President Trump continues to promote a payroll tax holiday as a piece of the next coronavirus relief bill. The President has not been specific about the size of the tax cut or whether it would apply to the employer or employee share. But reducing payroll taxes fails as either relief to cash-constrained businesses and individuals or as economic stimulus. A freshman Republican senator may have a better idea for boosting the sagging economy.

There are 26 million reasons why cutting employee payroll taxes is especially flawed today. That’s the number of workers who lost their jobs in just the first five weeks of the pandemic. Many face an immediate cash flow crisis: They don’t have money to pay the rent, the utilities, or even their health insurance premiums.

It won’t help the jobless

It should go without saying, but if you have lost your job, a payroll tax cut does you no good at all. And even among those who are working, such a tax cut would be highly regressive. High-income workers would get far more dollars than low-wage workers.

At the same time, liquidity-constrained businesses need cash to keep the lights on and, perhaps, keep a few workers on the job. But cutting payroll taxes now would not help business cash flow very much since the recently enacted Coronavirus Air, Relief, and Economic Security (CARES) Act already allows many firms to defer paying their payroll taxes until 2021 and 2022.

And at this stage of the current slowdown, it is hard to see how a payroll tax cut would create much stimulus. With people still unwilling or unable to shop, such a tax cut is unlikely to boost consumer demand, even among those still working. It might help them pay bills, but there are better ways to do that such as the CARES Act rebate checks now going out.

Nothing new

An actual payroll tax holiday as stimulus is hardly a new idea.

In 2011 and 2012, Congress and President Obama reduced the employee share of the payroll tax from 6.2 percent to 4.2 percent.  Since this share of payroll taxes was supposed to fund Social Security, Congress replaced the money with general revenues.

But there is an important timing difference between Trump’s idea and Obama’s plan. While Obama’s had its own flaws, at least his tax cut came as the economy began to rebound. Thus, it helped boost consumption a bit. Trump’s would come at a time when it would have little or no effect on consumer spending.

While Republicans generally opposed Obama’s effort, Trump aides have been beating the drum for a payroll tax cut since well before the pandemic.  The Hill GOP has been largely silent.

A better idea

But some Republicans have been floating other, more productive, ideas. Sen. Josh Hawley (R-MO) has an interesting one (two, actually). One is a temporary universal basic income. The other is a temporary wage subsidy for employers.

While he says he’d provide a “refundable payroll tax rebate”  he does not mean a rebate for payroll taxes. Instead, he’d create a refundable tax credit to subsidize a share of an employer’s payroll cost. The government would reimburse employers for their labor costs up to the median wage ($949 per week, or about $49,300, according to the Bureau of Labor Statistics). It is unclear whether Hawley wants the government to also pay a share of employee benefits and associated payroll taxes, or how long it would go on, or how he’d prevent firms from gaming the plan.

But it is an interesting idea that has gotten some traction elsewhere in the world.  For example, Denmark  is directly reimbursing companies for up to 75 percent of their cost of retaining workers.

Improving the CARES Act

Unlike Trump’s plan to cut payroll taxes, Hawley’s would pay employers to keep workers on the payroll, or bring back those who have been laid off. At the right time, it may also be an improvement over the CARES Act that, among other things, created a less generous worker retention tax credit.  

The CARES Act also raises unemployment benefits, an excellent way to target assistance to those who need it most. But once the economy begins to rebound, it might be better to subsidize firms that bring their employees back to work than to pay people to not work.

Hawley’s idea may be premature. Today, many hard-pressed firms may not have the resources to pay even the 20 percent of payroll that Hawley’s bill would require. And without customers, it seems implausible they’d rehire workers to sit around, even with an 80 percent government subsidy.

But Hawley’s tax rebate for payroll costs is a far better idea than Trump’s poorly thought-out payroll tax holiday.