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Coronavirus

To Fight Coronavirus, Trump Wants a Trillion-Dollar Stimulus That Could Make the Crisis Worse

Trump wants a poorly targeted, budget-busting payroll tax that might encourage sick people to work.

Peter Suderman | 3.12.2020 3:23 PM

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In last night's address to the nation about the government's response to coronavirus, President Donald Trump called on Congress to pass a payroll tax holiday that would last through the end of the year.

The proposal, as explained by the administration, would eliminate the collection of both individual and employer payroll taxes, which fund Social Security and Medicare. The idea, administration officials say, is to stimulate the economy by giving workers bigger paychecks.

You might be wondering: Isn't this just a tax cut that allows people to keep more of their own money? Not exactly, at least if funding for Social Security and Medicare continues, as administration officials have suggested. From a budgeting perspective, cutting off a dedicated revenue stream while continuing to spend as if it still existed is the same as sending out checks. Like other forms of fiscal stimulus, Trump's proposed tax holiday would disburse money while vastly increasing the deficit.

The plan could result in $840 billion in lost revenue if it lasted through the end of 2020, and more than $1 trillion if it lasted a full year, according to an estimate by the Committee for a Responsible Federal Budget—more than the stimulus package passed in 2009 under President Barack Obama. Trump, in essence, is proposing a nearly $1 trillion fiscal stimulus plan designed to prop up an economy in crisis.

It's likely to fail on just about every level: Not only would it push the already high federal budget deficit to unprecedented levels, but it would also offer little help to those who need it most, wouldn't address the underlying economic or health issues, and might even exacerbate the crisis. Trump's proposal isn't a response to the current crisis so much as an anti-response—a policy that wouldn't solve anything and could make existing problems even worse.

Under Trump, annual budget deficits, which trended downward during President Obama's second term, have climbed faster than previously projected, thanks to a combination of increased spending and tax reductions. Budget deficits are now projected to come in at $1 trillion or more for the foreseeable future. With a payroll tax holiday in place, the annual deficit would close in on $2 trillion, according to The New York Times—far higher than the $1.4 trillion record set under Obama in the aftermath of the recession.

Debt and deficits are already a drag on economic growth. That's why the Congressional Budget Office (CBO) currently expects growth to slow in the coming years, in large part because of the drag of high debt and deficits. To fight an economic slowdown, in other words, Trump wants to implement a policy that would have a negative effect on growth.

High debt and deficits present other risks as well: In particular, they limit the tools that policy makers have to respond to a crisis, which is exactly what we are in now. For years, the CBO has been warning that running an economy on borrowed money carries systemic risks during moments of crisis. Trump's plan would exacerbate those risks.

Then there's the issue of targeting: Policy responses should be designed to help people who need it the most. In this case, that means low-income workers, especially those in the service, travel, and hospitality industries, many of whom rely on tips. The workers who face the brunt of the impact are, more than likely, going to be out of work or working reduced hours. The biggest effect of a payroll tax holiday would be to put cash in the pockets of people who still have jobs.

And that, in turn, could lead to a different problem: If anything, a payroll tax holiday, which boosts the reward to work, could encourage struggling workers to go to work, even when they should be staying home. The effect probably wouldn't be huge, but, in theory, it could increase the spread of coronavirus by creating an incentive for people to go to the office when they should be isolating themselves.

That Trump and his advisers have settled on a payroll tax holiday as their preferred response is both telling and worrying since it suggests they fundamentally misunderstand the nature of the crisis. Although closures and cancellations brought on by the virus will undoubtedly result in substantial economic damage, the coronavirus is, at its root, a crisis of community health.

The nation's health system is at risk of being overwhelmed, with hospital beds and ventilator equipment becoming scarce, as is currently happening in Italy. The most effective tools for mitigating its impact are physical distance and rigorous personal hygiene, which can slow the spread of the disease and reduce the strain on the health system. A payroll tax holiday treats the coronavirus as if it is an ordinary economic downturn; it isn't.

Up until this week, Trump has viewed the coronavirus primarily as an economic (and thus political) threat. He has also been slow to grasp the severity of its impact. The insistence on the payroll tax, which would at best be ineffective and could well be counterproductive, is yet another sign that he still does not fully grasp the nature of the problem.

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NEXT: A Qualified Immunity Case That the Federal Courts Got Right

Peter Suderman is features editor at Reason.

CoronavirusPayroll taxDonald TrumpPublic Health
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