With Congress unable to reach a deal on the next coronavirus relief package, Donald Trump decided to take matters into his own hands and signed an executive order to address unemployment aid, looming evictions, student loans, and payroll taxes. But on top of being legally questionable, the president’s action is unambitious and misses the mark on stimulating the economy and providing relief to the households suffering most from the current economic crisis. And when it comes to payroll taxes, which fund Social Security and Medicare, the executive order is just about as effective as fighting a building fire with a garden hose.
For starters, Trump didn’t actually cut the federal payroll tax, the 6.2 percent levy that wage-earners pay on income up to about $138,000; he deferred it. What that means is that, for the time being, workers’ take-home pay might increase, but the taxes will have to be paid later unless the government eventually forgives them.
But more important, given that Republicans are especially worried about spending in this next round of relief, payroll tax cuts — which are the direction the president wants to go — are a misdirected use of funds. That’s because for people to benefit from such cuts, they have to have jobs in the first place, leaving behind the tens of millions of Americans who are without work, and the over 1 million Americans who are filing for unemployment for the first time each week. Spending more money on unemployment benefits, on the other hand, is much more effective at mitigating the worst potential outcomes of this recession. A far less targeted approach to dealing with an economic crisis that has millions of people on the brink of falling into poverty is handing extra cash to people who are still making money while slashing benefits to those who aren’t making an income at all through no fault of their own.
Payroll tax cuts, however, are not totally useless; if people have more money at their disposal, they’re more likely to spend it and stimulate the economy, potentially helping some businesses stay afloat. In fact, the Obama administration enacted payroll tax cuts during the recovery of the Great Recession for this reason — though only by 2 percentage points, not entirely as Trump has proposed. But this economic crisis is not like the last, because it’s coupled with a pandemic that requires people to stay at home, making it harder to spend the extra money from a payroll tax cut. People are thinking twice about going out to eat or taking a vacation, which is in part why personal savings have gone up. While that’s good for the long term, it’s hardly a short-term solution to an economy in need of stimulus.
Despite all of this, Trump has been insisting on a payroll tax cut from the very beginning of this economic downturn, with little support, even from people in his own party. “This seems to have a constituency only in the White House,” said Alan Auerbach, a professor of economics and law at the University of California, Berkeley. “I don’t know anybody in Congress who’s pushing this, Democrat or Republican, and I don’t know where this comes from. I don’t know what the logic is.”
This raises the question of why the president is going after payroll taxes. One alarming possibility: If payroll tax cuts become permanent, as Trump promised they would be if he is reelected, then the way Social Security is funded would change, leaving it much more susceptible to getting scaled back because it no longer would have a designated revenue stream.
Ultimately, the president’s executive order is weak and, when it comes to payroll taxes, utterly misguided. It’s unlikely to come close to seriously dealing with the high unemployment rate and the staggeringly weak economy. But the blame falls on Congress, which has failed to do its job. Federal unemployment benefits lapsed over two weeks ago, and lawmakers have yet to act. In order to get the economy running again and to prevent Trump from endangering the Social Security Trust Fund, Congress must strike a deal and send an actual coronavirus relief bill to the president’s desk now.
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