Washington continues to work on measures aimed at supporting the economy and American workers, but a new analysis shows that a payroll tax holiday proposed by the White House won’t help the neediest households in the country. According to the Penn Wharton Budget Model (PWBM), Trump’s plan to suspend payroll taxes for the remainder of the year will cost $807 billion. That’s greater than the bailouts in 2008, which rang in under $700 billion.
An increase in employee wages would increase taxable income for federal taxes. But the analysis finds that “the increase in federal income tax revenue, however, is not enough to offset reductions in payroll tax revenue.”
“On net,” the study finds, “the payroll tax holiday loses revenue.”
What’s more, the analysis finds, it won’t help those who will be impacted by the economic fallout of coronavirus most: low-income households and workers.
“Households in the bottom 20% of incomes — those households with the highest willingness to spend their tax savings — would receive about 2% of the total tax cut,” the study writes, adding that it would limit “the policy’s stimulus potential.”
“Moreover,” the study highlights, “only about 33% of this group would receive any of the tax cut, as many of the lowest-income households have neither wages nor self-employment earnings and thus pay no payroll taxes under current law.”
‘Skewed to the top’
Richard Prisinzano, director of policy analysis at PWBM, says that Trump’s tax proposal is “skewed to the top.”
Any tax savings would be accumulated “slowly over time,” according to the study .
Currently, House Democrats are working with Treasury Secretary Steven Mnuchin on a coronavirus economic package, after releasing the Families First Coronavirus Response Act Wednesday night. The bill would provide food assistance, paid sick leave, and extra funds for unemployment insurance benefits.
It was criticized by House Minority Leader Kevin McCarthy (R-CA), who called the plan “completely partisan” and “unworkable.” Trump also slammed the Democrats on Twitter for not supporting his payroll tax cut.
On Friday, Trump took to Twitter to promote his proposal again, writing “if you want to get money into the hands of people quickly & efficiently, let them have the full money that they earned, APPROVE A PAYROLL TAX CUT until the end of the year, December 31.”
“Then you are doing something that is really meaningful,” he continued. “Only that will make a big difference!”
But the budget analysis shows that the bulk of the money distributed back to people who are in the top 10% of wage earners. According to PWBM, that group receives 25.2% of the tax cut.
“This is a poorly targeted policy in that it won’t necessarily get cash or the revenue loss to low-income folks,” said Prisinzano. “A policy that was more targeted — say, checks to everyone — would be better.”
But Prisinzano stresses that the details around the payroll tax cut are important. Payroll taxes are split between the employee and the employer; there are “skewed distributional effects,” he says, depending on how the employer side of the tax cut is treated. If it is given to employees, that would increase wages and give it to people and quickly.
Elise Gould, senior economist at the Economic Policy Institute said that while a payroll tax cut “makes a lot of sense,” it relies on people continuing to stay in the workplace.
“If you’re just cutting hours and you operate some sort of a payroll tax credit through work, that depends on your working — instead of giving more direct cash to people,” she said.
Because lower-wage earners are most likely to spend tax savings, there would be “little net impact” on the economy, the PWBM found, as the bottom 20% of income earners would be little impacted by the tax cuts.
Instead, by 2030, it would reduce the size of the economy by 0.1% and by 0.2% by 2050, thanks to the additional debt incurred.
The federal debt, PWBM writes, would also crowd out investment, reducing capital stock by 0.2% by 2030 and 0.5% by 2050.
Average hourly wages would also decrease over time — 0.1% by 2040 and 0.2% by 2050.
According to the CDC, 42 states and Washington, D.C. now report cases of COVID-19 with 36 deaths and over 1,200 cases. Globally, more than 100,000 people have been infected with some 4,000 deaths reported across nearly 100 countries. Many companies are forced to have employees self-quarantine, while countries close borders, and some presidential primaries have been delayed.
Trump on Wednesday announced plans to restrict travel from Europe to the U.S. with exemptions made for American nationals and permanent residents.
The CDC has advised the public to “avoid crowding” and “limiting attendance at larger gatherings.” The center has also warned against “handshaking” and says to use other “noncontact methods of greeting.”
Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.