Before Donald Trump indicated his support for the current coronavirus-relief program, he broached the idea of a payroll-tax cut.
In addition to the money withheld from paychecks for income tax, there are, thanks to the Federal Insurance Contributions Act (FICA), two payroll taxes: Social Security and Medicare.
The Social Security tax rate is 12.4 percent (split equally between employer and employee) on the first $137,700 of employee income. The Medicare tax rate is currently 2.9 percent (split equally between employer and employee) on every dollar of employee income. Self-employed persons pay the full 15.3 percent, but receive a deduction toward their income tax equal to 50 percent of the amount of their payroll taxes. “The rich” also pay a 0.9 percent Additional Medicare Tax on income exceeding $200,000 ($250,000 married filing jointly) that employers are not required to match. And for the self-employed, the extra 0.9 percent is not eligible for the 50 percent income tax deduction.
A payroll-tax cut was instituted once before when the Bush tax cuts were due to expire at the end of 2010. For 2011 and 2012, Barack Obama — with little support from Republicans — was able to get Congress to implement a 2 percentage-point cut in the employee share of the Social Security tax rate as part of the Bush tax-cut two-year extension called the Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA). During that time, general revenue was used to add to the balance of the Social Security trust fund to replace the revenue lost because of the cut in the Social Security tax rate. The passage of the American Tax Relief Act of 2012 ended the Obama payroll-tax cut.
Before that, Congress introduced the Making Work Pay (MWP) refundable tax credit for 2009 and 2010. It provided a 6.2 percent tax credit on earnings up to a maximum credit of $400 ($800 for married filing jointly). It therefore functioned as a quasi–employee payroll-tax cut for workers earning less than $75,000 ($150,000 married filing jointly) a year. The tax credit began to phase out above those levels, and phased out completely once income reached $95,000 ($190,000 married filing jointly).
In 1977, the Carter administration enacted a New Jobs Tax Credit to benefit employers. To encourage job growth, employers received a tax credit of 4 percent of the Social Security payroll taxes they had paid. The credit expired at the end of 1978.
Under Trump’s plan — as described by Peter Navarro, one of his economic advisors,
The government would, through the end of the year, stop collecting the 6.2 percent Social Security tax currently taken out of workers’ paychecks and the 1.45 percent tax taken for Medicare. It would also suspend equally large taxes paid on behalf of workers by their employers. Self-employed workers would be relieved of the entire 15.3 percent tax they currently pay.
If the employer share of the payroll taxes was eliminated, employers could conceivably pass along all or part of their windfall to workers in the form of higher pay, giving Americans who pay payroll taxes an added increase in their take-home pay. But of course, there is always the chance that employers wouldn’t do that.
Neither conservatives nor liberals were too excited about Trump’s proposed plan. Democrats and Republicans in Congress didn’t even consider it.
“A payroll-tax cut like the president wants wouldn’t help the elderly nonemployed, who are at the most risk from the virus,” said Michael Strain, an economist at the conservative American Enterprise Institute. “It would provide a larger benefit to the well-off. And it isn’t targeted on those who need it.”
Claudia Sahm, an economist at the liberal Washington Center for Equitable Growth, maintained that lawmakers could still ward off a recession with stimulus, but “a payroll tax won’t do it.” Cutting payroll taxes “will be too slow, and its effects too small,” she added. “So small most won’t even notice it. Those who don’t have or will lose their jobs won’t get it at all.”
And then, of course, there is the argument that cutting payroll taxes helps only those Americans who are still working; it does nothing for those who are furloughed or laid off.
Cutting Social Security and Medicare taxes for the remainder of the year is certainly the right policy, but not because it will help avert a recession, stimulate the economy, or mitigate the economic effects of the coronavirus.
First of all, taxation is government theft on a grand scale.
It doesn’t matter whether it is income taxes, estate taxes, sales taxes, excise taxes, or payroll taxes. The result is the same: the government takes the fruit of Americans’ labor and redistributes it in the form of grants, subsidies, and various welfare schemes; pays the bloated salaries of government bureaucrats; fights unnecessary wars and maintains an empire of troops and bases around the globe; and squanders the rest of it on untold boondoggles and pork barrel projects.
And second, Social Security and Medicare are glorified welfare programs.
Social Security has two parts. The Old-Age and Survivors Insurance (OASI) program provides monthly benefits to retired workers, families of retired workers, and survivors of deceased workers. The Disability Insurance (DI) program provides monthly benefits to disabled workers and families of disabled workers.
Medicare is government-funded health care for Americans 65 years old and older and for those who are permanently disabled, or have end-stage renal diseases or ALS. The four parts of Medicare are: Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage plan), and Part D (prescription-drug plan).
But since the Constitution nowhere authorizes the federal government to have a retirement program for workers, their families, or survivors, or for taking care of the disabled or their families, the Social Security program is illegitimate. And if the Social Security program is illegitimate, then the payroll tax that mostly funds it is also illegitimate.
And since the Constitution nowhere authorizes the federal government to have anything to do with health care, prescription drugs, medical procedures, or insurance, the Medicare program is illegitimate. And if the Medicare program is illegitimate, then the payroll tax that partially funds it is also illegitimate.
Temporarily suspending the payroll tax is the right policy because any cut in any type of taxes, no matter how small or temporary, is a good thing.