Tuesday, August 20, 2019

The Payroll Tax Is Not The Problem

Fresh from defending the economy against recession fears over the weekend, there are now reports that the White House is considering a payroll tax to stimulate the economy. The fit of mixed messaging comes after a week of erratic stock markets and amid several softening economic indicators.

Yesterday, the Washington Post reported that the Trump Administration was considering a payroll tax cut to avert a possible slowdown as the next round of tariffs takes effect. The new tariffs, which heavily impact consumer electronics products, are slated to become effective on September 1 for some imports and December 15 for others. The tariff increase will apply a 10 percent tax to most of the remaining $300 billion of Chinese imports that have escaped import taxes so far. A report by JP Morgan estimates that new tariffs will increase the cost of the trade war from $600 to $1,000 for the average American household.

In another hint that the White House is concerned about the economy, President Trump has renewed criticism of Federal Reserve Chairman Jerome Powell. On Twitter, the president has pushed Powell for more cuts to interest rates that are already near zero.


The Post reported that members of the Administration were in preliminary discussions about the possibility of a payroll tax cut to offset the cost of the next round of tariffs to American consumers, but a White House spokesman officially denied the report in a statement to CNBC, saying, “As Larry Kudlow said yesterday, more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time.”

Most working Americans pay a 6.2 percent payroll tax into Social Security that is matched by their employer. Considering a median household income of $61,372 annually, the average family pays about $3,800 in payroll taxes every year.

Cutting the payroll tax to stimulate the economy is not a new idea. President Obama passed a payroll tax holiday in 2010 which exempted qualified employers from paying the tax. The Heritage Foundation pointed out at the time that the tax cut failed to stimulate the job market, arguing that “reducing employer costs and uncertainties will make employers more willing to pursue new opportunities in the economy, which is the key to growth.”

While there are no specifics of any proposal that might be under discussion in the Trump White House, payroll tax cuts typically are intended to make the cost of labor less expensive and leave people and businesses with more money to spend. Such a cut could be targeted at either the employer side of the tax, the worker side, or both. As a change to existing law, Congress would have to approve a payroll tax cut.

A big problem with payroll taxes, aside from their ineffectiveness, is that they reduce revenue to  Social Security and Medicare entitlements that are already in financial distress and contribute to a rising deficit. The Social Security Administration already estimates that the SSI trust fund will be exhausted by 2037, only 18 years from now. The federal deficit is up sharply under Donald Trump and is expected to top $1 trillion this year.

The prospect of a payroll tax cut comes as US Steel announces hundreds of layoffs in the battleground state of Michigan due to the temporary shutdown of two blast furnaces. The news is an unintended consequence of the tariff war, which was originally ostensibly launched to protect American steel and aluminum producers. As tariffs were announced last year, steel companies increased production to meet an expected increase in demand as Resurgent reported at the time. But subsequent tariffs led consumers of steel to cut back, which caused a glut in the steel supply and sent prices tumbling.

Donald Trump’s attempt at central economic planning is generating other problems as a result of the Law of Unintended Consequences as well. The loss of China, one of American agriculture’s largest export markets before the trade war, has necessitated bailouts to keep farmers solvent. The farm bailouts alone have cost the US Treasury more than the sum total of all revenues received from tariffs.

While the US economy is slowing, it is not payroll taxes or interest rates that are the problem. The tax cut that would benefit Americans most is an end to the tariff war. In a perfect world, restoring the tariff taxes the status quo antebellum would be accompanied by President Trump restraining himself from dabbling in the economy. His interference has led to unpredictable and inconsistent rules that make long-term business planning impossible.

As Ayn Rand famously put it in Atlas Shrugged, “Get out of the way.”
Originally posted on The Resurgent

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