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Responses to the Economic Consequences of the Coronavirus from Heritage Foundation Experts

Sound Economic Coronavirus
Heritage Foundation scholars and policy experts David Burton, Norbert Michel, Parker Sheppard and Paul Winfree have just posted a paper addressing the issues raised in our recent article, How Far Should Trump’s Coronavirus Economic Stimulus Go? Here are some key takeaways from the paper, posted with the kind permission of our friends at the Heritage Foundation.

Virtually every interest group in Washington will attempt to exploit the coronavirus crisis to further its own aims. The aphorism “Never let a good crisis go to waste” exists for a reason. Congress should not allow the crisis to be exploited either by special interests seeking bailouts or special favors or by those seeking to achieve policy aims that are only tangentially related to the crisis said the authors of the Heritage Foundation paper – and we agree.

In the view of the Heritage Foundation scholars, the economic effects associated with the coronavirus epidemic are potentially significant. Moreover, in the United States, these effects represent an economic shock to an otherwise healthy economy. The response to the coronavirus should be targeted, temporary, and transparent. Any emergency fiscal policy response should link directly to the coronavirus in order to address the source of the economic shock while limiting any political abuse that can develop in moments of crisis.

Congress should not exploit a crisis by bailing out special interests or handing out favors to those seeking to achieve policy aims unrelated to the outbreak.

An “epidemic tax credit” for private firms in epidemic areas would help provide flexible paid leave, aid public health efforts, and reduce the risk of infection.

The authors of the Heritage Foundation paper are skeptical of a payroll tax cut, arguing a payroll tax cut is the type of tool that might address a recession, so it is probably not the best tool to use to combat a pandemic. Moreover, a payroll tax cut does not assist those who help to minimize the public health risk by staying at home rather than reporting to work during the epidemic, and payroll tax cuts have a small impact on the economy because labor supply elasticities are low.

The political temptation in a crisis is always to extend and expand “emergency” assistance of every kind, noted the Heritage Foundation policy experts. The Federal Reserve has been no exception to this rule. While the record clearly shows that it can successfully provide market-wide liquidity without special emergency lending powers, the Fed also has a long history of focusing support on favored industries.

Invariably, these instances have included some combination of (1) direct lending to institutions to which the Fed would not normally lend, (2) purchases of assets the Fed normally would not buy, and (3) providing below-market rates/above-market prices for anyone receiving loans or selling assets. In the wake of the 2008 financial crisis, for instance, the Fed used its Section 13(3) emergency lending authority to provide more than $16 trillion in loans to financial firms (an amount roughly equal to annual U.S. GDP at the time).

Now, due to fears over a coronavirus pandemic, officials are arguing that Congress may need to expand the Federal Reserve’s ability to purchase a broader array of assets. This approach is unnecessary because the Fed already has all the tools it needs to provide system-wide liquidity, and it is dangerous because the Fed has yet to unwind its unconventional operating framework. Thus, expanding the Fed’s ability to purchase assets runs the risk of blurring the lines between monetary and fiscal policy, increasing the risk of uncontrolled spending, the Heritage experts argued.

Instead of massive new programs or expanding the Federal Reserve’s ability to purchase assets, the authors of the Heritage Foundation paper propose an “epidemic tax credit” Specifically, they suggest Congress should adopt a new Internal Revenue Code Section 45T creating an epidemic tax credit.

The proposed “epidemic tax credit” could serve the function of providing income support for those workers whose incomes are threatened by the epidemic. It would also discourage people from congregating at workplaces where they are likely to contract or spread the disease and would discourage people from going to work while sick because they need income.

Another way to help accomplish this goal would be to eliminate regulations that prohibit private wage earners from choosing between overtime pay and overtime paid time off. The Working Families Flexibility Act would eliminate this type of regulation.

As proposed, the epidemic tax credit would pay for 90 percent of the costs of providing paid leave to employees who cannot reasonably telecommute and who work in declared epidemic areas. It would take effect immediately and would not require the delay and expense entailed by the creation of a bureaucracy to administer a program.

Both C corporations and pass-through entities would receive the tax credit as with other business tax credits. In the case of C corporations, it would reduce the corporation’s annual tax liability and the quarterly estimated taxes that they must remit. In the case of pass-through entities, the tax credits would be reported on owners’ Schedule K-1 and personal tax return. It would reduce the owners’ individual tax liability and reduce the amount of quarterly estimated tax that they must remit. General business tax credits can typically be carried back one year or forward 20 years if a business is unprofitable in the current year.

Under the proposed credit, for purposes of Internal Revenue Code Section 38, in the case of an employer, the tax credit would be an amount equal to the applicable percentage of the amount of applicable wages paid to qualifying employees for a period of up to eight weeks. Because the general business credit applies only to taxable employers, additional language would need to be added to include tax-exempt employers.

This would include organizations exempt under Internal Revenue Code Sections 501, 521, 527, and some others.  The applicable percentage would be 90 percent.

For the complete breakdown of how the “epidemic tax credit” could be implemented go to the Heritage Foundation white paper through this link.

The authors’ rough estimate is that this credit would reduce federal revenues by as little as $2 billion and as much as $80 billion depending on assumptions about infection rates (determining the number of epidemic areas); the length of time people would be on leave; the percentage of people that could telework; the percentage of employers that would take advantage of the credit; and the weekly earnings limitation adopted by Congress.

Just as the Heritage Foundation scholars could not be certain about the extent to which the virus will spread, they note, “we do not know how severely the virus will affect the economy. While the stock market has dropped recently in anticipation of temporary disruptions in the supply chain, there are as yet no indications that the coronavirus will result in a change in the business cycle that would suggest the use of broader monetary and fiscal policy tools. The February jobs report solidly beat expectations, and the unemployment rate remained unchanged at its 50-year low.”

Although the economic outlook could change, the policy response to address the adverse economic consequences of the coronavirus epidemic should be targeted, temporary, and directed at aiding public health efforts. Specifically, targeted policy responses are appropriate when they either prevent the coronavirus from spreading or help those infected by the virus to recover. The proposed epidemic tax credit would help sick workers to take time off while limiting the spread of the virus in workplaces concluded the Heritage Foundation’s David Burton, Norbert Michel, Parker Sheppard and Paul Winfree.

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