Taxes

How Would Trump's Payroll Tax Cut Work? Glad You Asked!

The details are reeeaaaaaally sketchy, but here's what we know now.

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The Trump administration is reportedly considering a payroll tax cut as a way to boost the economy and stave off a possible recession.

Well, maybe. Trump has apparently kicked around the idea of cutting payroll taxes. The idea caught enough media attention for the White House's press office to officially deny the reports that the administration was considering such a move—until Trump himself confirmed that, yes, actually a payroll tax cut is under consideration.

Any changes to the payroll taxes paid by American workers and employers would have to be approved by Congress. So once the White House decides what it actually wants to do, we are still a long way from that proposal becoming law.

Still, payroll taxes are a little-discussed but critical part of Americans' fiscal relationship to the federal government. Because they are used to fund the so-called "mandatory spending" on entitlement programs, a payroll tax cut would let American workers put more money in their pockets now in exchange for putting Social Security and Medicare on even shakier fiscal footing. Unless they are combined with entitlement reforms—or unless the lost revenue is backfilled in some other way—a payroll tax cut is likely to trade a short-term economic boost for making America's long-term fiscal issues worse.

Why? Glad you asked. Here's a quick primer on everything you want to know about payroll taxes but might have been afraid to ask:

How do payroll taxes work and what are they used for?

Payroll taxes are taxes on wages. Under current law, both employees and employers are subject to a 7.65 percent tax on every dollar earned up to $132,900 annually.

Unlike other taxes collected by the federal government—which go into a general revenue bucket to be spent on everything from building new hotels in Kabul, Afghanistan, to feeding cocaine to Japanese quail—payroll taxes are tied to specific mandatory programs and run "off-budget."

The two biggest programs funded by payroll taxes are Social Security and Medicare, the government-run health care program for the elderly. (Medicaid, the government-run health care program for the poor, is funded jointly by state and federal taxes.) That 7.65 percent tax on workers and employers is actually two taxes: a 6.2 percent tax to fund Social Security and a 1.45 percent tax to fund Medicare. The Social Security tax only applies to the first $132,900 earned this year—the cap is gradually increasing—but the Medicare portion of the tax is uncapped and applies to all earnings.

There are a few other payroll taxes. One is paid by employers on the first $7,000 earned by all employees and is used to subsidize state-run unemployment insurance programs. Others fund pensions for railroad employees and federal workers—but you don't pay those unless you work for a railroad or the federal government. For the purposes of this post, we'll ignore them.

OK, so cutting those taxes means I get to take home more money?

Probably. But the answer depends on whether Trump is considering cutting the employer or employee half of the payroll tax.

A cut to the employee's half of the payroll tax would indeed mean more take-home pay for workers. Exactly how much more would depend on the details of the plan, which we don't have yet. The Committee for a Responsible Federal Budget, a nonpartisan nonprofit that favors balanced budgets, estimates that a reduction in the employee's payroll tax would result in a reduction of government revenues of about $75 billion per percent cut per year.

In other words, if Trump were to enact a 2 percent cut that would last for two years, it would put $300 billion in American workers' bank accounts that otherwise would have gone to the federal government.

A cut to the employer's half of the payroll tax would reduce federal revenues by about $60 billion per percent cut per year, according to the CRFB's analysis (which is based on estimates from the Congressional Budget Office and Joint Committee on Taxation). The "cost" of that cut is less because it is assumed that the cut would translate into higher wages for employees—higher wages that would be subject to employee-side payroll taxes, thus capturing some of lost revenue.

Why is Trump considering this tax cut now?

Mostly for political reasons. There is growing concern about a possible recession on the horizon—one that might be triggered, or worsened, by the president's trade policies. If there is a recession in the next year, it would seriously complicate Trump's re-election effort. Still, unemployment remains near all-time lows and consumer spending is high, even though the trade war has whacked manufacturing and forced businesses to cut back on investments. With the boost from the 2017 tax cuts fading, Trump probably sees another tax cut as a good way to reinvigorate in the short-term growth.

But, wait—didn't White House economic advisor Larry Kudlow just say there's not a recession coming?

