Trump Demands Payroll Tax Cut in Stimulus Bill. But Is It Value for Money?

The terms of a new coronavirus relief package will be among lawmakers' priorities when Congress returns from recess next week, with President Donald Trump determined to ensure the stimulus plan includes a payroll tax cut amid doubt over whether such a measure would work.

The 7.65 percent payroll tax paid by both workers and employers funds Social Security and Medicare. It was previously reduced under former President Barack Obama but Trump wants to cut it completely for a period.

White House spokesman Judd Deere said in a statement shared with Newsweek that Trump "wants to provide relief to hardworking Americans who have been impacted by this virus and one way of doing that is with a payroll tax holiday."

"He's called on Congress to pass this before and he believes it must be part of any phase four package," he added.

U.S. President Donald Trump
President Donald Trump on the South Lawn of the White House on July 16, 2020 in Washington, DC. He has made payroll taxes a key part of the next COVID-19 stimulus package. Drew Angerer/Getty Images

Despite opposition from Senate Republicans and House Democrats who have rejected it, the measure has become something of a red line for the president.

Stephen Moore, a White House economic adviser, said high-ranking White House officials believed the president would not back any phase-four stimulus deal without the tax cut.

"I have talked to several high-level people in the White House who said the president will not sign [the legislation] if it does not include a payroll tax cut," The Post reported.

When it approved the CARES Act in March, Congress rejected Trump's previous demands for a payroll tax cut for individuals, instead approving stimulus checks to individual Americans.

Those opposing Trump's plan, which includes key Republican senators, say it only helps those who actually have jobs.

Steven Hamilton, assistant professor of economics at The George Washington University in Washington, DC, said that cutting the tax workers pay is not a good way to provide relief as it is poorly targeted.

"Half of payroll taxes are paid by workers and the other half by firms. Trump has signaled he wants to cut both sides. Workers out of a job get nothing, and high-income workers get far more than low-income workers," he told Newsweek.

He believes it would be much better to provide means-tested cash stimulus, enhance unemployment insurance, and boost the Earned Income Tax Credit (EITC).

"But cutting the firms' side would give businesses much-needed relief as they face higher costs and falling revenues. We've let firms defer those taxes for now, but that tax bill hangs over their heads which is just one more reason to pull the plug."

"Anything we can do to help businesses survive—including an employer-side payroll tax cut—will reduce the severity of the recession and speed our recovery on the other side," Hamilton said.

U.S. coronavirus
The 9/11 memorial plaza on July 04, 2020 in New York after it reopened from a three-month shutdown caused by COVID-19. Congress will consider another stimulus package to boost the economy reeling from the virus. Spencer Platt/Getty Images

Derek Klock, finance professor at Virginia Tech, did not think a payroll tax would cause much impact right now, and believes those who lost their jobs during the pandemic would get no benefit at all.

"It would reduce the total payroll expense, thus the hope would be that corporations would be more willing to keep employees on the payroll," he told Newsweek.

"I'm not sure that a one or two percent reduction in payroll expense will be an
effective inducement, considering double-digit declines in revenue in many firms, " he told Newsweek. However, he said that "not every company needs this assistance, some companies have done amazingly well."

He said with the huge drop in household consumption, extra money might be saved and may not result in extra spending and economic growth.

"I think that we need to target those who truly need it: the unemployed, underemployed; those within 200 percent of the poverty line... and anyone who is food or shelter insecure," he said.

"I'm not sure that tax relief is the right tool this time," he said, adding that if employers are going to continue layoffs, unemployment benefits are, "probably the best mechanism to ensure that the most economically vulnerable are supported."

There is a tight time frame for lawmakers, with extended unemployment benefits for Americans who lost their jobs during the crisis due to end on July 31, just before another recess for Congress. It creates a tight window for possibly the last chance to pass a bill before the November election.

However, Klock believes that any renewal of additional benefits would have to be tied to prior earnings above some minimum threshold.

"Passage of this would be more contentious and the implementation would be harder, but the outcome would be much more targeted and thus more effective use of stimulus money," Klock said.

Politico reported that Vice President Mike Pence has told House Republicans that they should be on board with the tax cuts.

A GOP priority for any stimulus bill is liability protection, the terms of which are being finalized by Senate Republicans led by Republican Senate Majority Leader Mitch McConnell and Sen. John Cornyn (R-TX).

McConnell, who had previously resisted another round of coronavirus relief, is looking for backing for a $1 trillion bill focusing largely on temporary protection from lawsuits due to exposure to the coronavirus until 2024 for a number of organizations.

These would include schools, businesses and churches, unless there was "gross negligence" or the entities did not follow public-health guidelines properly.

This story has been updated to include a media statement by the White House shared with Newsweek.