Ill-Considered Tax Cuts Will Not Help the Economy Recover From the Coronavirus Crisis
As the coronavirus pandemic continues to surge, workers are suffering and the U.S. economy could be teetering on the edge of a much deeper downturn. Officially, 11.9 percent of workers are unemployed. At least 1 million Americans have filed for unemployment insurance every week since March 14, with nine of those weeks seeing claims above 2 million. More than 30 million unemployed workers are at imminent risk of losing a vital lifeline, with enhanced unemployment benefits expiring this week. State and local governments face severe budget shortfalls that could force them to cut services and lay off employees. More than 100,000 small businesses have shuttered permanently.
This is an unprecedented public health and economic crisis, yet some conservative policymakers are reflexively reaching for the only tool they know how to use: tax cuts for corporations. The Trump administration also continues to push for a payroll tax holiday—an idea that has been rejected by lawmakers in both parties because it is so ill-suited for the country’s economic needs—as well as some wrongheaded tax breaks for specific industries.
Instead of these ill-considered tax cuts, Congress should focus relief where it is most needed: toward workers who are out of work, self-employed workers who have lost income, states and communities facing budget shortfalls, families needing child care, and struggling small businesses—many of which, especially those that are minority-owned, have been shut out of relief efforts to date.
Large corporations do not need more tax cuts
Since President Donald Trump took office, Congress has gone on a corporate tax-cutting spree. Even before the pandemic began, corporate tax payments had dropped by about one-third thanks to the massive tax cuts in the Tax Cuts and Jobs Act (TCJA), which was signed into law by President Trump in 2017. These tax cuts were a bust. Instead of investing or paying their workers more, corporations, which had been awash in cash even before TCJA passed, bought back record amounts of their own stock, increasing stock prices further and enriching wealthy shareholders. Then, when the pandemic hit, Congress enacted even more tax cuts for corporations as part of its broader response. Many of these tax cuts reversed provisions of the 2017 law that restrained the official cost of the legislation by limiting some corporate and business deductions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress and signed by President Trump on March 27, included a major corporate tax cut that allows corporations to carry back tax losses from 2020 as well as from 2019 and 2018, before the pandemic began. Corporations can deduct these losses against income as far back as 2015, when the tax rate was much higher, thereby allowing for much larger benefits. Congress also gave wealthy owners of other types of businesses an enormous tax cut that allowed them virtually unlimited use of business losses to reduce taxes on their ordinary personal income. These tax cuts are estimated to cost $26 billion and $135 billion, respectively, over the next decade.
In addition, the CARES Act gave corporations a tax credit to encourage them to retain employees, at a cost of $55 billion; a suspension of a TCJA provision limiting the amount of interest on business debt that can be deducted, at a cost of $13 billion; and a delay in employment tax payments until the end of 2021 and 2022, which effectively constitutes an extraordinary interest-free loan from the federal government.
These recent tax cuts come on top of other extraordinary relief for large corporations aimed at ensuring that even those firms that have experienced only a temporary decrease in profits have many options to maintain liquidity and survive until the economy picks up again. Large corporations can generally borrow funds at very low interest, reinforced by new Federal Reserve programs. The Fed facilities are backed by $500 billion from the U.S. Treasury Department under the CARES Act. Equity financing—selling company stock to investors in return for cash—is still available and relatively cheap, with the stock market returning to pre-pandemic levels.
Incredibly, on top of all of this largesse, business lobbyists and some lawmakers want Congress’ next coronavirus relief package to allow corporations and businesses to accelerate tax credits into 2020 that otherwise would have to be carried forward to future years. Businesses generally are not allowed to use tax credits to reduce their taxes below zero. Instead, they must carry them forward to future years when they have more tax liability. But under this proposal, the U.S. Treasury would write them a check for any amount that exceeds their 2020 tax liability, potentially accelerating into 2020 tens of billions of dollars of tax credits without any assurance that these businesses would not still lay off workers. The largest of the credits is the research and development tax credit, which is already refundable for very small businesses, so the proposal would mainly benefit corporations and larger businesses. And depending on how the proposal is drafted, large, profitable companies that currently pay little or no U.S. income tax—such as Amazon and Netflix—could stand to benefit.
Trump’s special tax breaks won’t work and could make the virus outbreak worse
The Trump administration has also embraced targeted tax cuts to subsidize activities that could actually worsen the pandemic. This includes tax breaks for having business meals at restaurants, attending large-scale sports events, and traveling around the country. These special tax breaks, targeted at specific industries, are a bad idea in normal times. They are an even worse idea now.
President Trump has said that he wants to allow corporations and businesses to deduct more of the cost of business meals and entertainment. Over the years—and most recently in the bill signed by President Trump himself in 2017—Congress has trimmed back tax deductions for business meals and entertainment so that regular taxpayers would not have to subsidize the cost of business executives’ personal consumption at lavish restaurants, golf courses, luxury suites, and other venues. Restoring the tax-subsidized “three martini lunch” is an exceptionally out-of-touch response to the economic crisis faced by American workers and families. Moreover, it encourages an optional activity—in-person dining—that is linked to the faster spread of COVID-19. Subsidizing sports attendance may make even less sense. As one epidemiologist explained: “The reason we don’t have sports back in the U.S. right now is that the virus is out of control in the U.S. … We should not have large gatherings of people for optional events when the virus is out of control, and we definitely shouldn’t be incentivizing that behavior.”
