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Nicklaus: Trump's actions do little to prevent economic calamity

Nicklaus: Trump's actions do little to prevent economic calamity

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President Donald Trump wants to cut the payroll tax, but workers shouldn’t get too excited about a potential windfall.

For one thing, Trump’s recent executive order would only defer — not forgive — the 6.2% tax for people making less than $2,000 a week. The little bit extra in your paycheck this fall would have to be made up by increased withholdings starting in January.

Employers, meanwhile, aren’t keen on the idea. They’re concerned that if a worker quits during the deferral period, they could be on the hook for the unpaid taxes. If the deferral is optional — and there’s no indication that it won’t be — most employers may simply go on collecting the tax as usual.

As economic stimulus, then, the president’s order doesn’t amount to much. If it causes workers to worry about the solvency of Medicare and Social Security, which are funded by the payroll tax, it may even be counterproductive.

“The money is coming due, and not much later,” said Joel Prakken, chief U.S. economist at IHS Markit. “I think it would be essentially no boost to the economy. … And it gives the appearance of raiding the Social Security trust fund.”

Trump seems to be thinking like a businessman for whom it’s always better to pay taxes later rather than sooner. Workers who still have their jobs, though, don’t have a cash-flow problem right now.

The folks who are hurting are those who have been furloughed or laid off, and the payroll tax isn’t an issue for them.

“The issue is not so much the problems of the employed as the problems of the unemployed,” said Mark Hamrick, senior economic analyst for Bankrate.com. “The payroll tax deferral is a poorly conceived idea.”

Another of Trump’s executive orders, providing a weekly supplement of $300 or $400 to unemployment benefits, would help people who are out of work, but here too there’s less stimulus than meets the eye. The president’s legal authority to make the payments is questionable, the White House has sent mixed signals on whether states must provide matching funds, and the money will run out in as little as six weeks.

The president is diverting money that Congress appropriated to help states cope with the coronavirus pandemic. The money hasn’t all been spent yet, but the needs are there. Funds that go to unemployment benefits won’t be available to buy laptops for schools, cover health care costs or provide housing subsidies.

“You’re diverting money from other pandemic relief efforts,” Prakken said. “It is paying Peter by robbing Paul, and it’s not clear what the macroeconomic benefits are.”

It’s also not clear when the additional unemployment benefits could begin flowing. A federal supplement of $600 a week expired July 31.

That supplement, and other money appropriated in March as part of the $2 trillion CARES Act, helped prevent the COVID-19 recession from turning into a depression. Second-quarter personal income actually rose as a result of the government payments, and job growth in May, June and July was stronger than expected.

With the pandemic still raging, that progress is now in danger. “We need to build a longer bridge across the COVID-19 chasm,” Prakken said. “It will be a pretty rough year without additional fiscal support.”

The shortcomings of Trump’s orders only highlight the need for Congress to pass another package similar in size to the CARES Act. Doing nothing is not an option, and the president’s actions aren’t much better than doing nothing.

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