A Payroll Tax Cut Is a Terrible Idea Without Social Security and Medicare Reform

The Trump administration is kicking around the idea of a payroll tax cut, though it’s hard to know how seriously the idea is on the scale of building a border wall to buying Greenland.

“Yeah, we’re looking at various tax reductions. But I’m looking at that all the time, anyway,” President Trump told reporters earlier this week. “Payroll tax is something that we think about, and a lot of people would like to see that.”

A White House press release said a payroll tax cut is “not something under consideration at this time.”

It shouldn’t be under consideration. At least not without some significant reforms to the Social Security and Medicare programs which are funded by the payroll tax.

The tax is 15.3 percent up to $132,900 in earnings per year. Supposedly half is paid by employees and have is paid by employers, but that’s a bit of a shell game. Employers see the tax as a payroll cost not all that distinct from a give employee’s wages and benefits. It’s really employees who pay that tax because it comes out of the cost of employing them.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#ffffff” txt_color=”#000000″]Fiscal conservatism isn’t just cutting taxes. It’s prudent management of the nation’s finances.[/mks_pullquote]

Anyway, as it stands now the revenues from this tax aren’t covering the costs of Social Security and Medicare. A recent report from Social Security’s trustees stated that the program’s “total cost is projected to exceed its total income (including interest) in 2020 for the first time since 1982.” But while 1982’s red ink was a temporary situation, the trustees see this new deficit persisting “throughout the remainder” of their forecast.

They see Social Security depleting its reserves by 2035, though those reserves are a fiction. The roughly $2.8 trillion in reserves supposedly in the Social Security Trust Fund and Federal Disability Insurance Trust Fund is “invested” in the national debt. The federal government took those surplus revenues from the payroll tax and loaned the money to itself.

When Social Security needs that money, the federal government has to pay it back. Where do you suppose those funds come from? Either more federal borrowing or our taxes.

Meanwhile Medicare Part A is also running a deficit, with that program’s reserves expected to be depleted by 2026.

This is an ugly fiscal situation, and any cut to the payroll tax would make it worse.

President Barack Obama reduced the employee’s share of the tax to 4.2 percent in 2011 and 2012, and financed the reduced revenues with federal tax revenues from other sources. Which essentially means we added the cost to the national debt, because at no point during the Obama administration did the federal government operate in the black.

Republicans at the time opposed this move, and they were correct to do so. While in the short-term some payroll tax relief would be welcome news for America’s workers, and would perhaps even spur some economic activity, but without changing the cost trajectory of Social Security and Medicare it would worsen the nation’s long-term fiscal outlook.

How is that responsible leadership?

Fiscal conservatism isn’t just cutting taxes. It’s prudent management of the nation’s finances. If we’re going to have gigantic government programs like Social Security and Medicare then the taxpayers need to feel the cost of paying for them.