Is the coronavirus pandemic finally starting to abate?
The initial signs are promising in some parts of the country and we can only be thankful. In the US, the economy is glacially returning to life. Federal and state officials seem in agreement that the process cannot proceed naturally and more stimulus measures will be necessary, on top of the $3 trillion already expended by the national authorities alone.
President Donald Trump’s administration is examining options, including potential tax cuts. Nothing has been determined yet, although Congressional Democrats are already lining up in opposition. For once, the debate seems healthy, rather than blindly partisan, for stimulus is a tricky business.
Take the unemployment benefit enhancement introduced as part of the CARES Act. This boosted weekly unemployment benefits by $600, the extra cash helping individuals and the essential businesses they patronize to survive. On July 31, this benefit is set to expire.
Republicans want the benefit to expire on schedule, citing evidence that enhanced unemployment checks are incentivizing workers to avoid seeking employment just when the economy needs them. The Democrats, usually anxious to kill anything that crawls free from the White House, support continuance, pointing to ongoing high unemployment. Useful policies are often sold as short term, but they can take on a life of their own. Programs that then become politicized are hard to amend or kill, no matter what the numbers may tell us.
Consider the White House proposal for a payroll tax cut, which suggests a holiday on the 12.4% Social Security tax on earned income. A ‘permanent’ reduction may also be sought, but since impermanence is the way of politics, we wouldn’t assign it much longevity. In any case, if enacted, a payroll cut would pump billions into the citizenry’s pockets and provide relief to employers, who pay half of the payroll tax. This is more efficient than mailing out stimulus checks and incentivizes employment, addressing the noted problem of ‘aid dependency’. Sounds like a winner.
There’s a problem, though: the survival of that perennial problem child, the Social Security system. Last year, 89% of the program’s funding came from the payroll tax. A relatively brief payroll tax moratorium should be survivable and appears likely, at this point. How the ‘permanent cut’ pundits are planning to address the long-term funding problem is yet to be determined.
Is Congress in a mood to accept a payroll tax cut? The Democrats generally dislike tax cuts, except perhaps in an emergency – is this such a time? Liberal members may not want to position themselves against the apparent needs of the average worker – certainly not in an election year. Nevertheless, the Social Security funding card may well be played, as the issue affects the majority of the working population and their futures.
The crucial ideas under discussion, from our point of view, are those applying to investors and businesses. First up is a proposed reduction in the capital gains tax. President Trump’s team hopes this will stimulate investment in a time when markets are unsteady and likely to remain so this year and next – and perhaps beyond.
Critics argue that the lion’s share of benefits would accrue to the rich. This factor, even if true, makes no material difference if the object is stimulus, but in the context of domestic political turmoil and election sloganeering, the matter may become highly contentious, both in Congress and among the voters. We rate the likelihood of passage as good: while the wealthy would benefit, no one else would suffer, and indeed, there are many small investors among our clients. People have plenty to worry about these days, so we expect them – both congressmen and voters – to eventually let the measure pass.
Other corporate-friendly measures are under consideration, including a proposal to allow full deduction of business-related expenses for meals and entertainment, including sports tickets (presumably, the arenas will reopen soon). We expect Congress to blanch at the idea but note that trading chips are often included in broad-ranging legislative proposals. The idea may be serious – it merely suggests a return to earlier practice – but for the White House, it may be intended as a throwaway in negotiations to gain more vital points, like the payroll tax cut. How this one plays out we can’t exactly predict, but call even odds on its passage.
Another proposal, amorphous at this stage, would allow companies to fully deduct any capital investments – those in machinery, property and manufacturing facilities. Initial reports suggest the initiative is intended to last long term, although whether this means two years or twenty has not been officially voiced. We like this proposal, but await the fine print.
The pressing issue is simple enough: the economy needs stimulus, but what’s the right formula? The recent direct cash infusions from federal coffers (or rather, printing presses) were often lifesavers, but critics say they failed to moderate the recession. Tax cuts stimulate from another direction: extra funds appear in individual and corporate pockets, tinder for lighting up the economic boiler. Each approach has its strengths and dangers, its pundits and foes. We counsel keeping a focused eye on the political theater in the weeks and months ahead.