Trump’s Payroll Tax Cut is a Lose-Lose Deal

August 6, 2020 12:11 PM
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Close up of a person's hand holding a form labeled 'payroll' with some cash with a calculator, pen, glasses and other paperwork visible on the desk underneath

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Mea Culpa. I was wrong, very wrong on the issue of the payroll tax cut, or suspension, that is now circulating around the White House. It is such a bad idea that I never dreamed that it would materialize as a proposal, much less actionable legislation.

Last March, rumors started to circulate that President Trump wanted to eliminate the payroll tax for the remainder of the year. The reporting the president’s comments strayed so far from reality that I opined that the payroll tax cut would never see the light of day. 

Wow was I wrong. I said there is no chance that President Trump wants to go into an election cycle facing questions about how he ended Social Security. Apparently, he does because the idea of lowering the payroll tax simply will not go away.

Earlier this year, the GOP added a suspension of the employer’s portion of the payroll tax to the CARES Act. That amendment gives employers a couple of years to pay the bill for the employer’s portion of the payroll tax. It is basically an interest free loan to businesses, the largest of which goes to organizations like Amazon, where the losses are eaten by the general tax payer when businesses close in the meantime.

Mind you, I get more wrong. At this point, the president’s team is considering ordering the Treasury Department to stop collecting the tax whether Congress agrees or not. I wouldn’t have believed it, but Trump confirmed that he is considering a payroll tax suspension that has been previously reported by CNBC.

Financially, Social Security does better when more people work, and these tax proposals replace any lost revenue. In theory, reducing a tax on wages will encourage businesses to hire more people and provide those with jobs better raises. That is great for Social Security – in theory. It is even better for people who have no job if they get hired. In theory, this is the win-win strategy that politicians love to sell come election day.

That is theory. In reality, you have an anti-growth idea that puts Social Security at risk politically. 

  •  Unfocused tax regimes are not pro-growth. Capitalism hates uncertainty. That type of risk creates economic friction in the wheels of business that are anti-growth. No one wants to invest in an area where the government can’t figure out a basic tax strategy. Employees are long-term investments and the course of those investments is not going to change over a brief change in the tax code.
  • There is little chance that managers will pass along the proposed savings to employees when they have no idea whether there will be savings. Employers do not want to have to increase wages today for political reasons when they will have to decrease them later. The people who decide how to allocate wage resources have no way to assess the possibility that the government will forgive these obligations which are currently enforceable under the tax code.

While Social Security enjoys a prospective bump financially, that money comes at a steep cost politically. 

The more Social Security draws from the general fund, the more the program faces questions about its contribution to the financial troubles of the broader government. That isn’t a good thing. The whole point of the Trust Fund is to ensure that Congress does not use reductions in benefits to offset spending elsewhere in the budget. Now, younger voters have the justification to say, “Let’s spend less benefits and more on us” because there is no clear line dividing one pot of money from the other.

Worse, it doesn’t take long before no taxes become the new normal. At some point, Congress will have to resell voters on Social Security at a 12.4% increase in their payroll taxes. You might think that voters would be happy with the year-long reprieve, but it didn’t work out that way the last time a payroll tax cut ended. Back then, The Washington Post observed, “President Obama raised middle-class taxes and lost an election.”

So in total, you have a no-growth concept that will put the system on which millions depend at risk. And you wonder why I did not believe that it would draw serious consideration.

© 2020 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes, FedSmith.com, MarketWatch, TheHill.com, and regional media like The Denver Post.

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