As the COVID-19 death toll rises in the United States and around the world, Congress and the White House are weighing measures to curtail the spread of the highly infectious disease, and reduce the economic fallout.
Italy and China, two countries that each have more hospital beds per capita than the United States, have seen hospitals overflow with capacity to treat those seriously ill with COVID-19. As a result, many public health experts have recommended “social distancing.” When sick workers stay home, it prevents disease transmission, and when healthy people stay home, they reduce the likelihood that they’ll contract the disease, or pass it along to others before they notice symptoms. Therefore, providing financial support directly to families wouldn’t just reduce economic hardship: it would also prevent disease transmission, by allowing people who rely on a paycheck to stay home more easily.
In response, President Donald Trump has recommended lowering the payroll tax to 0% for the remainder of the year. Today, workers and their employers each pay taxes of 7.65% on most wages, usually withheld from workers’ paychecks during every pay period. Cutting payroll taxes would provide an immediate boost to workers’ paychecks, explained Jason Furman, professor of the practice of economic policy at Harvard University. Jason Furman served as chair of the Council of Economic Advisors during President Barack Obama’s administration, and helped craft Obama’s response to the 2008 financial crisis. Speaking to me by phone, Furman said, “A payroll tax decrease gives too much money to people who don’t need it, and too little money to people who do.” After all, as he pointed out, someone making $100,000 per year would get a payroll tax break that is four times greater than someone making $25,000 per year, even though they need less help.
And people who aren’t working — for example, because their boss has cut back their hours at work, or because they’re taking unpaid sick leave — wouldn’t get help at all.
81% of payroll tax revenue is allocated for Social Security, and as a result, some worry that short-term or long-term cuts to payroll taxes would undermine Americans’ retirement security. Before the COVID-19 crisis emerged, the New York Times reported that the Social Security trust fund will be depleted in about 15 years, and explained that under current law, that shortfall would require the federal government to cut social security benefit checks by 20%. In a statement on Tuesday about Trump’s payroll tax cut proposal, Max Richtman, president of the National Committee to Preserve Social Security and Medicare said, “A payroll tax reduction would provide scant relief to working people while destabilizing the finances of Social Security. There are better ways to cushion the economic impact of the coronavirus than robbing Social Security of much-needed revenue.”
Furman recommends that Congress do something simple to help Americans weather the financial shock in lieu of or in addition to a payroll tax holiday: give people money.
But how exactly would that work?
Ways to Hand Out Cash
During the 2008 financial crisis, most Americans were able to get direct assistance from the federal government in one of two ways. Americans receiving Veteran’s Administration benefits, disability benefits like Supplemental Security Income, and Social Security retirement benefits were given an extra $250. And nearly everybody who filed a tax return in 2007 or 2008 was given a “recovery rebate” of $600; those with children who qualified for the Child Tax Credit were given an additional $300 per child. These IRS payments didn’t reach everybody: for example, they missed people who hadn’t filed a tax return, couldn’t be reached by the IRS, or who hadn’t earned any income in the previous year, but most low-wage workers were still eligible.
Furman points out that a payroll tax holiday “dribbles the money out slowly over time, instead of up front.” For a worker earning the federal minimum wage, a payroll tax holiday wouldn’t put $600 back in her pockets until she’d worked 1,103 hours: that would take roughly six months if she was working full time, and much longer if she’s sick, working part time, or if her employer cut her schedule in response to COVID-19.
To respond to the current crisis, Furman recommends a payment of $1,000 for every adult, and $500 for every child, although he also said he was open to the possibility that those amounts may be too low. During the 2008 financial crisis, he said policymakers weighed the possibility of reaching people who hadn’t filed tax returns, by using Social Security Administration data.
Most people, says Furman, received payment within three months, either through a paper check or electronically, and the first checks were mailed six weeks after President George W. Bush signed the stimulus act. The payroll tax was also reduced in response to the Great Recession, although not until 2011, and only by 2 percentage points.
Long story short? The federal government knows how to put cash back into workers’, retirees’, and families’ pockets. It can do so quickly if Congress passes legislation — possibly within six weeks. That would make a big difference for people who will struggle financially, but won’t stop someone without sick leave and coronavirus symptoms from going to work tomorrow if her rent is due next week. And keeping people healthy, through free COVID-19 testing and medical treatment, will be the most critical boost of all.