Payroll tax cut could boost economy, but not Trump’s re-election

As President Donald Trump’s advisers cast about for ways to cut taxes to juice the economy, temporarily trimming payroll taxes has fallen out of favor, and with good reason: Voters might not even notice it.

While a payroll tax cut could help increase consumer spending to head off a potential economic slowdown, it would be one of the least visible boosts to workers’ paychecks.

With a payroll tax cut, “you’re getting some economic advantages but sacrificing the political advantage of big, fat check signed by President Trump that is very visible and salient to people,” said Ernie Tedeschi, a policy economist for Evercore ISI.

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President Donald Trump speaks to members of the media before boarding Marine One on the South Lawn of the White House

Trump insists that the economy is strong, but his advisers are quietly discussing options for tax cuts as signs of slowing growth have roiled financial markets and sent Treasury yields toward record lows. While a payroll tax cut has been under discussion, a White House official said Monday that such a move isn’t currently on the table.

“I’ve been thinking about payroll taxes for a long time,” Trump told reporters at the White House on Tuesday. The president also said, “We’re looking at various tax reductions” but that the White House does that “all the time.” Trump said “we’re very far” from a recession.

Payroll taxes — a 7.65 percent levy automatically taken from paychecks to fund Social Security and Medicare — are a hidden tax for many people. While taxpayers are likely to spend a modest increase in their take-home pay, they probably won’t recognize that it’s from a federal tax change.

‘Sending a check’

President Barack Obama didn’t get credit for several tax cuts — including a temporary reduction in the payroll tax — implemented at the start of his administration as a counterweight to the recession in 2008.

The payroll cuts under Obama reduced the tax burden for a median-income family by about $996, according to Politifact. Spread over a twice-a-month pay days, that meant about $41.50 extra in each check.

The money got into the economy quickly, but the amounts were so small that people largely didn’t notice, said Dean Baker, a senior economist at the Center for Economic and Policy Research.

By contrast, Obama’s predecessor, George W. Bush, when faced with a slowdown, opted for rebate checks. Still, that wasn’t enough to overcome the financial crisis.

“He lost the chance to get credit for a tax cut,” Baker said of Obama. “The differences between reducing withholding and sending a check are very small, so the psychology is worth just sending the check.”

Voters have also critiqued Trump’s 2017 tax overhaul because it was structured so that taxpayers had less withheld during the year, resulting in lower refund checks when they filed their tax returns this spring. Even though most taxpayers got a tax cut, some felt as though they didn’t because they received a smaller refund check than in year’s past.

This isn’t the first time the White House has floated a tax cut when facing political headwinds. Last fall, ahead of the midterms where Republicans ultimately lost their majority in the House, Trump suggested he would cut taxes for middle-earners by 10 percent. The tax cut announcement came as a surprise to administration officials and Trump’s allies in Congress. That plan was never released.

Any tax cut plan would have to go through Congress, meaning Trump would need to convince Democrats in the House that a tax cut is necessary at this point in the economic cycle and not merely a tactic to boost his re-election chances. And any payroll cut would likely be costly — the Committee for a Responsible Federal Budget estimates a payroll tax holiday would cost between $70 billion to $75 billion per percent cut each year.

“It’s hard to answer whether we are really at a point in the business cycle where we should provide a stimulus,” said Alan Viard, a scholar at the American Enterprise Institute. “Donald Trump would not be the first president to suggest to stimulate the economy right before an election.”

— With assistance from Jordan Fabian