He did. Much like how the White House press office tried to squash the story that Trump was considering a payroll tax cut only to have the president contradict those claims hours later, there have been mixed messages about recession fears. On Sunday, Kudlow told Fox News there was "no recession in sight." On Tuesday, White House chief of staff Mick Mulvaney told a gathering of Republican donors that the administration was preparing for a "moderate and short" recession.

So the official position of the White House seems to be that a recession isn't coming and that it will be a small one when it arrives.

I'm sorry I asked. More importantly, will a payroll tax cut prevent that recession that is or is not coming?

Probably nothing can prevent recessions forever, but Trump is likely right about the fact that a payroll tax cut would boost growth. When the Obama administration cut the employee-side payroll tax by 2 percent in 2010 and 2011, the Congressional Budget Office projected that it would boost the economy by between $90 billion and $270 billion over five years.

That tax cut lasted only two years, in large part because Republicans opposed extending it in 2012.

Political ironies aside, what's the downside here? More money in my pocket and a much-needed jolt to the economy sounds pretty good.

The downside is the fact that America is already in a massive fiscal hole—the Congressional Budget Office now expects a $960 billion deficit this year—and a tax cut that isn't paid for with spending cuts will only maybe that problem worse.

Even without reducing the revenues that pay for it, Social Security is expected to hit insolvency—the point at which full benefits can no longer be paid—in the mid-2030s. Medicare Part A, which covers hospital and nursing home costs, will be in the same boat as early as 2026. (The programs' trustees expect that Medicare Part B, which covers routine medical care such as visits to the doctor, and Medicare Part D, which covers prescription drugs, are on more solid footing and will remain solvent "indefinitely.")

Those coming shortfalls are a big part of America's long-term fiscal problems. Over the next 30 years, Social Security and Medicare are expected to run a $100 trillion deficit, while the rest of the federal budget is going to run a $16 trillion surplus, according to the Manhattan Institute's Brian Riedl, a former chief economist to Sen. Rob Portman (R–Ohio).

One idea frequently floated as a way to get the national debt under control is to raise payroll taxes. Usually this takes the form of suggesting that the current cap on the Social Security payroll tax be upped or eliminated. But even that would not be enough to plug the long-term gap.

Unless Trump is going to shift general revenues to fill the gap created by his proposed payroll tax cut, this policy will make America's entitlement crisis more immediate and more difficult to solve.

So, basically, our elected officials are going to have to decide whether a short-term boost to the economy to help Trump avoid a recession and aid his chances of winning re-election is worth making the long-term fiscal problems—problems that already seem almost insurmountable—even worse?

Yep. And when it comes to short-term thinking versus long-term planning in Congress, it's almost all one-way traffic.

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  1. Wait, I thought the Con Man promised us 4-5% perpetual growth if his sorry lying ass became president. Instead, his best year is 2.9% growth – no better than Obama’s was.

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    2. “Wait, I thought the Con Man promised us 4-5% perpetual growth if his sorry lying ass became president. Instead, his best year is 2.9% growth – no better than Obama’s was.”

      Turd here continues to cherry-pick data from a time where Obo started at near zero; even an econ-igonramus like Obo couldn’t keep growth down under those circumstances.
      Trump gets a recovery in progress, is predicted to cause massive failures and delivers record highs in the market and employment.
      Next, our fucking pedo will tell us job growth is stalling!
      (neglecting to mention it’s hard to get more than full employment).
      If turd were not allowed to post lies, turd would have nothing to post here.
      Fuck off and die, and take that pathetic piece of shit Hihn with you; you deserve each other.

  2. But, wait—didn’t White House economic advisor Larry Kudlow just say there’s not a recession coming?

    That dumb motherfucker said that in 2007 as well when he was shilling for the Bushpigs.

    1. As OBL and others have pointed out, the country is already in a deep recession. However, the news media is covering it up. Just this morning, NBC covered the five most traffic choked cities in America and – fake news – attributed it to “increased employment and a good economy.” When will the media stop lying about Trump’s Great Depression?

