American workers could enjoy a payroll tax cut, if the Trump administration goes ahead with its reported efforts that are ostensibly aimed at bolstering consumer spending and, in turn, staving off a looming recession.
The payroll tax is explained by Paul Davidson, a reporter on economic matters with USA TODAY, who considers whether the economy would be boosted by the cut which is dependent for its passage on the assent of Congress.
Payroll taxes are best understood as resources taken from the pay-checks of most American workers in order to fund social safety net programs such as unemployment insurance, Medicare and Social Security, among others.
The Peter G. Peterson Foundation – an organization set up to address fiscal issues – reports that the Trump administration is allegedly planning to cut the payroll tax specifically used as a resource for Social Security programs, a tax that amounted to $855 billion in 2018.
Ordinarily, such tax amounts to 6.2% deduction from an American worker’s wages. While the amount of reduction planned is not yet known, a general surmise would indicate a reduction of up to 2%, as much as the Obama administration had enacted in the years 2011 and 2012, resulting in a final tax deduction of just 4.2%.
Were the reduction of 2% to the employee payroll tax to be enacted, the net annual cost to the Social Security trust fund, in terms of lost revenue, would be approximately $150 billion, as reported by the Committee for a Responsible Federal Budget. The Obama administration used its general fund to compensate the trust fund for the lost revenue. Consequently, the deficit rose, even as the Social Security programs remained wholly funded.
Bigger pay checks would result from the tax cut and lead, in turn, to increased consumer spending, especially by middle- and low-income workers. Moody Analytics’ chief economist, Mark Zandi, estimates that a tax cut of $1 would add up to 80 cents to the GDP; contrast that to the boost to GDP (merely 65 cents to every dollar spent) that would result from a cut in personal income tax. Zandi accounts for this apparent anomaly by pointing out that the benefits of cuts to income tax mainly accrue to higher income earners who tend to save such increased income.
According to Zandi, in 2011, the consequent gain to the annual GDP from the payroll tax cut pushed it to 1.6% (a substantial increase of half a percentage point). However, this time around, any GDP growth sustained from the cut would be lower, given that fewer workers are available to raise production levels of goods and services than in 2011. Zandi explains this lower availability by pointing to the 3.7% unemployment figure that USA currently registers, the lowest recorded in half a century.
If numerous economic experts of prominence are to be believed, the rise in the deficit accruing from the payroll tax cut is not justifiable. Zandi avers that a comparison with the situation in 2011 and 2012 is untenable, considering that in the aftermath of the great recession from 2007 to 2009, the US economy had not yet fully emerged. Unemployment was estimated at 8-9%, and wage growth was stagnant. Contrast that situation with the low unemployment and high wage growth currently enjoyed in the country.
Daco adds that traditionally strong consumer spending habits hardly need a boost. Besides, fears of a looming recession could belie predictions that increased spending would result from the windfall gains in workers’ pay checks.
The annual deficit is expected to touch the $1 trillion mark within a decade. Marc Goldwein, senior VP of the Committee for a Responsible Federal Budget, is convinced that the payroll tax cut would only exacerbate the problem of a growing annual deficit that was underscored by the passage of federal income tax cuts by Congress in December 2017.
The next recession -- whenever it arrives -- would need a remedial dose of spending measures, measures that are only made harder when widening deficits are added to a humongous national debt of $22 trillion.
Valderas Financial Solutions LLC