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.

https://twitter.com/realDonaldTrump/status/1163472273388576768?s=20

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

Why the Republicans are considering a tax increase

Recently the story that Republicans are in favor of allowing the payroll tax to increase over President Obama’s opposition has been making the rounds on the internet. The story, presented as evidence of Republican hypocrisy on taxes, is more complex than it seems.

The cut in the payroll tax stems from last year’s compromise to extend the low, Bush-era tax rates for all Americans. A provision of the compromise deal lowered the Social Security payroll tax from 6.2 percent to 4.2 percent for employees during 2011. Employers were still required to pay the full 6.2 percent for their portion of the payroll tax. The self-employment tax was also cut by two percent. If not extended, the payroll tax will return to 6.2 percent for employees at the end of the year. The employer portion will remain the same.

The tax cut obviously did not stimulate economic growth. Economic indicators have trended negative over the past few months leading many economists to predict that a second recession is increasingly likely.

Speaking to the Associated Press, Rep. Jeb Hensarling (R-TX) said, “It's always a net positive to let taxpayers keep more of what they earn, but not all tax relief is created equal for the purposes of helping to get the economy moving again."

The payroll tax cut is an example of the most ineffective type of tax cut, one that is temporary, targeted, and tiny. From the beginning, the payroll tax cut was only meant to last for a year, which means that it would not affect long term economic decisions. It was targeted to employees, and did not apply to the employer match, where it would have had a greater impact.

Perhaps most important, the payroll tax cut was tiny. For a worker earning $50,000 the two percent tax cut is worth $1,000 for the year. However, the taxpayer does not get this savings all at once. It is prorated throughout the year in each paycheck. This means that the true savings is only $83 per month. If a worker is paid weekly, it amounts to only $20 per paycheck. This is not even enough to buy a tank of gas and is barely noticeable to most workers.

Social Security payroll taxes only apply to the first $106,800 of income. Therefore, the largest savings that any worker would realize from the tax cut, no matter how much they earn, would be $2,136. This translates to $178 per month or $41 per week.

Conversely, the payroll tax is used to fund Social Security which, under current estimates, will go bankrupt by 2036. That year the trust fund will be exhausted and Social Security will no longer be able to pay benefits without using current taxes. In 2010, Social Security expenditures exceeded revenues. Social Security is already operating in the red.

For 2010, Social Security tax receipts were $865 billion according to the Congressional Budget Office. Half of this money was paid by employers and half, $432.5 billion, was paid by workers. The two percent tax cut would be equivalent to $8.65 billion. This figure is slightly more than one percent of Social Security’s 2010 expenditures of $700 billion.

Since the payroll tax cut was too small to produce economic growth, it follows that allowing it to expire would have a minimal impact on the economy. Even a small impact might tip the scales toward recession though. On the other hand, the increased revenue might be able to buy a little more time to reform Social Security before the entitlement program goes bankrupt. The money in question is a tiny part of Social Security’s annual expenditures. Neither option is likely to be palatable for Republicans.

Nevertheless, it is likely that Republicans will agree to extend the payroll tax cut. Former house speaker and current presidential candidate Newt Gingrich was quoted by Talking Points Memo as saying, “I think it's very hard not to keep the payroll tax cut in this economy. I don't know what Republicans are going to say but I think it's very hard to say 'no.' We're going to end up in a position where we're gonna raise taxes on the lowest income Americans the day they go to work and make life harder for small businesses.”

Read this article on Examiner.com

http://www.examiner.com/conservative-in-atlanta/why-the-republicans-are-considering-a-tax-increase

 

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