    2. Need to turn you in to the feds. Hopefully you get Epsteined in luck up.

    3. Why don’t you go play with the other Russian trolls over on msnbc.

  3. TLDR- the “fiscal conservatives” want to game the system after having blown a massive hole in both the deficit and the debt, during a “booming economy” no less.

    Don’t worry though- they’ll find a way to blame it on Democrats and the gullible rubes will eat it up.

  4. Haha. Boehm writes it but doesnt get it.

    Unless Trump is going to shift general revenues to fill the gap created by his proposed payroll tax cut, this policy will make America’s entitlement crisis more immediate and more difficult to solve.

    What would be a good strategy for Trump (who actually likes America and Americans, no matter what reason says) to force Congress’ hands to cut debt spending?

    Cuts taxes as much as possible so veto-proof federal budgets send debt spending into territory that requires Congress cut spending.

    Make Congressional debt spending a campaign topic in 2020. While Trump should have vetoed FY 2018 (House vote of 359-49 and Senate vote 85-7) and FY 2019 (House 300-128 and Senate 83-16) budgets they had veto proof majorities.

    1. Yeah right. 3D chess and all that. Gosh he is so brilliant.

      1. Poor alphabet troll.

        All of Trump’s random tactics still outmaneuver Lefties.

      2. Chess is too easy. It’s 4D Risk now. We just have to acquire Greenland first and then Europe will be ours!

        1. If it was 4D Risk, couldn’t you get to Europe from another Dimension and not need to go thru Greenland?

      3. Yeah right. 3D chess and all that. Gosh he is so brilliant.

        Aren’t you getting tired of saying shit like this?

        Every time he does something you and your ilk vomit out the 3-4-5 D chess thing

        And then you’re left standing there with your mouths gaping.

        How many times does he have to pull something like this? He just fucked over Planned Parenthood–and got the 9th Circuit to help.

        Another amazing ‘accident’ from an ‘idiot’ in what seems to be an endless string of them.

      4. Knowing that vetoes can be overturned is 3D chess!

    2. I don’t know man, I think Trump is just a big time spender. He always has been.

  5. Trump has apparently kicked around the idea of cutting payroll taxes. The idea caught enough media attention for the White House’s press office to officially deny the reports that the administration was considering such a move—until Trump himself confirmed that, yes, actually a payroll tax cut is under consideration.

    Those two things are not contradictory, the administration isn’t considering cutting payroll taxes but Trump is. Well, for a generous value of “considering”. It’s an idea that just popped into his head and 5 seconds later he’s tweeting about it.

    Look, goddammit, Trump didn’t give more this idea more than 5 seconds thought, why the hell are you spending any more than 5 seconds thought on it? Just put up a post titled “Trump said some stupid shit today” and keep it stickied to the top of the blog and half your work is done here.

    1. Jerry….I feel the same way. I can’t help but wonder if he was in a Cabinet meeting where the question of what small things could be done to ‘nudge’ the economy just a little. And no doubt, someone said increasing the money in circulation will increase economic activity via more spending. Personally, I think that is a questionable assumption.

      This is a redux of what other POTUS’ have done; notably, George HW Bush back in the early 1990’s. I could easily envision a POTUS Trump saying something to the effect that doing something now before it becomes a problem is the way to go. And to not have to deal with Congress (a measure of how truly terrible and sclerotic Washington DC has become)? Yeah, I could see him just blurting out some shit like that during a Cabinet meeting and people then leaking it.

      1. “someone said increasing the money in circulation will increase economic activity via more spending”

        I seriously doubt it was said in those terms. It’s not about “money in circulation” – that is far too wonkish a consideration.

        No, it’s about people seeing a larger number when they look at their take home pay. That alone (and certainly not to any consideration of how their pay increase relates to changes in M#whatever) is what would be seen as tending to goose economic activity.

  6. Why not set all taxes to 0% and finance all of government spending via borrowing?

    1. This plan may have flaws now, but once the FED gets rates negative, it becomes pure genius.

      we are all gonna be rich!!!!

    2. Did you know there used to be no income tax? Whanna guess how the government was funded?

  7. >>>stave off a possible recession.

    stop being part of the problem.

