The Myth of Payroll Tax Cuts

Dear Rich Lifer,

Over the last several days, we’ve begun hearing President Trump suggest the possibility of a temporary payroll tax cut as a way to help support the U.S. economy – and a vast swath of regular Americans – as the coronavirus causes financial damage to workers and businesses.

Now, here’s the thing: When it comes to politicians, I’m an equal opportunity critic.

I lambasted President Obama when he pushed a payroll tax cut back in 2011… and again when he extended it in 2012. 

Today I’m going to do the same regarding Trump’s proposal.

It isn’t because I want to pay more taxes.

Heck, no!

In fact, as a self-employed person responsible for the full 12.4% of the payroll tax – i.e. the employer side and the employee side – I’ve paid an obscene amount of money into the program over the last decade operating my own business. 

Honestly, I would love to never pay into Social Security again!

 But let’s be realistic …

While I’m all for tax cuts, I don’t like when politicians mislead the public about how these moves will actually impact our nation’s finances.

The Truth About Taxes

In the case of the last round of payroll tax cuts, lawmakers were trying to goose the economy in the wake of the financial crisis.

Their solution simply took more money out of the Social Security system and had Americans spend it.

Sure, Americans thought they got something for nothing.

 Yes, stealing money from the future made the present look a bit better.

And ultimately, all of Washington’s career politicians looked better going into the 2012 elections.

At the same time, the Social Security system was already running annual deficits!

It’s always the same old game of musical chairs.

In fact, what was really hilarious was what happened once the rate reverted back to where it was in 2010: Everyone started complaining about the payroll tax “increase.”

And now, here we are today …

With a Social Security system that is in even worse shape than it was then…

With a bunch of proposals aimed at taxing “wealthier” Americans to solve the shortfalls…

 And at the same time, the chance of another temporary payroll tax cut being floated by someone up a president up for re-election.

Ugh.

There’s No Such Thing As a Free Lunch.

A payroll tax cut puts more money into our pockets right away, which has a stimulative effect on the economy.

Though in this case, even that is questionable if the concern is that activity will simply cease as people stay home and do nothing.

Meanwhile, what is absolutely certain is that we will end up with a greater Social Security shortfall going forward. 

That means higher taxes in the future… benefit cuts… new means testing for wealthier Americans… and/or other draconian measures.

This is what politicians – Obama, Trump, Congress or anyone else — mean when they say they’ll “make up the lost revenue.”

How else COULD they accomplish that goal?

Are they all going to donate money from their own pockets? Of course not.

Based on reports I’ve read, President Trump actually wants a payroll tax cut that would be more extreme than the 2-percentage-point reduction we saw under Obama.

Trump’s version might do away with the payroll tax cut altogether… possibly through the end of the year or even through November 3rd election. (How convenient!)

Luckily, a lot of politicians – on both sides of the aisle – are pushing back on the idea.

As The Hill reports:

“Sen. Mike Braun (R-Ind.) predicted that a payroll tax cut would spark resistance not only from fiscal hawks but a broader swath of the Senate GOP caucus. 

“‘I think there are going to be a lot of fiscal conservatives, and I think that’s going to go deeper into the conference than normal,’ Braun said, asked about opposition to the idea. ‘My gut is there’s going to be folks not interested in doing it quickly.’  

“Asked if he was one of those who would be opposed to quickly passing a payroll tax cut, Braun added: ‘I would be one of them.’” 

The article goes on to cite plenty of opposition from Democrats as well …

“Senate Democrats railed against a payroll tax during a press conference on Wednesday. 

“Sen. Ron Wyden (Ore.), the senior Democrat on the Finance Committee, called Trump’s payroll tax proposal a ‘huge mistake’ that would ‘amount to hundreds of billions of dollars in tax cuts for big corporations.’”

Putting aside the hypocrisy that some of these same people supported Obama’s payroll tax cuts…

And the fact that payroll tax cuts do benefit individuals at least as much as businesses…

I do agree that a payroll tax cut would be a mistake, especially since it wouldn’t have any benefit to someone who has become temporarily unemployed. 

If the government feels the need to step in right now, there are definitely much better ways to do it.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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