On August 20 President Trump said regarding tax cuts that the “payroll tax is something that we think about, and a lot of people would like to see that, and that very much affects the workers of our country.” Such a strategy is based on the economic belief that reducing taxes on low- and middle-income Americans is the best way to ensure that consumers continue spending money and the economy is stimulated. It's unclear how that would eliminate Trump’s electoral concerns. The public’s fear of an impending recession largely stems from Trump’s trade war, and such a tax reduction could weaken his position by sending money to China.
The trade war with China has been blamed for U.S. Steel’s recently announced layoff of hundreds of workers. The agriculture, energy, and technology industries are also at risk of U.S. job and wage loss attributable to retaliation against Trump’s protectionist policies. China is one of the largest holders of U.S. national debt, which is now at an all-time high of more than $22 trillion. The Trump administration’s recently proposed payroll tax cut would send more money to China for its cheaper technology and cars and weaken the U.S. position in the trade war.
Payroll taxes, currently 15.3 percent, pay for federal benefits to the retired, the disabled, and needy children in the United States. FICA taxes are paid on wages or salaries up to $132,900. The tax rates for Social Security and Medicare are 12.4 percent and 2.9 percent, respectively, half of which — 6.2 percent and 1.45 percent — is paid by employees. The economic policy of reducing payroll taxes targets those in the lower income brackets, and we’re already seeing the Tax Cuts and Jobs Act’s short-lived economic effects of reducing taxes on the wealthy.
There's an additional payroll tax of 0.9 percent for Medicare on single and married taxpayers with wages over $200,000 and $250,000, respectively. But as far as economic policy is concerned, the immediate impact of reducing this tax would be on par with the other major tax cut being discussed by the administration: reducing the taxation of capital gains. Extra income for lower-income earners is generally spent on necessities such as food, transportation, and utilities, so it would have a more immediate impact. Reducing tax for capital gains would have a longer-term impact on spending because the benefit of capital gains largely shows up in retirement.
The tariffs Trump has imposed on Chinese goods affect the prices of laptops, phones, and other products on which Americans would also spend their extra money from reduced payroll taxes. The industries being affected by retaliatory taxes and tariffs imposed by countries around the world would see excess cash in the hands of Americans going to buy cheaper foreign goods, such as steel and food, and to pay for foreign taxes imposed on the digital economy.
Tax neutrality prevents the economic frictions and costs that Trump’s trade war has compounded. The TCJA’s export deduction and current taxation of offshore earnings under the guise of a territorial tax system were supposed to give Americans more money to help boost the economy. Interest rate changes recently informed the world of the fragile state of the U.S. economy, and Trump now wants to return to the same method he just credited for fixing it: cutting taxes. Sure, saying you’re cutting taxes may sound good at first, but Americans know that any temporary relief will lead only to future pain plus interest. Irresponsible debt levels led to the housing market crash of 2008, and Trump wants to add even more to the national debt that increased under the tax cuts, only now his focus would be on reducing the long-term funds essential to supporting the Americans most in need — the elderly and disabled.