown that could come if the public, out of fear, unnecessarily cuts back on plans to spend, which could in turn lead businesses to curtail investment, creating a self-sustaining loop of falling demand. “Fear, uncertainty, and job loss could stifle demand,” explained former George W. Bush economic adviser Donald Marron. “That’s why we see proposals to distribute cash, cut payroll taxes, etc.”
So far, members of Congress of both parties have not been receptive to the idea. Yet, many prominent economists and officeholders are saying that, while the payroll tax cut may be sufficiently large enough for the scale of the problem, something is needed that would go out the door even faster to households and reach more people directly affected by the pandemic.
Former Clinton Treasury Secretary and top Obama adviser Larry Summers said Friday that the government should be “getting money into people’s pockets, credit into the hands of businesses, taking advantage of this moment to make necessary investments in infrastructure, and perhaps, most critically, making sure that people are getting paid for their sick leave.”
House Democrats and the administration negotiated Friday on an emergency package that would include paid leave for workers kept at home by illness or quarantines. But Summers, a Harvard economist, said, “We’re going to need much more in terms of direct injections into the economy.”
Greg Mankiw, another Harvard economist and former adviser to Bush, advocated sending hundreds of billions directly to households.
“Considering the difficulty of identifying the truly needy and the problems inherent in trying to do so, sending every American a $1000 check asap would be a good start,” Mankiw wrote on his blog Friday. “A payroll tax cut makes little sense in this circumstance, because it does nothing for those who can’t work.”
“There are times to worry about the growing government debt. This is not one of them,” he wrote.
Bush sent checks to households when the economy deteriorated in 2008 in the form of tax rebates of up to $600 per individual plus $300 per child. The stimulus amounted to more than $150 billion that year, not adjusted for inflation.
Pelosi has said that Democrats will pursue another economic response bill once they’ve passed the one currently in consideration.
Separately, Democratic legislators introduced legislation Friday to send a check of between $1,000 and $6,000 to every person who earned less than $65,000 last year, with 200 million checks going out within three weeks of the bill’s passage.
“We must soften the blow for workers as large gatherings and events are canceled and hours are cut,” said Rep. Ro Khanna of California, who authored the bill along with fellow congressman and former presidential candidate Tim Ryan of Ohio. “A payroll tax cut is not sufficient.”
Another option to get money in the hands of the public quickly would be to accelerate tax refunds. Paul Kupiec, a finance expert at the conservative American Enterprise Institute, wrote Friday that the government should “send each household that files a tax return a refund of $5,000, roughly equal to the average refund for the 2019 and 2020 tax years combined, and recoup the expenditures by withholding refunds, or surcharging taxpayers who do not get refunds, starting in 2022, when the economy has already recovered from the coronavirus recession.”
