Trump’s Payroll Tax Plan Is a Flop

By Yuval Rosenberg

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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