Of Course Trump’s Going To Reduce Payroll Taxes
Never mind that he’ll never admit the economy might be weakening: he’s not gonna sell it like that. Instead, it’ll be a little “gift” from benevolent President Trump. Like a free turkey at Thanksgiving.
And there’s another even bigger reason we’re almost certain he’s going to do it: there’s a probably much more significant tax cut he really wants to do. Because there’s one thing Trump feels is an even bigger image booster than strong economic growth numbers, and that’s a soaring stock market. So reducing capital gains, which is what you pay on profits in stocks or other investments, would more directly support the stock market. Problem is, it would likely be perceived as another Trump hand-out to really rich people. Because that’s what it would be. And despite Trump’s best efforts, his massive previous tax cut has come to be seen as mostly done for the benefit of big corporations, which it is. So Trump needs the payroll tax cut as cover. A hand-out to the middle class to distract focus from another bonanza to the rich.
Trump says he believes he can mess with capital gains without Congressional approval. That’s because he wouldn’t actually be cutting capital gains taxes, which would stay at the same rate, he’d just be indexing to account for inflation.
OK, so what the hell does that mean? If you buy $100 worth of stock now, and sell it in 10 years for $200, you normally will pay capital gains tax on your profit of $100. But if it’s indexed to inflation, and say that stays around 2%, then that gets added to the price you paid for the stock when you sell, so your profit on paper is reduced, and you pay less tax, even though the tax rate is the same. In the case we just laid out, instead of your profit being $100, it’d be considered $90, since your cost instead of being the $100 you actually paid, would be considered $110 with subsequent annual inflation factored in.
Anyway, good thing for Trump if as he says definitely, has the authority to do this without Congressional approval. According to the New York Times, maybe he does, maybe he doesn’t. But such a blatant tax give-away to the rich would almost certainly not get Congressional approval, especially not from the Democratically controlled House.
The payroll tax cut, which would require Congressional approval, is another matter. It’ll be very hard for Democrats to deny a tax break they’ve often favored because it goes right into the pockets of working Americans. Especially hard to oppose if it comes during a Presidential election year. And it’s not actually a bad idea, especially if the economy’s slowing down.
President Obama was able to get a payroll tax cut through in 2011 and 2012, as the economy was still recovering from recession. That temporarily cut to what the government takes out for Social Security to 4.2% from 6.2%, or a savings of $1,000 a year for an employee making $50,000 a year. Workers also pay in to Medicare in this way. There’s a little trick here too: really wealthy people cap out at how much they pay in, so these taxes impact middle class workers the hardest in terms of percentage of wages they have to turn over.
In 2013 those taxes went back up (even though President Obama proposed extending the cuts), mainly because Republicans opposed it, using the excuse that it was increasing the budget deficit. But also some Democrats got scared that would give Republicans an excuse to start messing with funding to Social Security. That increase really hurt Obama, especially since it was coupled with a new tax to pay for Obamacare. And despite a booming economy and stock market, it at least partly contributed to Democrats losing the Senate in the 2014 midterms and a lot of other bad things since.
Now, as then, reducing payroll taxes will increase the federal budget deficit, because by definition, it’ll mean the Treasury will be taking in less money so it’ll need to borrow more.
But those same Republicans that opposed it in the past, might now be OK with the idea. And the tax dollars Trump may put back into the pockets of the middle class will almost certainly put the programs payroll taxes pay for in greater peril down the road (and maybe not that far down the road). With an aging population, those costs can’t be reduced, except by slashing benefits or limiting eligibility. And since we’ve seen of late that the tea-partiers of old, most notably Acting White House Chief of Staff Mick Mulvaney, are now all of a sudden fine with running up the federal budget deficit, it’s pretty clear now that they were really always about promoting Conservative policies in the guise of controlling deficit spending. Many of those policies involved taking benefits away from taxpayers. And now they’re getting that via another route. So Trump cutting payroll taxes, which will allow them to cut programs like social security in the future because there will be “no other choice”, partly as a result of Trump cutting payroll taxes, will be a win-win for them. As we’ve noted several times, the only Member of Congress who voted against President Bush’s stimulus plan, President Obama’s stimulus plan, and President Trump’s gigantic corporate tax cut, North Carolina Republican Walter Jones, died recently.
When the possibility of a Trump-led payroll tax cut was first raised by the Washington Post, it reported there was some back-and-forth going on at the White House because some people in the Trump administration felt proposing such a thing would be admitting signs of weakness in the economy, which Trump emphatically denies. Even when he’s berating the Federal Reserve with not providing lower interest rates and growth that could be even better, he still predicts a “WIN”. That America’s economy is “the best!”.
When Trump, chatting with the media after a meeting with the President of Romania, admitted a payroll tax cut is something he’s thinking about, he said he hadn’t really made a decision yet. He reiterated that anything and everything bad happening with the economy right now is the Federal Reserve’s fault, not his. And that if the Fed cut interest rates much more aggressively you’d see a “burst of growth like you’d never seen before.” (Which the Fed might not necessarily disagree with, just what would come after that. ) He also repeated one of his favorite conspiracy theories of late: accusing the media of promoting the idea of a Recession simply because “they would love to see a Recession”. At the same time, Trump was also clearly wrestling with keeping that possible payroll tax reduction separate from any talk of any economic slowdown. Here’s a clip (click on the photo to watch):
But don’t be fooled: Trump’s just all about maximizing the timing and grandeur of the announcement. Plus his Chief Economic Advisor, Larry Kudlow never met a tax cut he didn’t like (and spent most of his career essentially doing public relations for Wall Street). And in some ways it won’t even matter if the payroll tax cuts have a big immediate positive impact on the economy. Trump is betting on lower capital gains for the real stimulus. Last time payroll taxes were cut, many people just saved the money, which didn’t contribute to the economy at all right away. But it always just feels good to have a little extra money in your pocket.