Trump’s Proposed Payroll Tax Cut Is Not the Right Answer

MARCH 13 UPDATE: After publication, the President proposed a more radical measure, elimination of all Social Security and Medicare taxes through the end of the year. Read new ITEP analysis of the proposal and latest blog post from Steve Wamhoff.

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The Trump administration is floating a cut in the Social Security payroll tax as a measure to counteract a potential economic downturn related to the COVID-19 virus. It should go without saying that a public health crisis requires government interventions that have nothing to do with taxes. But even if policymakers want to find ways to stimulate the economy beyond solving the health crisis, the payroll tax cut is not likely to be very effective.

Lawmakers enacted a 2 percentage-point cut in the payroll tax to address economic problems in 2011 and 2012. The policy was a compromise between President Obama and congressional Republicans who refused to extend other policies that were probably more effective.

The table below illustrates how the same proposal would affect taxpayers in different income groups if it was in effect for 2020.

Nearly half of the benefits (48 percent) would go to the richest 20 percent of taxpayers, meaning it would not be particularly targeted to those who need help. This is a problem because an effective economic stimulus would put money mainly in the hands of low- and middle-income households. These households would likely immediately spend any new money they receive, making purchases that they have put off because they lacked the funds, pumping that money into the economy and boosting consumer demand.

To be effective, an economic stimulus measure would need to benefit everyone, or nearly everyone, at the bottom of the income scale. A payroll tax cut would fail to do that. As the table illustrates, 77 percent of taxpayers in the bottom fifth would receive some benefit from a payroll tax cut, meaning nearly a quarter of this group would not. Low-income seniors who are not working and unemployed adults would receive nothing from a payroll tax cut.

During the last recession, the Congressional Budget Office and outside economists found that spending measures would provide more “bang for the buck,” meaning more economic growth for every dollar spent, than most types of tax cuts. For example, economists found that expanded unemployment insurance would be particularly effective because it puts money in the hands of those most in need, those most likely to spend it right away and, therefore, boost consumer demand.

That being said, a payroll tax cut is not the very worst idea for counteracting an economic downturn. Enacting new corporate tax cuts would be worse. The Trump Administration has floated the idea of allowing companies in the travel and tourism industry to defer taxes. As ITEP has pointed out, current tax rules already allow a lot of tax deferral and, as a result, most of the major airlines have paid little or nothing over the past two years. So, a payroll tax break would be more effective than cutting taxes for corporations that already pay nothing. But that’s an awfully low standard to meet.

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