Trump’s Payroll Tax Plan Is a Flop

Trump’s Payroll Tax Plan Is a Flop

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Plus, US debt costs falling even as borrowing soars
Friday, September 11, 2020

Trump’s Payroll Tax Plan Is a Flop

President Trump’s payroll tax deferral plan is fizzling.

The plan, meant to boost workers’ incomes by allowing their employers to postpone collection of the 6.2% employee share of the tax funding Social Security, took effect at the beginning of the month. So far, though, big employers are rejecting the idea, concerned about the complexity of administering a temporary deferral and about having to pay back the uncollected taxes next year.

The New York Times’s Jim Tankersley reports:

“More than a month after Mr. Trump signed an executive memorandum to defer the collection of the payroll taxes that workers pay to help fund Social Security, few companies or people are taking part. Trade groups and tax experts say they know of no large corporations that plan to stop withholding employees’ payroll taxes this fall. As a result, economic policy experts now say they expect the deferral to have little to no effect on economic growth this year.”

Small businesses and even some Republican-run states are balking at Trump’s tax deferral, too. And Bloomberg News adds:

“Even the House of Representatives isn’t going ahead, concluding it ‘would not be in the best interests’ of employees. The Senate’s still mulling it over. That largely leaves the federal government largely on its own in proceeding, with its workers.”

No trust in Trump: As The Washington Post’s Aaron Blake notes, those decisions to not participate in the deferral come even as Trump has repeatedly pledged to have the deferred taxes forgiven if he’s reelected. “The reaction shows how little confidence American businesses — and even some red states — have in Trump’s promise,” Blake writes. “There’s very little reason not to defer the taxes if you think they’ll be forgiven at a later date.”
Trump reiterated his promise in a tweet Thursday night:

“When we win I, as your President, will totally forgive ALL deferred payroll taxes with money from the General Fund. I will ALWAYS protect Seniors and your Social Security! Sleepy Joe Biden will do the opposite, he will raise your taxes and DESTROY our Country!”

Trump’s tweet is problematic in a number of ways. First, forgiving the taxes would require congressional action, making it less likely. Second, the idea of transferring money from the Treasury Department’s general fund — “America’s checkbook,” as the Treasury Department website calls it — and of “terminating” the payroll tax completely, as Trump has indicated he would do, would at the very least raise some serious questions about Social Security’s funding and future as well as the federal budget deficit.

Democrats and Social Security advocates warn that Trump’s promise to pursue the elimination of the payroll tax is tantamount to ending Social Security — a charge that fact-checkers have said is partly false or mostly false.

Putting Social Security in play?
Still, Trump’s plan, or lack of one, does represent some risk. “Trump, in effect, has proposed a dramatic restructuring of how Social Security is financed by not relying on the payroll tax as a dedicated source, but instead by tapping the general fund,” Josh Boak of the Associated Press wrote last month. “The risk is that the loss of a dedicated funding source could destabilize an anti-poverty program that provides payments to roughly 65 million Americans. It also could force people to cut back on the spending that drives growth so they can save for their own retirement and health care needs if they believe the government backstop is in jeopardy.”

The problem is that Trump has essentially pledged to protect Social Security while getting rid of the taxes that fund it, without providing a clear and realistic source of alternate funding. “Over a 10-year period, Trump’s idea would blow a $16.1 trillion hole in a U.S. budget that is already laden with rising debt loads,” Boak reported. When Trump was asked last month how the general fund could cover the costs of Social Security when the government was already incurring large deficits, he said, “We’re going to have tremendous growth.” But the kind of extraordinary growth needed to offset the loss of payroll tax revenues isn’t likely.

That brings us back to the economy. With Congress having failed to pass another coronavirus relief package and companies declining to implement the payroll tax deferral, economists warn that household incomes could take a hit, slowing the economic recovery. “Without additional fiscal support in the next few weeks,” Mark Zandi, chief economist at Moody’s Analytics, told Bloomberg, “odds that the economy will backslide in the fourth quarter are well over even.”

US Deficit Tops $3 Trillion Through August

The federal budget deficit topped $3 trillion over the first 11 months of the fiscal year, according to Treasury Department data released Friday. Largely as a result of the emergency response to the coronavirus pandemic, the federal government has spent more than $6 trillion so far this fiscal year, compared to $4.4 trillion in 2019. Revenues, meanwhile, are on pace to roughly match last year’s level.

US Debt Costs Falling Even as Borrowing Soars

Interest costs on the national debt have fallen about 10% this fiscal year, even as the amount of debt issued by the U.S. Treasury has hit record levels, Bloomberg reported Friday. And over the next few years, the cost of servicing the debt held by the public — which now totals more than $20 trillion — will be cheaper relative to the size of the economy than any time since the early 1970s, according to projections by the Congressional Budget Office.

The reason is simple, Bloomberg’s Liz McCormick and Alexandre Tanzi say: Interest rates plunged in the wake of the coronavirus pandemic, despite the record supply of debt, and are expected to remain low for years to come.

A focus on net cost: The federal budget deficit is expected to total $3.3 trillion this fiscal year, more than three times larger than the year before, but the average interest rate on U.S. debt has fallen from 2.4% to 1.7%, and it’s expected to continue to fall.

“While there’s been a lot of concern about the mounting debt, it hasn’t caused the problems that were anticipated by the doomsters,” Ed Yardeni of Yardeni Research told Bloomberg. “It’s not just a question of how much debt is outstanding, but what is the cost to service that debt.”

Room for more?
The falling cost of the growing debt suggests that the U.S. will be able to issue more debt at low cost in response to the coronavirus crisis, should policymakers see the need to do so. “The U.S.’s debt affordability is quite OK, not stretched by any means,” Felipe Villarroel of TwentyFour Asset Management in London said. “We also look at what is the perceived use of the money a government is borrowing, which is now widely accepted as necessary.”

‘Bond vigilantes’ vanquished:
Yardeni, who is credited with coining the term “bond vigilantes” 40 years ago to describe the investors who would supposedly pressure governments to limit their debt issuance by demanding higher interest payments, says conditions have changed. The Federal Reserve is now playing the opposite role of the 1980s investors, purchasing trillions of dollars’ worth of government debt to keep interest rates near record lows.

“If there were some bond vigilantes still out there to push the bond yields higher, then the Fed will target the bond yields,” Yardeni said.

What if rates rise?
Plenty of policymakers and investors are worried about what happens if and when interest rates start rising, perhaps on the heels of surging inflation. “The Fed is greasing the system to make sure the financial markets are functioning well,” said Gary Pollack of Deutsche Bank. “But at some point in time the world will look different, and all of a sudden we are going to be stuck with a huge bill.”

Still, most economists say the current need for relief and stimulus outweighs any long-term concerns about the cost of the debt — with low interest rates making the decision that much easier. Writing at The Washington Post Friday, former Treasury chiefs Robert Rubin and Jack Lew said that although they “share a history of concern about rising deficits and debt,” the coronavirus crisis calls for more federal spending. “[W]ith a pandemic raging amid an ongoing, deep recession, this isn’t the time to let deficits stand in the way of adequately addressing the crisis and the great need it has created,” they said.

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