You are here

Trump Adopts one of Barack Obama’s Better Ideas: The Payroll Tax Cut

Trump’s decision to Institute a payroll tax holiday via an executive order over the weekend is a good idea even if its effectiveness as an aid to workers and the economy is somewhat limited. It is the area where he is on the strongest legal footing regarding the executive orders he signed over the weekend. He can honestly say he’s following in the footsteps of his predecessor, Barack Obama, who often circumvented Congress, and saw payroll tax cuts as such a great way to help working class Americans that he did them in 2011 and again in 2012.

This may explain why House Speaker Nancy Pelosi was mysteriously silent on the subject of the payroll tax holiday in her response to executive orders, though she did scold the president for doing “nothing to put food on the table for hungry families.” She was a much bigger booster of idea in 2011. “This is a victory for the American people. They spoke out clearly and, as a result, 160 million American workers will continue to receive their payroll tax cut—about $1,000 in the pockets of the average family.”

Unlike the attempt to extend the unemployment benefits, the payroll tax cut does not involve government appropriating funds without the consent of Congress. Instead, it instructs the Treasury Department to not collect the 7.5 percent taxes that are normally automatically deducted from workers’ paychecks. In other words, the administration is merely allowing workers to retain money that they’ve already earned. It is a workaround of Congress’ authority, to be sure, but it is one that the administration does have at its disposal. It will boost the take home pay of struggling workers and it has the added benefit of not creating complications for employers or state or local governments. The tax cut benefits all working Americans and thus cannot credibly be called a break for the rich.

The benefits are limited because they only apply to people who are currently working. The 10.2 percent of people who don't have jobs right now aren’t going to benefit from this. It’s not going to make hiring people any more enticing to employers because the holiday won’t affect them. That doesn’t mean the suspending the payroll tax temporarily isn’t a good idea though.

Critics have claimed this harms Social Security, since the payroll tax is officially allocated towards paying off current retiree benefits. However, nobody in the administration is actually calling for the cutting back on Social Security benefits. “It’s a deferral. It’s not a tax rate change,” White House economic advisor Larry Kudlow told CNN. The government will simply reroute other funds towards covering the benefits as it has done in the past whenever the payroll taxes have fallen short of current obligations. The Trump administration knows nobody in Congress is actually going to object to this, so these criticisms are noise and nothing more.

There’s also the fact that earlier this year Congress passed legislation exempting employers from having to cover their half of the payroll tax obligation. “To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes,” the IRS announced in May. All the administration is doing is extending that to the other half of the equation.