In June, the president touted an “Explore America” tax credit, first proposed by Sen. Martha McSally (R-AZ), that would provide a nonrefundable tax credit of 50 percent of the costs of taking a vacation, including transportation and hotels. The tourism industry is certainly hurting. But encouraging people to go on vacation while infections are still increasing in many states could contribute to further spread.
These types of tax deductions and nonrefundable tax credits for leisure activities are highly regressive: Their benefits would flow overwhelmingly to high-income people, and most Americans would not stand to benefit at all. Moreover, it is doubtful that they would have any significant effect since it is the pandemic, not the lack of tax subsidies, that is keeping people at home. To the extent that these tax deductions do encourage more of these activities, they would worsen a virus outbreak that will inflict severe economic damage as long as it persists.
A payroll tax holiday is poorly targeted at the country’s current needs
President Trump is insisting on a payroll tax holiday. This is a misguided response to the crisis at hand. It would do nothing at all for workers who have lost their jobs or livelihoods; its benefits would go mainly to employers and higher-income households who have not lost income, such as affluent professionals who are able to work from home.
The payroll tax is a 7.65 percent tax on wages paid by both employers and employees, the proceeds of which go into the Social Security and Medicare trust funds. The administration has not specified whether it wants both sides of the tax to be suspended, but that is what some close to the White House have recommended.
Suspending the employer side of the payroll tax would be a costly giveaway, largely benefiting wealthy corporations. With a temporary suspension of the tax, employers would have no reason to pass on their tax savings to workers by raising wages; they could simply pocket the benefit. Since the tax cut applies to all payroll, it is neither targeted toward those businesses most affected by pandemic-related closures nor those deciding whether to maintain their payrolls. It would not even help businesses with their immediate cash flow needs, since in prior COVID-19 relief legislation, Congress took the extraordinary step of allowing employers to delay their payroll tax payments until the end of 2021 and 2022.
Suspending the employee side of the payroll tax benefits highly paid workers the most while doing nothing for those who have lost their jobs or sources of income. Consider the following examples:
- An employee who has been laid off would get $0.
- A freelancer, contractor, or self-employed business owner who is unable to earn income because of the pandemic would get $0.
- An essential worker whose wages are at the federal minimum would get roughly $480 over the rest of the year, or $22 per week, assuming full-time work is available.
- A lawyer earning a $135,000 salary would get about $4,300 over the rest of the year, or $199 per week.
- Unless the benefit is somehow capped, a CEO making $1 million in compensation would get about $6,000—and potentially as much as $9,600.*
Coming out of the last recession, President Barack Obama and Congress agreed on a partial payroll tax holiday for 2011 and 2012. But even at the time, policymakers recognized that it would be a suboptimal policy, as it was the lowest common denominator of what Democrats and Republicans could agree on at the time. Subsequent research has confirmed that small tax cuts in paychecks are less effective in stimulating the economy than larger one-time payments.
Conclusion: Ineffective tax breaks could take dollars away from Americans who are hurting
Senate Majority Leader Mitch McConnell (R-KY) has said that the cost of the next coronavirus bill should not exceed $1 trillion. There is no reason for Congress to arbitrarily restrain the response to COVID-19 given the unprecedented scale of the crisis. Interest rates on Treasury debt remain historically low, signaling that markets are unconcerned with additional deficit spending. But to the extent that members of Congress are aiming to hold down the official price tag of the next round of COVID-19 relief legislation, every dollar that goes to corporate tax breaks or ineffective payroll tax cuts is a dollar that is not going to unemployed workers or preventing layoffs of teachers and other state and local workers.
Before the pandemic, about two-thirds of families lacked even six weeks of take-home pay set aside for a rainy day. If Congress fails to enact further support for the unemployed and low-income families, a large number of families will not be able to cover their expenses. Furthermore, as state and local governments stare down deadlines for meeting strict budget requirements, families and their children will suffer even more. State and local spending on education, for example, is already on the chopping block, along with public sanitation and other vital functions. And more families are likely to lose their incomes due to state and local government job layoffs.
In its next COVID-19 response, Congress should reject tax cuts that are ill-suited to America’s current challenges. Instead, it should focus on directly helping the families, small businesses, and state and local communities that are in need of immediate relief.
Seth Hanlon is a senior fellow at the Center for American Progress. Alexandra Thornton is the senior director of Tax Policy for Economic Policy at the Center.
*Authors’ note: These examples assume that the 7.65 percent payroll tax—including both the 6.2 percent Social Security component and the 1.45 percent Medicare component—is suspended for the final five months of 2020. They also assume that very high earners, such as CEOs, who have already exceeded the $137,750 wage maximum for the Social Security tax only receive the benefit of the Medicare tax suspension; if they also receive a Social Security payroll tax cut pro rata for five months, they would receive an additional $3,559.
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