With the stock market reeling, supply chains disrupted, and consumers engaging in “social distancing” because of the coronavirus outbreak, the economy will slow significantly in the coming months.
Of course, stopping the spread of the virus is the key to turning the economic corner. But no one knows for sure when that will happen. In the meantime, Washington must support consumers and businesses, especially smaller businesses, by lowering one of the most oppressive of all federal taxes — the payroll tax.
President Trump has called for a 0% payroll tax from now until the end of the year to boost the economy, but Congress seems to be waffling. A reduction to 0% would immediately increase take-home pay for millions of workers, shrink the cost of labor for businesses, and provide insurance against a downturn.
The payroll tax is imposed on both employees and employers to fund Social Security, Medicare, and other social insurance programs. Since 1955, the basic payroll tax rate has nearly quadrupled from 4% to 15.3%. Today, almost 70% of taxpayers pay more in payroll taxes than they do in federal income taxes. Altogether, the typical worker pays nearly twice as much in payroll taxes as in income taxes.
The payroll tax continues to impose a heavy economic burden on workers and small businesses. The maximum Social Security payroll tax for a single-earner family is now a whopping $7,960 annually. Moreover, payroll taxes are highly regressive, with the bottom fifth of households paying 6.9% on average while the top 1% pay 2.3%, according to the Tax Policy Center.
Suspending the Social Security payroll tax from April 1, 2020, through the end of the year would immediately support after-tax incomes for workers and cash flow for businesses, providing a much-needed boost to the employees and owners of the small businesses and industries most acutely hurt by the virus.
Although a payroll tax cut wouldn’t solve the myriad issues caused by the coronavirus, the effects at the margin would encourage workers to seek more hours and induce businesses to hire more workers.
Many high-income workers have already paid their full year’s worth of Social Security taxes by this time of year, so any cut would provide extra benefit to the middle and working classes. And, unlike other suggestions to boost government spending, the money would not be delayed by bureaucratic planning (like infrastructure projects) or flow-through rent-seeking special interests (industry-specific bailouts); it would instead go directly to workers and businesses.
Trump’s proposal would amount to a huge $800 billion tax cut or 5% of gross domestic product over nine months. The evidence from President Barack Obama’s payroll tax cut in 2011 found that people spent 35% of each dollar in tax relief. Therefore, a 0% payroll tax rate would boost the economy by $30 billion a month or 1.7 percentage points in gross domestic product over the nine-month time frame.
While a payroll tax cut would temporarily enlarge the budget deficit, it would be wise to weigh this against the more damaging costs of a deep recession. Regarding potential concerns about the effect on the Social Security Trust Fund, such a temporary reduction is unlikely to have significant lasting effect.
A payroll tax cut should not be a partisan issue. Obama supported a temporary payroll tax reduction during his first term. In 1990, my then-boss Wisconsin Republican Sen. Robert Kasten Jr. teamed up with New York Democratic Sen. Daniel Moynihan on payroll-tax-cut legislation that garnered the support of the National Federation of Independent Businesses and the AFL-CIO.
Tax cuts are the most efficient stimulus for the economy, and action needs to happen quickly. Congress should take up Trump’s proposal immediately to fight the economic effect of the coronavirus for hourly workers.
Cesar Conda, former chief of staff to Sen. Marco Rubio and chief domestic policy adviser to Vice President Dick Cheney, is a founding partner of Navigators Global, LLC.
