On March 27, Donald Trump signed a bill to stimulate the economy in the amount of $ 2 trillion. It allows an increase to unemployment insurance payments, provide loans to businesses, and reduction of tax on the social security fund.
The bill allocates $ 350 billion for the loans for small businesses that need help to stay afloat during the quarantine period, $ 100 billion to hospitals that accept a huge influx of patients, and continue to prepare for an even greater increase in cases of coronavirus, $ 46 billion to commercial airlines, and $ 454 billion for businesses, States and municipalities.
Meanwhile, the proposal of the President to reduce the tax on the social security fund was not received by the Congress enthusiastically, due to the assumptions that the tax will be reduced permanently. The original idea was to suspend payroll taxes until the end of the year, which means that the government will stop collecting 6.2% of the social security tax from the first $ 137,700 earned by employers and employees. Self-employed people will be exempted from the 15.3% that they pay.
Such a reduction would entail a huge loss of revenue, as in 2019, the total payroll taxes was $ 1.2 trillion. This proposed suspension is much more ambitious than the benefit granted last 2011-2012. At that period, the reduction was reimbursed from the general revenue, so it did not have direct financial implications for the short-term or long-term outlook of social security. Perhaps though, the same thing will work right now too.
The only problem is that the reduction in the payroll tax is not exactly the needed cure for the current situation because first, in terms of supporting families, the main problem is that people are losing their jobs. The reduction in the payroll tax will only help those who work, not those who have been laid off or quarantined due to the virus. Second, people earning $50,000 will only get $74 a week from the tax cut. Moreover, the impact of the cut on the employers will depend on the extent that they will provide as assistance, such as wage increases. What's more, people don't respond well to cuts that they know are temporary.
As for the social security program, the transfer of its funding from the Treasury will break the link between contributions and benefits. In addition, even if it will not technically affect the program's financial balance, it may make the social security deficit more visible to policy makers.
The solution to the problem of income, which last year seemed trivial now may seem daunting. Suspending the payroll tax is an inefficient and potentially dangerous step.
This "distribution of dollars", will so far lead to the weakening of the dollar in the foreign exchange market.
