There are few measures that will more directly benefit American families struggling through the economic turmoil of the COVID-19 outbreak than an immediate payroll tax cut.
“Temporarily cancelling the collection of these taxes will reduce the cost for employers for continuing to pay employees regardless of whether they are working or on sick leave and increase liquidity for employers to help them respond to losses in revenue,” U.S. Chamber of Commerce CEO Tom Donohue wrote in a letter to President Trump, House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell.
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The plan now is to send checks to Americans, as Treasury Secretary Steven Mnuchin has confirmed, though many details have yet to be worked out.
But from a policy perspective, a payroll tax cut is a far superior approach to sending checks. And there’s no reason it can’t be achieved quickly, if all of us—including Congress, the IRS, businesses and their employees—work together to navigate these unfamiliar waters.
The payroll tax is now levied at 6.2 percent on wages (paid by both employees and employers), topping out at $137,700. That means that a worker earning $50,000 annually pays $3,100
A payroll tax holiday is better than a check before, first and foremost, because it can be enacted quickly and uniformly. American workers could see the results in their paychecks almost immediately.
On the other hand, to make a “stimulus checks” scheme work effectively, the IRS would have to determine who has truly been affected by the economic fallout of the coronavirus, and to what degree. Doing it quickly would mean making it universal. (Remember, that’s how Social Security was passed, and how it remains politically viable).
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In other words, company CEOs would get the same $1,000 check as working moms. Hundreds of billions of dollars would be spent without a real plan for helping those of us who are truly struggling. And after a few weeks, we’d be back in the same boat.
There’s also a very fundamental difference between a tax cut and deficit spending. When government enacts a tax cut, it allows taxpayers to spend their own money on what they need. When a government in the red enacts a stimulus package that includes checks sent out to all Americans, it’s simply spending their money in advance, on programs that may or may not work.
Finally, a payroll tax cut would achieve the goal of letting people keep more of the money they’ve earned. That’s important, and here’s why.
What people fear during unsettled times—the kind that arrived on our shores with the coronavirus—isn’t necessarily the virus itself; it’s the uncertainty. One researcher from Rutgers University-Camden points out, “People are worried about the well-being of family and friends, they are worried about their jobs, and they are worried about how the virus will impact their goals going forward.”
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Allowing Americans to keep more of what they have earned not only shores up the family finances, it also reinforces a basic human need—the need to feel confident that we ourselves can care for our loved ones.
The argument against a payroll tax holiday is that it won’t help those who are already out of work (or who soon will be). But that’s wrong; you don’t reject a measure that will help the majority of American families because it doesn’t help all American families. Instead, you look for ways to ensure that no one is left behind.
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Economic stimulus and financial relief don’t all have to originate in Washington. Governors, mayors and county judges are issuing decrees asking residents to shelter in place.
Surely there’s much they can do to help alleviate some of the pain those decrees are causing. They can enact state and local sales tax holidays, for example. They can ensure that their localities are affordable and entrepreneur-friendly. Let them be as bold as President Trump is being, but with a more targeted approach than what is possible from Washington.
Our greatest strength is community. We know that when Americans have the means, they gladly give of their own time and money to help their neighbors.
No one is more generous than we are. It seems counterintuitive, but community is what will help us weather this crisis, even in a time of social distancing.
Kevin Roberts, Ph.D., is the executive director of the Texas Public Policy Foundation.