For the past two months, mitigation measures meant to halt the spread of the coronavirus disease 2019 (COVID-19) have wreaked havoc on the U.S. economy and labor market. We've seen more than 33 million initial unemployment benefit claims filed, and the unemployment rate has rocketed from 50-year lows of sub-4% to Great Depression levels of 14.7%.
While these measures were deemed necessary to prevent additional loss of life tied to COVID-19, it's left many working Americans in dire financial shape. That's why, on March 27, Congress passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The CARES Act, which tipped the scales at $2.2 trillion in size, provides money for hospitals, small business loans, distressed industries, expanded unemployment benefits and, of course, working Americans and seniors.
Stimulus money is very much needed, but it's not nearly enough for most Americans
The CARES Act ultimately set aside $300 billion for direct stimulus payments to what's estimated to be 175 million Americans. Single filers and married couples filing jointly can receive maximum payouts of $1,200 and $2,400, respectively, with qualifying children aged 16 and under adding an additional $500 per child to a parent's or household's payment.
At the same time, tens of millions of Americans won't receive a dime from the largest stimulus bill in history. This includes high-income earners (defined as single, married, and head-of-household filers with more than $99,000, $198,000, and $136,500 in respective adjusted gross income), non-citizens without a legal pathway to citizenship, and dependents aged 17 and older.
Through the first couple of weeks of the program, close to 90 million tax filers had received their Economic Impact Payment, as these stimulus payouts are officially known, with the average payout totaling about $1,792. That might sound like a pretty hearty helping of cash, but with so many Americans now out of work, it doesn't come close to covering most workers' or families' expenses.
According to an April-released Money/Morning Consult survey of 2,200 people, 74% expected their stimulus money to be gone in four weeks and nearly half are believed to have burned through their Economic Impact Payment in two weeks or less. With a majority of U.S. states still slowly reopening business activity, additional stimulus to support working Americans and their families may prove necessary.
President Trump has a specific vision for a phase four stimulus deal
The question, of course, is what this next round of stimulus might look like. In recent weeks, four proposals from both sides of the political aisle have been making their rounds on Capitol Hill. But if there's to be a phase four stimulus deal, President Trump has a very specific idea of what that package should include.
In Trump's view, the best way to resolve the current economic malaise would be to eliminate or reduce the payroll tax, as well as the capital gains tax. In addition to stating that "we're not doing anything without a payroll tax cut," at a Fox News virtual town hall on Sunday, May 3, Trump fired off this tweet on May 5, outlining his phase four agenda:
Well run States should not be bailing out poorly run States, using CoronaVirus as the excuse! The elimination of Sanctuary Cities, Payroll Taxes, and perhaps Capital Gains Taxes, must be put on the table. Also lawsuit indemnification & business deductions for restaurants & ent.— Donald J. Trump (@realDonaldTrump) May 5, 2020
What's the thinking here, you ask? With regard to reducing or eliminating the payroll tax, it would allow working Americans to keep a greater portion of their income. Today, 15.3% of a worker's income goes toward payroll taxes -- 12.4% to Social Security on up to $137,700 in earned income, and 2.9% for Medicare, with no earnings cap. If you're self-employed, you're on the hook for this full 15.3%. Meanwhile, if you're employed by a company or someone else, your employer covers half of your liability (i.e., 6.2% of Social Security and 1.45% of Medicare).
If payroll taxes were permanently reduced or eliminated, the average working American employed by someone else or a corporation would get up to a 7.65% "raise." For the self-employed, we're talking about an up to 15.3% bump in take-home income.
Meanwhile, lowering or eliminating the capital gains tax would allow investors to hold onto more of their wealth, presumably encouraging additional investment into businesses and the stock market.
Trump's phase four proposal would be a monumental disaster
While Trump likely has the best intentions in mind to get the economy and stock market humming along again, as they were when the year began, attempting to reduce or eliminate the payroll tax and capital gains tax as a response to the coronavirus pandemic would be an epically horrible idea for a number of reasons.
First of all, a payroll tax reduction or elimination would only help Americans who still have a job. Presumably, the 33 million people who've filed for unemployment benefits over a seven-week period are the folks who need financial assistance far more expediently than those who still have a job and are receiving a paycheck each week. Yes, a payroll tax reduction or elimination would help a majority of Americans, but those who need financial assistance the most would not benefit from the change.
Secondly, but perhaps more importantly, the payroll tax is the primary funding mechanism for Social Security and Medicare. In 2019, Social Security generated 89% of the $1.06 trillion it collected via the payroll tax. Removing or eliminating the payroll tax puts Social Security and Medicare at serious risk of not being able to fully cover benefits.
Though Trump has suggested that corporations should be responsible for paying into these entitlement programs at a later date and ensuring their solvency, shifting the payroll tax responsibility entirely to the corporate realm risks tying the health of Social Security to that of the economy. That's a risk that should never be taken.
Third and finally, a reduction or elimination of the capital gains tax would, again, not help those who need it most. Only around 10% (or fewer) of people surveyed said that they plan to invest their stimulus checks, suggesting that few workers and families are in a safe enough financial position to consider investing at the moment. A capital gains tax reduction would only help a small percentage of Americans.
While no one knows what a phase four deal might entail at this point or if another stimulus package is even possible, one certainty is that Trump's desire to see payroll taxes and capital gains permanently reduced or eliminated has no shot at passing muster in Congress.