(MarketWatch) Cutting U.S. payroll taxes might help stop an economic slowdown but would cost the government hundreds of billions of dollars at a time of rising deficits, according to one estimate.
Talk of a payroll-tax cut is in full swing after the Washington Post reported late Monday that senior White House officials have begun discussing whether to push for a temporary cut as a way to arrest an economic slowdown.
President Donald Trump said Tuesday that he’s “been thinking about payroll taxes for a long time. Many people would like to see that.” He told reporters during a White House meeting with Romania’s president that his administration was looking at “various tax reductions,” including cutting capital gains taxes by indexing them to inflation.
The Committee for a Responsible Federal Budget, an independent public policy think tank, took a look at what a payroll tax cut would cost. In an analysis released late Monday, the group says the cost would depend on several factors including its duration and size.
They estimate that cutting the employee-side Social Security payroll tax by two percentage points for two years would cost nearly $300 billion, before interest. Such a cut would mirror ones in 2011 and 2012, during the Obama administration.
There’s also the option of cutting payroll taxes on the employer side, which the CRFB says would cost $55 billion to $60 billion per percent cut each year.
As the Post noted, the Obama administration directed revenue to Social Security programs so those initiatives didn’t lose money, but the cuts added to the budget deficit.
The government’s red ink is already projected to rise. The Trump administration is forecasting that the deficit for the full budget year, which ends on Sept. 30, will top $1 trillion, up from a deficit of $779 billion last year. That reflects both President Trump’s tax cut and billions of dollars in extra spending approved by Congress in early 2018.
The U.S. federal budget deficit in 2018 was an estimated 3.9% of gross domestic product and is forecast at more than 4.0% of GDP in 2019, even though the economy has been growing steadily for the past decade. On current projections, federal deficits as a share of GDP are seen rising to nearly 5.0% of GDP in the next decade, well above the 2.7% average over the past 50 years.
