On Monday night, President Trump embraced a temporary payroll tax reduction, commonly called a payroll tax holiday. He tweeted, “The Democrats in the House should propose a very simple one year Payroll Tax cut. Great for the middle class, great for the USA!” On Tuesday afternoon, the president reiterated that he would go along with a payroll tax cut if Democrats approved it. However, Treasury Secretary Steven Mnuchin said on Tuesday that the administration was not considering a payroll tax reduction “at the moment.”
The administration’s on-again off-again relationship with a payroll tax holiday seems like a replay of last summer. President Trump stated on August 20 that he was thinking about a payroll tax holiday, only to declare the next day that it was unnecessary because the economy was strong. No payroll tax holiday was adopted.
A payroll tax holiday would be misguided now, as it would have been last year. As former Council of Economic Advisers chairman Jason Furman and my colleague Kyle Pomerleau have observed, a payroll tax cut would not provide effective stimulus in response to the coronavirus epidemic.
In an article last year, I pointed out another problem with a payroll tax holiday. The general revenue transfer to Social Security that would almost certainly accompany the holiday would threaten the program’s fundamental principles.
Congress designed Social Security to be a self-supporting program financed by payroll taxes and the other earmarked taxes that are paid into its trust fund. As a self-supporting program, Social Security is spared from having to compete with other programs in the annual budgetary process. However, Congress has imposed a different type of fiscal discipline on the program by limiting its spending over time to the amount that can be supported by its earmarked tax revenue.
A payroll tax holiday would reduce the flow of earmarked taxes into the Social Security trust fund. To offset that loss, Congress would almost certainly transfer money from the general treasury into the trust fund, just as it did during the 2011-2012 payroll tax holiday.
A new general revenue transfer would have undesirable implications. If Congress and the public incorrectly perceived the program to still be self-supporting, fiscal discipline would be undercut. Although Social Security would still be protected from the annual budget process, its spending would no longer be limited to its earmarked tax revenue. On the other hand, if Congress and the public recognized that Social Security was no longer self-supporting, its political support could be undermined. Social Security advocates have emphasized their desire to maintain the public understanding that Social Security is a contributory program that links benefits to taxes.
Although a temporary general revenue transfer would be less harmful than a permanent transfer, it should still be avoided. Any necessary fiscal stimulus can be provided through policies that do not affect Social Security. A payroll tax holiday should be rejected again, as it was last year.
This article by Alan D. Viard first appeared in The Daily Signal.
Image: U.S. President Donald Trump talks to reporters as he meets with Ireland's Prime Minister, Taoiseach Leo Varadkar in the Oval Office of the White House in Washington, U.S., March 12, 2020. REUTERS/Leah Millis