Solving the Stimulus Package's Payroll Tax Dilemma

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This article originally appeared on Law360

The $2 trillion emergency stimulus package pending in the Senate will have a big impact on payroll taxes, and what we do about payroll taxes will have a big impact on how we recover from the coronavirus crisis. In an expert analysis piece on the stimulus package in Law360.com, Get America Working’s chair Bill Drayton writes, "It’s remarkable how the debate on what to do about coronavirus’ damage to the economy is largely a debate on what to do about payroll taxes."

Secretary Mnuchin estimated Americans could lose 32 million jobs in the crisis; the CEO of the St. Louis Fed estimated 48 million. To help prevent that, the stimulus package would delay employers’ 2020 payroll tax payments for two years. A proposed amendment would suspend employer and employee payroll taxes for a year. But deferring or forgiving payroll taxes would cut revenue and balloon debt. Other proposals would double down on spending payroll tax revenue to vastly expand unemployment benefits. But that would deplete revenue and balloon debt.

"This fundamental dilemma — whether to cut payroll taxes to create jobs or redouble reliance on their revenue to expand the safety net — long predates the coronavirus," Drayton writes. "But the pandemic and its tangible threat of mass unemployment makes it more salient, so the question of what to do about it has shot up the policy agenda." His piece articulates Get America Working's solution to that dilemma: payroll tax shifting.

"The key is to cut payroll taxes for both employers and employees, and to make the cuts budget-neutral, paying for them with new revenues from nonlabor sources," he explains. "Payroll tax shifting can focus well over $2 trillion on stimulating job and economic growth, without costing taxpayers a dime . . . Even before coronavirus, we needed job creation in the eight-figure range to work through massive hidden unemployment.

"Now we’ll also need jobs for tens of millions of Americans who could lose theirs in the pandemic. There is no other proposal that can generate jobs on a scale of tens of millions — not even massive infrastructure spending or a WPA-style government jobs program (assuming we could find money for those). And there is no other policy for stimulating jobs and growth that pays for itself in real time, without increasing deficits or net taxes."

Read the full piece here

Ashoka insight

It’s remarkable how the debate on what to do about coronavirus’ damage to the economy is largely a debate on what to do about payroll taxes. Both sides make valid points, but there’s a strong, underappreciated case for cutting payroll taxes to recover from coronavirus shock — and to ensure higher growth long-term. Payroll taxes raise hiring costs, suppress labor demand and undercut job growth. They also shrink paychecks, suppress consumer spending and undercut economic growth.

There is a much better, cleaner way to provide payroll tax relief without blowing a hole in revenues. The key is to cut payroll taxes for both employers and employees, and to make the cuts budget-neutral, paying for them with new revenues from nonlabor sources. This strategy is known as tax shifting because it doesn’t just cut the taxes, it replaces the revenue from payroll taxes, which undercuts jobs, with revenue from nonlabor sources (chiefly natural-resource taxes), which don’t.

There is no other proposal that can generate jobs on a scale of tens of millions — not even massive infrastructure spending or a WPA-style government jobs program (assuming we could find money for those). And there is no other policy for stimulating jobs and growth that pays for itself in real time, without increasing deficits or net taxes.

For more on how replacing payroll taxes with non-labor taxes could create tens of millions of jobs, stimulate growth, strengthen Social Security and Medicare financing, and incentivize environmental and climate protection, visit www.getamericaworking.org