Why payroll tax cut opponents may want to reconsider

Democrats and Republicans in Congress and tax watchdog groups have come down hard against the White House’s payroll tax cut proposals. That may be a mistake that merits a re-think — not because of the hardball politics (Trump at times threatened to veto a new relief package if it didn’t include payroll tax suspension), but because under certain conditions, cutting payroll taxes could actually work and create jobs on a massive scale.

At present writing the new stimulus package is stalled and the White House is preparing to act unilaterally using executive orders, including one suspending payroll taxes for the rest of the year, which White House economic adviser Larry Kudlow says he believes Trump will sign. Leaving aside the legal question of whether a president can really cancel the tax without Congress, and the political question of whether the executive orders are a bargaining chip to force an agreement on a stimulus package, there’s the real-world economic question of what cutting payroll taxes could do for jobless Americans.

That question has been flubbed mightily in the current debate. Opponents keep saying that people without jobs don’t benefit from a payroll tax cut, since they don’t get a paycheck. That’s an obvious talking point, but it lacks context, ignoring the relevant facts about the tax.

Payroll taxes are the largest taxes two thirds of Americans pay. They’re regressive (income above $137,700 is exempt), and they’re distortionary, meaning they artificially raise hiring costs and undermine job growth, which we desperately need now. Cutting them puts more money in the pockets of more workers than any other tax cut, and boosts job and economic growth, which is why previous presidents enthusiastically cut or suspended them during downturns, including George W. Bush and Barack Obama. 

As of Friday’s BLS jobs report, over 16 million are officially unemployed, and another 100 million are considered “not in the workforce.” In all, 44 percent of American adults don’t work. Some are retired or otherwise don’t choose or aren’t able to work, but most of them — many tens of millions — want jobs and can’t get them. They are the hidden unemployed, not counted in official unemployment statistics, yet suffering no less than those who are. People of color, people with disabilities, seniors, women, youth and legal immigrants suffer disproportionately more. To unwind official job losses from the pandemic we need to create 16 million new jobs. To relieve the plight of the hidden unemployed, we’ll need to create tens of millions more.

There’s a policy that can do that, and it happens to involve cutting payroll taxes: payroll tax shifting. Beyond simply cutting payroll taxes, tax shifting would phase them out and replace their revenue (currently $1.2 trillion a year) with some new combination of non-labor taxes (e.g. pollution taxes, taxes on energy inefficiency, a non-labor VAT, etc.). That would shift the relative prices of hiring people vs. consuming more stuff by 30 percent, incentivizing job growth and resource conservation. In contrast to enacting another trillion-dollar debt-financed package, tax shifting would be a free stimulus. It wouldn’t raise net taxes or deficits at all; it would simply shift the tax burden off employment, which the tax code should maximize, onto waste, pollution and inefficiency, which it should discourage. 

Other pro-employment policies envision creating a few million jobs at best. If it had been implemented, the trillion-dollar infrastructure proposal might have generated as many as 11 million jobs. But payroll tax shifting could create up to 45 million jobs.

That’s the scale of job creation Americans need now. Yet the CARES Act and other emergency measures this year spent $6 trillion without specifically focusing on job creation at all. They brought relief to families and helped distressed businesses stay open. But they were not designed to create new jobs for the tens of millions who need them. We need a policy that is. Payroll tax suspension could be a start.

Admittedly, replacing payroll tax revenues is not what the White House is proposing. But payroll tax suspension could be a first step towards tax shifting if Congress got serious about replacing the lost revenue with non-labor taxes. That would unleash job creation and allay the objections raised against cutting payroll taxes.

There are three main ones. First, opponents argue that cutting the employee portion doesn’t help Americans who have lost their jobs. But payroll tax shifting, which requires cutting payroll taxes, would help them. It’s the one policy that can put tens of millions of them back to work. Payroll tax suspension can be viewed through that wider lens — as a step toward tax justice, middle class tax relief and massive job growth.

Second, some assert that cutting the employer portion of payroll tax is a weak, poorly targeted stimulus, because the benefits accrue mainly to big businesses that still have a sizable workforce and are unlikely to pass their tax savings onto workers. To support that view they cite a 2008 CBO paper on tax stimulus, but omit to mention that same paper says payroll tax cuts are a strong stimulus: “in comparison with the other options being considered, a payroll tax holiday would probably have a large bang for the buck.” The benefits of payroll tax shifting would accrue mainly to employers who hire more, pollute less, and waste and consume fewer resources and less energy.

Third, some fear cutting payroll taxes would undermine Social Security and Medicare. That’s a legitimate concern, and we should be vigilant about entitlement funding. But payroll tax shifting could strengthen rather than weaken it. If payroll taxes were replaced with non-labor taxes, those new revenues could be earmarked to fund Social Security and Medicare the same way payroll tax revenues are now. Then these essential programs would no longer be financed unsustainably with a tax that lowers employment and shrinks the tax base.

Before the Trump administration, payroll tax shifting attracted support from smart progressives and conservatives alike. Trump’s payroll tax proposals have drawn bipartisan opposition. But payroll tax shifting is something both sides ought to agree on, because it could achieve economic justice and fiscal responsibility at the same time.

Congress could do worse than to accept payroll tax suspension to get a stimulus deal, provided they replace the revenue with other, non-labor taxes. It wouldn’t cost anything or take any resources away from other coronavirus relief. But it would create the conditions for putting tens of millions of Americans back to work.

Stephen Kent is president of the public interest PR practice KentCom LLC and consults for the bipartisan employment policy group Get America Working!. These are his own views.