I know that the president’s proposal for a Social Security payroll
tax cut has met with little enthusiasm in Congress. But let’s put it to
rest for good. It’s not the appropriate response to the COVID-19 crisis,
and it’s best not to fool around with the nation’s most valuable
program.
As I understand it, the initial notion was to suspend until the end of the year
both the employee and employer portions of the payroll tax. That is,
the government would stop collecting the 6.2% Social Security tax on the
first $137,700 of earnings paid by the employer and the employee. It
would also eliminate the 1.45% Medicare tax paid by both parties.
Self-employed workers would be entirely relieved of the 15.3% they pay.
Such a cut would involve a massive loss of revenues. The
Congressional Budget Office reports that total payroll taxes in 2019
amounted to $1.2 trillion.
The proposed suspension is far more ambitious than the relief provided
in 2011 and then extended through 2012, which reduced the Social
Security payroll tax rate by 2 percentage points for employees and the
self-employed.
In the 2011-12 period, the law provided that the Treasury make up for
this reduction by reimbursing the trust fund with general revenues.
Thus, the earlier cut had no direct financial implications for the
short- or long-term outlook of Social Security. I presume the mechanics
would work the same way under the current proposal.
The problem is that a payroll tax cut is the wrong medicine for our current problems
First, in terms of providing support to families, the major problem
is people losing their jobs. A payroll tax cut only helps those who are
working and not those furloughed or quarantined as a result of the
virus. Second, in terms of a general stimulus, any relief would be
dribbled out in bits and pieces. The worker earning $50,000 would see
$74 a week from the employee tax cut. The impact of the cut of the
employer’s tax would depend on the extent to which employers pass on
their relief in terms of higher wages. Moreover, people do not respond
very much to cuts they know are temporary.
In terms of the Social Security program, financing it through a
general revenue transfer from the Treasury would be a big departure from
financing it by an earmarked tax. It would break the link between
contributions and benefits. In addition, while a general revenue
transfer would not technically affect the program’s financial balance,
it would have the potential of making Social Security’s shortfall look
bigger to policy makers.
When considering changes to eliminate the long-run deficit in the
program, Congress not only would have to find money to cover the 2.78%
of taxable payroll reported in the 2019 Trustees Report,
it would also have to consider the reaction of workers and employers
when the current 12.4% payroll tax is reinstated after the suspension
period ends. Solving the problem on the revenue side, which last year
looked trivial, could now appear daunting.
In short, suspending the payroll tax is an ineffectual and
potentially dangerous step. Let’s make sure that the idea doesn’t gain
any momentum.
https://www.marketwatch.com/story/guid/75bf214e-6dfc-11ea-9246-826b7acc9f71?siteid=rss&rss=1
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