The voices of Tax Policy Center's researchers and staff
President Trump and some members of Congress are floating the idea of new tax cuts to respond to the growing threat of the novel Coronavirus in the US. Trump’s idea: A one-year payroll tax cut. I understand politicians’ temptation to “do something” when faced with a potential crisis. But the truth is: There is little any tax cut could do to repair the real economic damage a widespread outbreak of a highly infectious disease would cause.
Similarly, it is hard to see how today’s Federal Reserve Board decision to lower interest rate by 0.5 percentage point will undo the economic damage caused by the coronavirus-related illness Covid-19. While Fed chairman Jerome Powell said the rate cut would provide a boost to “household and business confidence,” he also acknowledged, “We do recognize a rate cut will not reduce the rate of infection, will not fix a broken supply chain.”
Not a normal slowdown
The same could be said of tax cuts. The US---and the world—faces a real economic risk. But it is not a normal financial threat or economic slowdown. And it will not respond to standard fiscal stimulus.
To understand why, it is important to recognize the nature of this economic problem.
The immediate threat, as Powell said, is disrupted supply chains. Many US manufacturers rely on parts from China and around the world. With some regions of China on economic lock-down due to the virus, those materials already are in short supply. As other nations confront Covid-19, the risk grows that alternative sources of these products also will dry up. Travel restrictions could make it even more difficult to get parts and supplies.
Without those parts, US factories cannot operate efficiently and workers risk being laid off. At the same time, prices may rise as fewer finished products hit the market. For example, cars assembled in the US are made largely from parts imported from around the world, including Mexico and Asia. Without those parts, those cars will never get to dealer lots. Fewer cars means higher prices for buyers.
The demand problem
But there also is a demand side problem. For now, hoarding may be boosting demand for certain products—canned goods, medicine, face masks, and the like. But if layoffs become widespread, or even if people fear to go to stores to shop, consumption could plunge. And because consumption represents 70 percent of the US economy, a decline in purchasing could throw the US into recession.
Could tax cuts cure either of those ills?
They surely won’t fix broken supply chains. It would take months or perhaps years for firms to find new suppliers. And in a widespread epidemic, the problem isn’t lack of capital. Thus, reducing the costs of purchasing plant and equipment through tax breaks or lower interest rates is no solution.
Similarly, if people are afraid to shop, or if there are shortages of products to buy, tax cuts won’t help very much.
Putting cash in people’s hands
However, if Covid-19 becomes a true public health crisis, rather than the problem it is today, tax cuts might serve one useful purpose. A temporary government payment such as a tax credit in advance of tax filing could put much-needed cash in the hands of people who lose jobs or face reduced hours. It could help them pay bills, including for health insurance.
In that environment, a temporary payroll tax cut might also help, on the margin. Similarly, a temporary tax cut could assist businesses facing a cash flow crunch. They wouldn’t cure the disease, but they might relieve some symptoms.
At the moment, any talk of a tax cut is premature. More troubling, tax reductions now (along with those interest rate cuts) would reduce the ability of government to respond should the economy fall into a real pandemic-related tailspin.
Today, a widespread outbreak of Covid-19 in the US is much more a risk than a reality. Government has a key role to play in restoring the nation’s health and confidence. But it can best do that through aggressive public health measures, not tax cuts.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.