Today member of President Trump’s economic recovery task force and former economic adviser to President Reagan Art Laffer endorsed U.S. Senator Josh Hawley’s (R-Mo.) plan to rehire workers now and keep them on payroll throughout the coronavirus pandemic.
In a Fox Business op-ed, Laffer and Jon Hartley wrote:
“Senator Josh Hawley, R-Mo., has now proposed a payroll tax rebate that covers 80 percent of payroll expenses while Canada and the UK are now implementing wage subsidies where employees receive 75 percent and 80 percent of their paycheck respectively albeit in the form of tax credits. A recurring biweekly payroll subsidy (rather than a one-time tax credit) would be faster and likely help boost spending because of what behavioral economists call “mental accounting,” that is people are more likely to spend something that they see as a permanent income boost to their income.”
Excerpts of the op-ed are available below and the full op-ed can be found here. Find more on Senator Hawley’s phase 4 coronavirus relief proposal here.
A payroll tax waiver, wage subsidies make most sense as stimulus: Art Laffer, Jon Hartley
Fox Business
April 20, 2020
As we’re already quickly discovering, there are several operational and implementation challenges we’ve encountered while delivering seriously needed trillions of CARES Act relief in a timely manner to the American people amid the COVID-19 outbreak and economic shutdown.
[. . .]
Why not deliver a faster and less operationally challenging stimulus through the payroll system that will incentivize employers to keep their workers on payroll and for them not to leave?
That is exactly the idea behind a negative payroll tax wage subsidy, which would not only bring the payroll tax to zero (which some argue provides too little relief) but bring it down further to become a direct payroll wage subsidy (or “negative payroll tax”).
Both employers and employees would both receive money from the federal government on a biweekly basis instead of having to pay the government a certain percentage of wages in payroll tax.
The beauty of a payroll tax waiver or payroll subsidy for both employer and employees is that it doesn’t have to go through inefficient government and banking administration which add significant costs.
The CARES Act (Phase 3 stimulus bill) does provide the Employee Retention Tax Credit, a payroll tax credit equal to 50 percent of certain wages paid by eligible employers, with a maximum tax credit of $5,000 per employee.
The spirit of this provision is good but could go much farther.
Along these lines, Senator Josh Hawley, R-Mo., has now proposed a payroll tax rebate that covers 80 percent of payroll expenses while Canada and the UK are now implementing wage subsidies where employees receive 75 percent and 80 percent of their paycheck respectively albeit in the form of tax credits.
A recurring biweekly payroll subsidy (rather than a one-time tax credit) would be faster and likely help boost spending because of what behavioral economists call “mental accounting,” that is people are more likely to spend something that they see as a permanent income boost to their income.
If the payroll tax cut wage subsidy is temporary, it would incentivize people and businesses to work a lot harder right away as they return to work to take advantage of the tax abatement before it disappears, say before the end of the year.
Fast implementation could be achieved quickly with the help of private payroll processing firms like ADP and Paychex.
[. . .]
We hope this idea is something that Congress considers as it decides how to deliver continued economic relief to Americans suffering economically that will also help to aid a fast recovery where employers and employees that were together prior to the crisis stick together.
If not, we may want to keep a payroll tax waiver or negative payroll tax in the policy toolbox for the next time a pandemic or economic crisis rolls around if we want to respond in an even faster manner.
Arthur B. Laffer is Chairman of Laffer Associates and a member of President Trump’s economic recovery task force.
Jon Hartley is a Master’s Candidate in Public Policy at the Harvard Kennedy School and previously was a senior policy advisor at the U.S. Joint Economic Committee.