- Trump has proposed a payroll-tax cut to shore up an economy that's being battered by the coronavirus.
- The plan to put more money into workers' pockets looks good on paper, but a payroll tax cut would disproportionately benefit wealthier people and play out over a prolonged period of time.
- "That's a bit of a drip and what we need right now is a big shot right away. Not a slow drip," top Obama economist Jason Furman told Business Insider.
- Visit Business Insider's homepage for more stories.
Over the last few days, President Trump has floated the notion of a payroll-tax cut to juice the economy and add more money onto worker's paychecks as the spread of the coronavirus inflicts damage on the economy.
Bloomberg first reported on Wednesday that Trump told congressional Republicans he wanted to zero out that tax through the end of the presidential race in November. Lawmakers, though, would likely seek a smaller reduction.
The plan looks good on paper. Payroll taxes are used to finance Social Security, with employees and employers each paying 6.2% on their wages scaling up to $137,700. Then an additional 1.45% is paid to fund Medicare.
Conceivably, reducing the amount of taxable wages puts more money onto workers' paychecks and helps encourage consumer spending during an economic downturn.
As the economy recovered from the depths of the financial crisis, President Obama instituted a 2% cut for employees back in 2011. Savings for the average household came out to around $896, according to the Urban-Brookings Tax Policy Center. The cuts were allowed to expire in 2013.
But economists say that slashing those taxes now would do almost nothing to help low-income Americans confronted with the prospect of losing jobs and their wages in the coming months. And it would likely benefit wealthier people.
Jason Furman, a top economist in the Obama administration who played a key role negotiating the last payroll-tax cut, recently posited an example on Twitter.
"A one-year payroll tax cut of 2% of income would provide up to a $5,508 tax cut to a high-income couple, only $500 to a single parent getting by on $25,000 a year, and nothing for a worker placed on leave without pay," Furman wrote.
In a recent interview with Business Insider, Furman also said that wealthier people tend to save up. A similar tax cut, in his view, would be "wasting the money in a way that doesn't encourage spending."
Furman also noted that scaling back taxes on wages would result in a gradual effect when he believes the economy needs an immediate stimulus package to prevent it from falling into a recession.
"Another thing about it is you get the money with each paycheck," Furman said. "And that's a bit of a drip and what we need right now is a big shot right away. Not a slow drip."
Instead, he's calling for Congress to enact a one-time check payment of $1,000 to be sent to every American adult, with an additional $500 for each child they have. The Bush administration undertook a similar action just before the 2008 financial crisis.
Workers would also be less likely to spend the money if they are confined to their homes and avoiding public spaces, dampening the effect of the cut if it were go into effect. Gary Cohn, a former top Trump economic adviser, said a payroll-tax holiday would benefit only people still drawing a paycheck.
That's another barrier when a quarter of American workers - or 32 million people - don't have paid sick leave at their jobs, many of which are in the service sector.
"Until people feel safe to resume pre-virus behavior, putting money in their pockets won't stimulate anything," he tweeted.
Trump's proposal, though, faces a winding road through Congress. Democrats control the House, and many have signaled they didn't want to implement a payroll-tax cut, CNBC reported. House Democratic Leader Steny Hoyer called the measure "a non-starter" on Wednesday.