The best economic idea we’ve heard in response to the coronavirus crisis is a payroll-tax suspension. President Trump restated his support for it at a recent press briefing, and for good reason: It would reward work and production rather than the growth of government. Republicans should rally around the idea as the centerpiece of their next economic revival plan.
The plan we recommend would cancel all payroll-tax collections from May 1 to the end of the year. This would suspend the Social Security and Medicare tax, known as FICA, which takes 7.65% from a worker’s paycheck, with another 7.65% paid by employers, up to $137,700 of income. Self-employed Americans, usually socked with the full 15.3% payroll tax, would also find relief.
Every worker in America would get a substantial pay raise for the remainder of the year, but because the tax is regressive, lowest-wage workers would be helped the most. The majority of low- and middle-income workers pay more payroll tax than income tax. Even minimum-wage workers would see a nice boost in their paychecks while their employers would pay less too.
By reducing employer payroll costs, this plan would encourage firms to start hiring. Several economic studies document what common sense would tell us: Lowering the tax on employment leads to more of it. Because the tax relief would be temporary, businesses would gain an incentive to hurry up and hire right away, or as soon as their work resumes. There is no time to waste: The U.S. needs to put perhaps 20 million people back to work.
This would help firms without picking winners and losers. Unlike almost every other “stimulus” plan—to bail out airlines, banks, Boeing, energy companies and the rest—suspending the payroll tax provides an equal benefit to every company in America.
Also important is its ease of implementation. By simply not taking some $800 billion from the businesses and workers on Main Street, this plan cuts out the bureaucratic middlemen who plague spending programs. Our previous research leads us to expect that this would be at least 20% more efficient than collecting the money from taxpayers, running the funds through the federal maze, and then distributing them through various spending programs.
We have heard the objections. One is that this will drain the Social Security and Medicare trust funds. But the Treasury would transfer money from the general fund to these programs, fully making up the shortfall. Benefits for seniors now or in the future wouldn’t be threatened.
Another is that it would be too costly to let workers and businesses keep $800 billion of their own money. But compared with the few trillion dollars Congress would otherwise spend on more government relief programs, the payroll-tax suspension is a bargain.
The other complaint is that House Speaker Nancy Pelosi would never go for this plan. Maybe, but this would forfeit the moral high ground completely. Suspending the payroll tax would give every minimum-wage and middle-class worker—most of whom have faced great hardship this year—a swift rise in their paychecks, starting immediately. If Mrs. Pelosi and her colleagues want to oppose that, let them.