  8. My biggest worry is not the recession but how it is handled when it happens. President Trump has shown me nothing to indicate he can do what is needed. This isn’t business where he could go to his father for a bailout or use bankruptcy. He has handled a good economy poorly (useless tax cuts and tariffs). I do fear a minor recession could go deep under his watch.

        1. The problem, Leo, is the lie.

          See the piece is worded in such a way as to make it seem that industries are reporting job losses.

          But they’re not.

          Because there weren’t any.

          The industries reported their numbers–which were all gains, and the BLS overestimated based on those initial numbers.

          The actual gains actually happened–and were reported as gains.

          The BLS is reporting THEIR error as if it means that jobs were lost. But no jobs were lost. Nothing ‘turned down’.

          The BLS just overestimated.

          And that overestimation is being reported on as if it heralds bad news.

          1. It’s not a lie. The article doesn’t even imply that jobs were lost. They over estimated.

            The point being that Trump’s claims like the following, “Companies are moving back, creating job growth the likes of which our country has not seen in a very long time,” are now roughly 20% more false.

        2. “While not as robust, it still shows that job creation is expanding at a steady rate.”

          Definitely a sign of a coming recession.

        3. Bureaucrats set figures and then change figures.

          Water is wet.

    1. Do tell M4e, what exactly will need to be done come the next recession?

      1. Nothing. But instead they’ll certainly do something and make it even worse.

        1. “Nothing.”

          Thanks Leo, I was kinda hoping to hear from M4e, because he certainly implies that something will be necessary.

          Nothing would indeed be a welcome change.

      2. Well other than the problem with the 22nd Amendment, I say put Barrack Obama back in charge. He did carry us out of the last recession with a good economy for over 10 years. As that is out I suggest we work the team that advised him.

        And when you suggest the we do nothing and let the economy work out the problem, I will point out that will only last so long and when the misery index takes over people will demand action. It may not be right but it will happen. Just as President Hoover.

        1. So, other than the impossible, you got nothing.

          Thanks.

        2. “He did carry us out”…… haha.

          Obama leg humpers crack me up. God, how you people need to be lead.

      3. “Do tell M4e, what exactly will need to be done come the next recession?”

        Pretty sure it has to do with the election of a D. Other than that M4e has no suggestions; he’s a TDS victim.

        1. Moderation4ever
          August.22.2019 at 1:49 pm
          “Well other than the problem with the 22nd Amendment, I say put Barrack Obama back in charge.”

          Told ya; fucking ignoramus…

        2. If the Rs don’t run an alternative to President Trump there is not much choice but a D.

          1. Mod….Wrong. There is always an alternative. You could for example vote for the Libertarian candidate.

            1. This will very likely be a close election and there will be no margin to let people vote their conscience. If, like me, you believe that President Trump has not stepped up and done his job, that he is not equipped by temperament for the job, and that he will only get worse in a second term, then you have to vote for the alternative with the best chance. Unless Rs nominate an alternative, you are left with the only choice being a D.

  9. Good, but fucking cut spending.

    1. Take notes, Buhm, you weenie. This ^ is how you do it.

  10. Unlike other taxes collected by the federal government—which go into a general revenue bucket to be spent on everything from building new hotels in Kabul, Afghanistan, to feeding cocaine to Japanese quail—payroll taxes are tied to specific mandatory programs and run “off-budget.”

    ORLY???

    Explain to me Boehm precisely how this Congress or any future Congress is bound by prior acts of Congress?

    Really wish they’d stop hiring children as writers.

    1. “Nothing is so permanent as a temporary government program.”
      — Milton Friedman

      1. Great quote, but SS and Medicare were never presented as temporary. I guess that makes them pretty much the Drowned God of Government.

  11. Personally, I much prefer indexing capital gains taxes to inflation, or even better, not taxing capital gains at all.

  12. The long-term solution is to eliminate Social Security and replace it with a means-tested welfare program for the elderly. Sooner or later, that’s what will happen. Sending checks to affluent old people at the expense of young wage earners is not sustainable.

