American workers and senior citizens have been dealt their toughest hands in decades this year. The coronavirus disease 2019 (COVID-19) has ravaged the U.S. economy, sent the unemployment rate to levels not consistently seen in more than eight decades, and cost the lives of nearly 160,000 Americans.
It's this turmoil that coerced Congress to pass and President Trump to sign the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27.
The CARES Act did little for the average American
The CARES Act is an absolute monster in terms of size. Clocking in at $2.2 trillion, it's close to triple the cost of the relief package designed to protect banks during the financial crisis. Ultimately, it supplied much-needed cash to distressed industries, small businesses, hospitals, and the unemployment benefits program -- the latter of which involved giving unemployed beneficiaries an extra $600 a week between April 1 and July 30.
However, the big draw of the CARES Act was the $300 billion set aside for direct stimulus payments to the public. At their maximum, these Economic Impact Payments could total $1,200 for an individual or $2,400 for a couple filing jointly (depending on adjusted gross income), with dependents aged 16 and under adding $500 each to what a parent or guardian could receive.
While tossing a boatload of cash at businesses proved valuable, it did little to help the average American who's struggling financially. An estimated three-quarters of stimulus recipients spent their payouts in four weeks or less, which doesn't help when there's no clear end in sight for the COVID-19 pandemic.
With another round of stimulus sorely needed, it should come as little surprise that Democrats and Republicans have been tirelessly negotiating in recent days on a new deal. As of late Thursday, Aug. 6, no new stimulus deal had been reached.
President Trump's payroll tax cut proposal finds new life
The problem is, the Senate's legislation session following the two-week July 4 recess only lasts three weeks. After Friday, Aug. 7, the Senate is to be in recess for a full month. This means lawmakers are (as of the time of this writing) taking these negotiations down to the wire. Financial assistance is needed now for many American families, and delaying discussions for another month due to legislative recess could prove disastrous.
Upon departing the Oval Office for Ohio, I've notified my staff to continue working on an Executive Order with respect to Payroll Tax Cut, Eviction Protections, Unemployment Extensions, and Student Loan Repayment Options.— Donald J. Trump (@realDonaldTrump) August 6, 2020
As some of you may recall, President Trump was adamant, before the Senate came back from recess on July 20, that he wouldn't sign a new round of stimulus if it didn't include a provision to temporarily halt or cut payroll taxes -- i.e., the tax paid by working Americans and employers that funds the Social Security and Medicare programs.
The thinking here is that if the payroll tax were temporarily suspended, the tax liability of workers and/or businesses would decline. This would put more money into the pockets of workers and businesses, therefore helping avoid a financial maelstrom.
With the Democrat-led House and Republican-led Senate still deadlocked on a handful of key stimulus issues, President Trump has threatened to sign an executive order that would extend eviction protections, enhance unemployment benefits, provide student loan borrowers with repayment options, and... cut payroll taxes.
Trump's stimulus proposal would decimate Social Security
The concern is that, if Trump gets his wish of a payroll tax cut, it would do nothing more than trade very short-term gains for long-term pain. Plus, it's even debatable whether the short-term gains would be all that noticeable.
First of all, a payroll tax cut would only provide an immediate benefit to people who are still working. Arguably, it's those folks who've been forced out of the labor force that are in the greatest need of financial assistance. A payroll tax cut would do nothing for those tens of millions of unemployed workers on the outside looking in.
But the bigger issue here is that the payroll tax is Social Security's primary source of revenue. Last year, it was responsible for $944.5 billion (89%) of the $1.06 trillion collected. Reducing or halting this income source for even a short period of time would prove disastrous for Social Security, which is already facing an estimated $16.8 trillion in unfunded obligations between 2035 and 2094, according to the latest Social Security Board of Trustees report. In all likelihood, a payroll tax holiday of any significant length would move forward the date by which Social Security is expected to exhaust its asset reserves. When these reserves are gone, an up to 24% across-the-board benefit cut awaits retired workers.
Of course, there's a viable legal question as to whether Trump has the legal authority to cut taxes. The U.S. Constitution specifically allows Congress to power to lay and collect taxes, so it's unclear if an executive order from Trump to cut or halt payroll taxes would have any legal merit.
The point is that reducing payroll taxes in any meaningful way is a terrible idea, and we should all hope that it doesn't come to fruition.