The Proposal to Cut Payroll Taxes

The latest scam proposed by the President is to cut payroll taxes in order to stimulate the economy. This is being proposed because current economic indicators point to a possible recession next year which would be bad for the President’s reelection prospects. However, while the indicators don’t look good, we are clearly not in recession at this time and there are other signs that the economy is relatively healthy, so a payroll tax cut is not warranted at this time.

One should ask, however, is there ever a good time to implement a payroll tax cut? In order to answer that question, we first need to ensure that everyone understands what the payroll tax is. Payroll taxes are the taxes withheld from employees paychecks and employer paid taxes that are based on employees’ income. They include federal, state and local income taxes, Social Security, Medicare and federal and state disability insurance premiums1. Unfortunately, the reality of past (and probably future) payroll tax cuts is that income taxes are not cut. Only the insurance premiums are cut. As a result, the reserves set aside for Social Security, Medicare and disability insurance are drawn down and not replenished2.

A payroll tax cut was implemented during the Obama administration, but this was done only after we were well into the recession; and it was not done for the political expediency of getting the President reelected. Furthermore, the government reimbursed the Social Security Trust Fund for the losses resulting from the cuts so that Social Security was not threatened by the action. Plus, it did help a little to stimulate the economy. The downside of those cuts was that the economic stimulus wasn’t that great and the administration had to increase government borrowing in order to reimburse the Social Security Trust Fund.

In general, the net result of a payroll tax cut is like that of any tax cut in that it decreases government revenues but does not decrease government spending which, in turn, increases government borrowing. In the case of a payroll tax cut where the Social Security Trust Fund is reimbursed from general revenues, the only threat to Social Security lies in the risk of the government defaulting on its debt3. However, if the administration decides to implement a payroll tax cut and not reimburse the Social Security Trust Fund, it would be disastrous to Social Security and could lead to its bankruptcy4. This would amount to the theft of Social Security Trust Funds to pay for other government expenses. To do so now, when we are not in recession, would amount to the stealing from the Social Security Trust Fund in order promote the reelection of the President, i.e., using the Social Security Trust Fund to finance the President’s political campaign.

1 These insurance premiums have been labeled taxes for political purposes in order to cast them in an onerous light. They are not taxes as, just like private insurance, the money will be returned to people when they reach retirement or when they become disabled. Those who wish to destroy these insurance (aka safety net) programs would prefer everyone perceive them as taxes in order to gain public support for eliminating them.

2 Unless reimbursed from general funds.

3 All of the Social Security Trust Funds are invested in government securities.

4 This would be a boon to those who wish to privatize Social Security or eliminate it altogether.