Trump Payroll Tax Cut Would Do Little to Ease Fallout From Virus

(Bloomberg) -- A payroll tax cut that President Donald Trump is pushing for in Congress would get money into consumers’ hands quickly but wouldn’t help those who’ve lost their jobs and may not be enough to stave off a recession, according to economists.

Cutting or suspending the payroll tax is one of the main ideas put forward by the president as his administration and Congress try to respond to the economic disruption caused by the spreading outbreak of the novel coronavirus.

“It presumably makes life incrementally easier for people who are working,” said Gordon Gray, director of fiscal policy at the right-leaning American Action Forum. “That’s presumably not the policy you need to pursue if people are out of work from a pandemic.”

Payroll taxes -- the 6.2% levies on wage income up to $137,700 used to finance Social Security -- are paid by the vast majority of American workers. Employers also pay a 6.2% tax for their employees. Gig economy workers, such as drivers for Uber and Lyft and other contractors, are supposed to pay both the employee and employer portions of the tax.

Trump hasn’t given any details about how much he proposes to cut the payroll tax or exactly how long, key factors in assessing the impact.

Read More: Trump Tells GOP He Wants Payroll Tax Waived Through Election

A one-year cut of 2 percentage points in the payroll tax, as was done in 2011, could generate modest economic growth -- about 0.3%, according to the Penn Wharton Budget Model.

That isn’t likely enough to counteract a big swing in employment and consumer demand and it comes with a potentially steep cost.

If an outbreak were to be bad enough to close schools and businesses for a prolonged period, individuals could be less likely to spend the extra cash while confined to their homes, muting the economic boost.

Additionally, cutting 2 points just for employees would cost the federal government up to $151 billion in revenue over a decade, according to the estimates. Any short-term economic gain is erased over that period because of the addition to the deficit, which is already set to hit $1 trillion this year.

Lawmakers could be looking at a cut about twice that size, possibly including employers. Senator Marco Rubio, a Florida Republican, said Tuesday that the plans under discussion could amount to about a $300 billion tax cut. Three people familiar with the president’s remarks said Trump told GOP senators Tuesday he wants the tax reduction to last at least through the November 2020 election, a move that would keep voters’ taxes low through the point where they decide whether to return him to office.

For individuals, the amount put back into paychecks depends on income. The payroll tax cut under President Barack Obama was about $896 for the average household, according to the Urban-Brookings Tax Policy Center. Spread over twice-a-month pay days, that amounted to $37.33 extra in each check.

In that instance, Congress agreed to reimburse Social Security from general funds to make up for the shortfall going into the program’s fund.

--With assistance from Alex Tanzi.

To contact the reporter on this story: Laura Davison in Washington at ldavison4@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Laurie Asséo

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