Trump says economic aid package 'must' include dubious tax break

The White House says a dubious payroll tax break "must" be part of the next economic aid package. It's worth understanding the point of this foolishness.
Twenty Dollar Bills Are Printed At The Bureau of Engraving and Printing
WASHINGTON, DC - JULY 22: Treasury Secretary's Timothy Geithner's signature can be seen on a new twenty dollar bill, at the Bureau of Engraving and Printing on July 22, 2011 in Washington, DC. The printing facility of Bureau of Engraving and Printing on 14th Street in Washington was until 1991 the only facility printing Federal Reserve notes until a western facility was opened in Fort Worth, Texas.Mark Wilson / Getty Images

When Congress passed the CARES Act in March, it created a critically important economic lifeline for millions of families affected by the coronavirus crisis. The benefits, however, including enhanced unemployment insurance, were temporary -- and they're due to expire this month.

House Democrats acted two months ago to extend economic aid, approving a $3 trillion package on May 15. Senate Republicans and the White House responded by condemning the progressive plan, while suggesting they'd eventually get around to proposing a GOP alternative.

As of this morning, that Republican plan still does not exist and there are no meaningful negotiations underway between the competing parties.

It may be tempting to think there's plenty of time ahead of the end-of-the-month deadline, but as the New York Times' Paul Krugman explained, that's not quite right. Pointing specifically to the $600 weekly supplement for the unemployed, the Nobel laureate noted in his new column that the aid "applies only to benefit weeks that end 'on or before July 31.' July 31 is a Friday. State unemployment benefit weeks typically end on Saturday or Sunday. So the supplement will end, in most places, on July 25 or 26, and millions of workers will see their incomes plunge 60 percent or more just a few days from now."

It's tough to be optimistic, in part because Republicans are staunchly opposed to extending the $600-per-week benefit for unemployed Americans -- a top priority for Democrats -- and in part because of the White House's latest demands. Politico reported yesterday afternoon:

President Donald Trump has signaled to Hill Republicans that he will not sign a new coronavirus stimulus package without the inclusion of a payroll tax cut, according to three sources close to the issue. This new red line from the White House serves to illustrate the challenges that lay ahead in negotiating another Covid-19 relief package. GOP and Democratic congressional leaders are trillions of dollars apart in funding goals for the package, as well as how those funds will be spent.

Soon after, the White House added in a written statement that the president believes a payroll tax break "must be part of any" upcoming aid package.

The use of the word "must" raised eyebrows, though it's worth noting that throughout his term, Trump has made bold threats only to back down soon after. Few genuinely believe the president would veto a bipartisan economic aid package that passed Congress -- where a payroll tax break faces opposition from both parties.

But what strikes me as weird is Trump's preoccupation with the idea.

Indeed, it's been a rare point of consistency for the president. As far back as March, when the coronavirus crisis was just starting to take shape in earnest in the United States, Trump delivered an Oval Office address in which he called on Congress to approve an "immediate" cut to payroll taxes.

Soon after, the Republican went a little further via Twitter, insisting that a payroll tax break is the "only" thing that will "make a big difference" for the economy.

As we discussed at the time, it's a difficult position to take seriously, and it's worth appreciating why. Under the status quo, 6.2% of American workers' paychecks are deducted to help fund the Social Security system. When there's a payroll tax cut -- as there was during Barack Obama's first term as president -- that number is temporarily reduced as a way to put some extra money in every paycheck. The government makes up the difference, paying into the Social Security fund so benefits remain unaffected.

Trump has argued that the cut gets money into people's hands "quickly," and there's some truth to that: if the payroll tax were temporarily scrapped, every American worker's paycheck would have a little more money in it right away.

But there are also some downsides, too. As The Atlantic's Annie Lowrey has explained, a temporary payroll tax break tends to be small, insufficiently targeted, and largely meaningless to those who've lost their jobs and are no longer receiving paychecks. For Americans who rely on tips, or who've seen their hours cut, this policy also would offer very little.

What's more, as the Obama administration discovered nearly a decade ago, many Americans don't necessarily notice the small increases in their paychecks, so they don't feel like they have a little extra money in their pockets to spend, which diminishes the larger impact.

So why is Trump so adamant about this? No one really seems to know. Maybe he's confused; maybe he's getting some bad advice; or maybe he remains preoccupied with his political standing and sees this as a possible device for his re-election campaign.

Remember, Bloomberg News reported a few months ago that the president specifically told Republican senators that "he wants a payroll tax holiday through the November election so that taxes don't go back up before voters decide whether to return him to office."

In other words, Trump is threatening to derail an economic aid package at a key moment unless Congress gives him an unnecessary tax break that the president wants to use as a campaign talking point.

No good can come of this.