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A payroll tax cut is one idea President Donald Trump is considering in response to the negative effects of coronavirus on the U.S. economy.
Experts say such a move would not necessarily be a magic bullet.
One reason why: It could impair funding to Medicare and Social Security, which rely on payroll taxes for funding and are already facing looming funding shortfalls.
Full details on how the Trump administration could implement a payroll tax cut are still not known.
Particularly, it’s unclear how that cut would affect levies for Social Security or Medicare or both.
Currently, employees and employers are each subject to a 6.2% tax for Social Security and 1.45% for Medicare. Self-employed individuals, meanwhile, make the full contributions on their own, 12.4% for Social Security and 2.9% for Medicare.
In addition, if you earn over $200,000 individually, or $250,000 if you’re married and file jointly, you pay an additional 0.9% Medicare surtax.
Those contributions help to keep both programs going, and their trust funds already face shortages. The Medicare Part A trust fund is projected to run out of money in 2026. Meanwhile, the latest estimate projects Social Security’s trust funds will be insolvent in 2035.
“They would have to find some way to replenish those trust funds,” said Howard Gleckman, senior fellow at the Urban Institute, a non-partisan Washington, D.C., think tank.
That could be accomplished as it was the last time there was a payroll tax cut, in 2011, when money was moved from the general fund to the trust funds.
However, halting payroll taxes for up to a year, which has been mentioned as a potential strategy, would be very expensive.
“We’re projected to have about $1.3 trillion in payroll tax revenues come in this year, and so that would be incredibly costly,” said Rachel Greszler, research fellow at the Heritage Foundation, a conservative Washington, D.C., think tank.
While payroll tax cuts can stimulate consumer spending, there are reasons to believe that won’t necessarily work in this situation.
Possible impact on individual workers
A payroll tax cut might not have the desired effect of inspiring consumers to spend more, Gleckman said.
That’s because this economic slowdown is being driven by a fear of a disease, rather than a financial recession.
“Nobody wants to go on a cruise, nobody wants to go on a long airplane flight,” Gleckman said. “If you put another $20 in their pockets, they’re still not going to go on a cruise and they’re still not going to go on a long airplane flight.”
What’s more, a payroll tax cut would only benefit those who are currently working.
“If you get laid off or can’t work, then it doesn’t help you at all,” Gleckman said.
Those who lose their jobs because of the negative impacts of the coronavirus will not benefit from a payroll tax cut.
“They’re the ones who are going to have the biggest drops in income, and yet they’re not going to get anything from a payroll tax holiday,” Greszler said.
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The other problem is that payroll taxes are progressive, so the more money you make, the more payroll taxes you pay. Big earners are unlikely to spend all of that extra cash, however.
“We know when high -income people get a tax cut, they don’t spend as much as low-income people do,” Gleckman said. “They’re more likely to just keep it and save it.
“You don’t get a great bang for your buck when that happens if you’re the government looking for a stimulus.”
During the Great Recession, there wasn’t a payroll tax cut. Instead, the government provided broader tax cuts to Americans, regardless of whether they were working or not.
“That’s a more sensible way to approach this than to think about this just for people who are working, the people who least need the tax cut,” Gleckman said.