Proposed Payroll Tax Cuts

Recently proposed payroll tax cuts are one of the more controversial proposals designed to head off a recession and keep the economy growing steadily. President Trump has recently indicated that he might be amenable to implementing payroll tax cuts to prevent a recession and stimulate the markets, although it is far from clear whether that support is given unequivocally. Payroll taxes are split equally between employees and employers (self-employed workers pay both portions, but are then allowed a 50 percent deduction when they file their taxes). Historically, in an effort to spur consumer spending, President Obama used payroll tax cuts to give employees a 2-percent tax break on the employee portion of the tax during the last recession.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions on the potential impact and viability of a payroll tax cut as a means for preventing the economy from sliding into a recession.

Their Votes:

Byrnes

Bloink

Their Reasons:

Below is a summary of the debate that ensued between the two professors.

Byrnes: Payroll tax cuts—and tax cuts generally—provide a positive way to stimulate the economy and encourage consumer spending without the need to pass comprehensive, time-consuming tax reform. They are targeted at a specific goal—giving all American workers a break at a time when economic fears may be preventing consumers from spending. Payroll tax cuts have worked historically, and I think they would work again today.

Bloink: First of all, the last time the government implemented a payroll tax cut, the economy was in an entirely different position. We were already deep into a lasting recession. Today’s market is extremely different. While the threat of another recession is real and present, there is no historical basis for saying that payroll tax cuts would do now what they did circa 2010. Further, these payroll taxes partially go toward funding Social Security—a system that is currently in crisis and needs to be shored up, not gutted by payroll tax cuts.

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Byrnes: Payroll tax cuts are meant to instill confidence in American consumers—to show them that the government is on their side and is willing to take all actions necessary to protect them from an economic downturn. Arguing that our situation today is not exactly the same as the situation during the recession is no proof that payroll tax cuts won’t work to give consumers the confidence that they need in today’s environment. Maybe if payroll tax cuts had been implemented sooner, our economy would have recovered much faster back in 2008.

Bloink: We have no guarantees that these payroll tax cuts will give consumers confidence that will motivate them to go out and make large purchases or have faith in the markets. In fact, I think it’s just as likely that consumers who remember the job instability and market chaos of last recession well will simply put those extra dollars away in conservative investments or even keep the funds as cash for a rainy day. In the meantime, cutting payroll taxes will place undue and additional stress on the system that many Americans rely on for their future retirement security—not to mention increase the already-skyrocketing budget deficit and provide even more instability in this country.

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Byrnes: Tax cuts increase economic growth, which is exactly what we need right now. The payroll tax cut would place dollars directly into Americans’ pockets. If they choose to invest those funds in the stock market via additional contributions to a retirement savings or other type of account, it strengthens business in this country just as much as if they go out and support businesses by buying a new car.

Bloink: I can’t agree that payroll taxes would have any significant impact right now. Regardless of what’s happening in the stock market, the job market in this country does remain relatively strong. Americans aren’t yet fearful for their job safety. More tax cuts aren’t going to be sufficient to give Americans confidence in this country once again—remembering that Trump pushed through a massive tax cut package less than two years ago. We need to instill confidence by offering reasonable, smart government and respect for this country’s institutions—Social Security and Medicare included—rather than rashly cutting taxes yet again.