The coronavirus has pushed millions of Americans into unemployment. The family hardships are real, and government is right to provide support to help Americans get through this difficulty. But the government also has an obligation to craft the legislation responsibly. In its rush to action, Congress fell short in a few ways.
The $2.2 trillion CARES Act set unemployment benefit levels at a rate that exceed what many people cast into joblessness had been making. It provided inadequate safeguards to prevent checks from being sent to the deceased even as millions more still await assistance. It even gave aid to wealthy households.
• Disincentive to work. Policies for unemployment benefits are set by a combination of federal and states actions. Traditionally, unemployment benefits replace less than half of prior wages in order to incentivize individuals to seek employment. The CARES Act went further, providing an additional $600 a week through July 31 with the aim to provide full wage replacement. In more than half of U.S. states the average individual is receiving more in unemployment benefits than from prior employment.
Under the most widely cited analysis by economist Ernie Tedeschi, a bit more than 40% of benefit recipients in Nebraska and Iowa could make more on unemployment than by working. Unemployment benefits, on average, are about 18% higher than previous wages for an individual in Nebraska and about 22% higher for a worker in Iowa. The lower an individual’s previous wages, the higher the percentage gain from unemployment benefits.
The $600 weekly payments end by July 31 under the CARES Act, but there’s a push in Congress to extend that support. That mustn’t happen.
The stress on many households during this crisis is undeniable and troubling. At the same time, it’s hard to see how the economy can be reignited if the government is handing out money in a way that creates an incentive for a considerable portion of Americans to not go back to work. Reopening the economy will be difficult and complicated, balancing economic need and public health. The aim should be to carefully remove impediments and adopt policies that enable growth, clearing the way for a successful economic restart at the appropriate time.
• The deceased. CARES Act checks are sent based on when someone filed a tax return with the IRS. As a result, the government has sent some checks to deceased individuals. The problem could have avoided, or at least lessened, had Congress required involvement by the Social Security Administration, which tracks deaths.
These federal payments to the deceased create complications. If the payment was made to joint filers and one spouse is still alive, the deceased person’s portion must be returned. If it’s not, the government can charge interest or penalties. Individuals in such situations are urged to contact the IRS about how best to handle procedures.
• The wealthy. The CARES Act temporarily suspends a limit on how much owners of businesses formed as pass-through entities can reduce their tax liability by deducting against their non-business income, such as capital gains. As a result, 43,000 taxpayers with incomes exceeding $1 million are each set to receive an average benefit of $1.7 million. Congress overstepped badly by doling out such largesse to the wealthy when so many average-income Americans are facing hardship and uncertainty.
Lawmakers must be sure to avoid repeating these errors when they craft and debate the next set of federal actions during this emergency.