White House payroll tax cut would counteract coronavirus downturn

President Trump has laid out a major part of his national response to the financial downturn induced by the coronavirus with a substantial, perhaps even total, payroll tax cut. This would put thousands of dollars back in the pockets of ordinary workers. Such a tax cut would not only help countless Americans but would also create more demand for goods and services, counteracting the economic, if not epidemiological, contagion.

To do even more good, the payroll tax cut should be extended to small businesses, the economic engine of the country that is disproportionately impacted by the coronavirus. Democrats, who like to claim they support small businesses, should put aside their partisan differences and approve such a payroll tax cut to address the pending national emergency.

The payroll tax is the biggest fiscal burden facing most Americans across the country. Nearly 70 percent of taxpayers pay more in payroll taxes than in federal income taxes. At more than 7.6 percent of every paycheck, this tax is almost twice as large as the amount that ordinary employees pay in income taxes. It has nearly quadrupled in size since 1955. By cutting the payroll tax, take home incomes rise along with consumption. According to Mark Zandi, chief economist at Moodys Analytics, gross domestic product increases by 80 cents for each dollar cut in payroll taxes. This is among the fastest and most direct methods to address the downturn.

Employees only represent half of the payroll tax burden. Employers also pay another more than 7.6 percent on wages. Providing small businesses, the biggest job creators in the country, with the same relief as employees would allow them to keep more of their earnings to keep their businesses afloat during this difficult period. Reducing this tax burden would prevent job layoffs, wage cuts, and business closures related to the coronavirus. A Congressional Budget Office study found that an employer payroll tax cut does significantly boost employment and economic growth.

Because the payroll tax does not apply to incomes above $138,000, this proposed tax relief would target ordinary earners, without skewing toward the upper middle class or the wealthy. As a result, this economic stimulus measure should enjoy broad bipartisan support. Indeed, President Obama temporarily cut payroll taxes in 2010 to stimulate the economy. By cutting the Social Security portion of the payroll tax by a third, Obama reduced the tax burden for a median income family by about $1,000 in 2011. This relief generated an estimated half point to economic growth. A divided Congress temporarily extended it the following election year.

But Democrats now, led by Senate Minority Leader Charles Schumer and House Speaker Nancy Pelosi, are unlikely to agree on such a tax cut, no matter what its benefits, because they do not want to give Trump a policy victory in an election year. Democrats have already come out against his plan. This sacrifices 30 million small business owners and the economy for political reasons. Yet this measure may backfire. When Americans hear the lame excuses that Democrats give publicly for not supporting such a measure, they will know who to blame if the downturn continues.

What about honest fiscal worries that a tax cut would exacerbate the national deficit and debt? These concerns should be taken seriously. However, payroll tax cuts make up for lost revenue because they spur hiring, wage increases, and economic activity. As Cesar Conda, a White House policy adviser to President Bush, has explained, any “immediate small blow” to the Social Security trust fund could be mitigated by the “long term protection against recession provided by the tax cuts.”

Trump has one of the best economic records of any president in recent history. With financial markets battered and economic hardship ahead as the coronavirus spreads, there is no better person to guide the country through this black swan event. His proposed payroll tax cut, especially if extended to small businesses, would be a major first step in getting the economy back to its rightful pole position where Trump placed it.

Alfredo Ortiz is president and chief executive of the Job Creators Network.