In his virtual town hall interview last night with Fox News, President Donald Trump again proposed the idea of using payroll tax cuts as a mechanism to help boost the U.S. economy amid the coronavirus pandemic.
When asked about the government’s next possible stimulus package, the president said he had given clear instructions to Treasury Secretary Steven Mnuchin: “We’re not doing anything without a payroll tax cut.”
So what exactly is a payroll tax cut and how would it benefit Americans?
Currently, employers and workers pay a 6.2% tax on wages up to $137,700. Should the government reduce that rate, companies would gain additional liquidity to offset slumping sales. And workers would see a small but immediate increase in their paychecks — one that experts hope they would then go out and spend.
The Trump Administration has been floating the idea of the tax cuts from as far back as August 2019, when there were initial signs of an economic slowdown. And the president again touted the idea in early March, as part of the government’s COVID-19 response. He suggested that the tax holiday could extend until the end of 2020, though few other details have emerged.
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There is precedent for such action: In 2010, President Obama temporarily reduced the tax for employees, from 6.2% to 4.2%, to boost the economy.
And industry experts say there are advantages to the move.
In a letter on March 10 to National Economic Council director Larry Kudlow, the Footwear Distributors & Retailers of America offered its support for the payroll tax holiday. “This would provide an additional $250 each month to shoe store employees across the country in a time of growing need,” FDRA president and CEO Matt Priest wrote.
However, Congress has been slow to adopt the plan and has instead favored direct payments and loans to individuals and businesses (as seen with the $2.2 trillion CARES Act and its $484 billion follow-up).
Critics argue that payroll holidays have a limited impact on the population.
Garrett Watson, a senior policy analyst at the Tax Foundation, an independent policy nonprofit, wrote in mid-March, “A reduction or outright suspension of the payroll tax would not be well-targeted to those most vulnerable to economic disruption. Retirees are not in the labor force and will not benefit from the tax cut.”
And a tax holiday would have no impact on the millions of unemployed in the U.S., who no longer receive a paycheck.
As an alternative, the FDRA and other industry organizations, including the American Apparel & Footwear Association, have pressed the administration to eliminate duties on imported goods and materials, which would provide immediate relief to companies and consumers.