Paul L. Caron

Friday, May 1, 2020

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews How Not To Give People Money During a Pandemic

This week, Mirit Eyal-Cohen (Alabama) reviews Pamela Foohey (Indiana-Bloomington), Dalié Jiménez (UC-Irvine), and Christopher K. Odinet (Oklahoma), CARES Act Gimmicks: How Not To Give People Money During a Pandemic And What To Do Instead, 2020 U. Ill. L. Rev. Online 81 (2020):

Mirit-Cohen (2018)

This timely essay scrutinizes the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in its aim to deliver economic relief. The main aspects of the CARES act provide individuals and families direct cash payments (“recovery rebates”), unemployment benefits, paid sick leave, foreclosure and eviction moratorium, and student loan suspension. The authors focus their attention on the first two.

The CARES act provides every household with direct payments of $1,200 per adult and $500 for every child under the age of 16. These amounts phase out based on AGI figures from previously filed tax returns by $5 for every $100 of income over an applicable threshold. The act also provides additional unemployment benefits of $600 per week to assist families during the crisis without making substantial changes in their spending and consumption. While both benefits do not cover all lost pay (past years’ national average weekly benefit was $387 and varied by state), they relax the pressure of job loss and allow individuals to continue to purchase food and supplies and pay for utilities while looking for new employment. They help maintain consumption and the nation’s economic activity. The CARES act also extends the duration of unemployment insurance and lowers the standards on eligibility requirements such as including individuals with insufficient work history, independent contractors, and gig economy workers.

Nevertheless, the authors claim that direct payments and enhanced employment benefits in the CARES act have a negligible effect on taxpayers and are merely “gimmicks”. Size-wise, the tax rebates constitute an insignificant portion of households’ monthly spending  and are likely consumed by debt collectors and banks. There is no adjustment of rebate amounts (as with housing vouchers and SNAP payments) compared to the cost of living in different geographical areas. The rebate phase-out mechanism relies on previous years’ tax returns that could fluctuate greatly for tips or commission-based taxpayers. Employment benefits necessitate that individuals be laid off and are too sluggish to be useful. There is no clear information as to when payments will be sent, which might be too late for jobless individuals having to face COBRA payments and car loans (the CARES act does not prevent vehicle repossession).  Finally, the delivery of the tax rebates is uncertain because only 20% of taxpayers provide the IRS with direct deposit information.

According to the authors, while direct payments and unemployment benefits serve as immediate signals to American citizens that help is on the way to assist them with increased costs and diminished wages, these programs would do little to help in enduring current and upcoming financial strains. Because the estimates show there will be another wave of Covid-19 relief legislation, the authors explore the CARES act arrangements and what Congress ought to accomplish in future bills to address the pandemic. When contemplating how to furnish American families with financial assistance during uncertain times, there are two essential methodologies: sending cash to individuals or temporarily suspending their common fundamental costs. The authors claim that the CARES act focuses on the former rather than the latter via the use of direct payments, enhanced unemployment benefits, and paid sick leave but dismiss the CARES act suspension of home foreclosures and rental evictions, student loans and mortgage payments because these all have to originate in government- sponsored loans as private moneylenders and large banks are excluded from these arrangements (estimated as one-third of the loan market). There is also uncertainty as to what happens to missed rental payments in the interim and whether they are subject to forbearance, accrue late fees and penalties, and due in a lump sum at the end of the moratorium.

What the authors seem to overlook are private market arrangements and reputational costs. Today, large banks have been offering similar or identical loan suspension arrangements to their customer helping them keep their heads above water. Similarly, private landlords who recognize the real estate market is frozen prefer to make private arrangements with their tenants rather than evicting them and remaining with a vacant property and no income. If practically speaking, eviction and foreclosure proceedings cannot be completed via social distancing but require face-to-face interactions and may increase infection rates, wouldn’t landlords then prefer to avoid them (or avoid paying increased fees to assume them) and rather be more patient?   

The gist of the authors’ proposal is claimed to be suspension of recurring costs as an ideal approach to deliver Americans with cash-comparable rather than insignificant direct money payments currently sent to individuals. But as an alternative, the authors do not propose that future bills abandon unemployment benefits or what they term as “gimmick payments” but rather expand them in size and scope. They call on Congress to send taxpayers increased payment amounts on a monthly basis to continue a few months after the health crisis ends (and up to a year) to give the economy time to recover. In their eyes, this will keep money flowing through the housing market and prevent a future government bailout of the mortgage finance sector. Such monthly payments should be adjusted to cost of living (based on Census data), a suggestion that ignores the literature warning this may subsidize, perpetuate, or even exacerbate high costs of living. As for the delivery manner, the authors reference Representative Tlaib’s proposal to replace payment checks with pre-loaded debit cards obtainable at post offices or local community centers. This suggestion seems an administrative nightmare and highly susceptible to abuse. Such high transaction costs will need to be analyzed and compared to the (so-called) added benefits of switching taxpayers from cashing IRS checks to using debit cards. 

The authors also advise that Congress should allow uninsured individuals or families to sign up for Medicare effective immediately. They object to characterizing debt collection as essential processes or businesses and call on nationwide eviction and foreclosure moratorium accompanied by a debt collection, garnishment, and re-possession moratorium. Yet, maybe here too, a private market approach will suffice accompanied by statements of officials such as that of the Massachusetts Attorney General, viewing current attempts to collect consumer debts as unfair practice in violation of the Fair Debt Collection Practices Act, the Consumer Financial Protection Act, and other state consumer protection statutes.

Lastly, the authors admit their proposals “will cost a lot” but promise they had found the formula that will help Congress “fix its mistakes” and “actually help American families survive the pandemic.” They estimate their proposal will cost over $2 trillion each phase over two or three stages. As for covering this cost, the authors simply mention in passing increasing wealth taxes when the crisis is over. While some of the essay’s suggestions may be useful, this and other normative points feel a bit like—gimmicks. 

Here's the rest of this week's SSRN Tax Roundup:

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