  13. Fuck off and die, Boehm.
    Seriously.
    You’re nothing but a garbage spewing shill.
    “Waaaaaah! Tariffs are taxes that make foreign production less profitable and prices will rise, so some people who choose to buy foreign products will pay some amount more and have less money to spend otherwise!”
    But also,
    “Waaaah, cutting payroll taxes will let people keep more of their own money, which threatens the redistribution ponzi!”
    Boehm, and Reason magazine:
    Subsidizing foreign production = good
    Stealing less from Americans = bad

    Get the fuck out of here

    1. Kinder gentler statism ain’t going to pay for itself.

    2. Subsidizing foreign production

      Huh, so NOT imposing tariffs is “subsidizing foreign production”.

      Not taxing = subsidizing

      1. “Not taxing = subsidizing”.

        Haha. Yeah. I wonder how AOC is spending that 3 billion $ windfall that NY didn’t have to “give” to amazon.

        1. When costs are artificially inflated through policy for domestic employment and exports but policy also protects external employment and imports from absorbing any of that cost inflation, then yes it is being subsidized

  14. Boehm should take a vacation, then when he comes back, observe the way Trump operates before clutching his pearls.

    1. TDS never allows that. Boehm thinks about Trump 24/7.

  15. Tax cuts are evil.
    On the contrary, we need to tax everyone at least 100% of their income otherwise our ruling elites might end eating at a four star restaurant instead of a five star restaurant.
    Does anyone out there really want that on their conscience?

  16. “That tax cut lasted only two years, in large part because Republicans opposed extending it in 2012.”

    Why did they oppose it?

  17. Boehm is the most stupid person I’ve seen in my life
    فروش تجهیزات شبکه

    1. A funny bot!

  18. Trump – Making America Great Again!!! This is so awesome…

    Its about time the government stopped subsidizing the sun-birds and their $500k RV trips to Phoenix. People who are a drain (take,take,take) on society certainly shouldn’t be living better than society.

    If a retiree is using their own labor/asset money – great!!! More jobs in the RV sector; but stealing the profits of Mr. RV maker so Sr. Sun-bird can throw money into the air on a vacation trip does nothing for Mr. RV getting ripped off or any other member of society than Sr. Sun-bird.

    1. Common sense RV regulations. Who could argue with that?

    2. RVs are a lot of work. My plan to drain society is get a nice place near the beach in Florida, sit around at the beach bar drinking bourbon, smoke a cigar every now and then and eating shrimp cocktails. Watch the pretty scenery walking by. Maybe do some fishing.

      Looking at the numbers here I could still be alive by the time we all go broke but with that lifestyle hopefully not.

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  20. What a pile of shit. All federal taxes are paid directly to the federal treasury. Employers do not make separate payments for payroll and income taxes. It’s one payment to the treasury. The treasury cuts checks based on whatever congress dictates. If there ain’t enough cash they sell bonds to make up the difference. End of story. All of this “off budget” “trust fund” “employer contribution” crap is pure fiction. Every American who has income subject to the payroll tax whether wages or schedule C pays 15.3% of their net income into the gaping maw of the US Treasury. Businesses don’t pay corporate taxes or regulatory costs. Their customers do. And Businesses don’t pay payroll taxes. Their employees do. See how that works Eric? It ain’t rocket science. But it really doesn’t matter. You could lower the payroll tax to zero but if congress says 65 year old John Doe is entitled to 2 thousand dollars a month the treasury will cut the check. The money will come from income taxes or tariffs or entrance fees at Yosemite or bond sales. But he will get paid. End of story. You could raise the payroll tax to 100% and the treasury would have a huge surplus. John doe still gets his 2k but congress would feel free to enact the Green New Deal or drop bombs on North Korea or some other scheme and the treasury would be selling bonds again. See how that works Eric? It ain’t rocket science. Reason continues to perpetuate the the same mythology that FDR used to sell this ponzie scheme 85 years ago. It just don’t fucking work that way. The US Treasury is 22 trillion dollars in debt. The payroll tax at 15.3% or 20.3% or 50.3% or 10.3% or 5.3% ain’t gonna save us.

  21. …but why would anyone ask an intellectual dilettante like Eric?

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