White House officials eye payroll tax cut in effort to reverse weakening economy

The Hour

WASHINGTON – Several senior White House officials have begun discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown, three people familiar with the discussions said, revealing the growing concerns by President Donald Trump’s top economic aides. 

The talks are still in their early stages, and the officials have not decided whether to formally push Congress to approve the cut, these people said, speaking on condition of anonymity because they weren’t authorized to disclose internal discussions. But the White House in recent days has begun searching for proposals that could halt a slowing economy.

Millions of Americans pay a “payroll tax” on their earnings, a 6.2% levy that is used to finance Social Security programs. The payroll tax was last cut during the Obama administration to 4.2%, as a way to encourage more consumer spending during the recent economic downturn. But the cut was allowed to reset back up to 6.2% in 2013.

Americans pay payroll taxes on income up to $132,900, so cutting the payroll tax has remained a popular idea for many lawmakers seeking to deliver savings for middle-income earners and not the wealthiest Americans. But payroll tax cuts can also add dramatically to the deficit and – depending on how they are designed – pull billions of dollars away from Social Security.

The payroll tax cuts during the Obama administration reduced taxes by more than $100 billion each year, but the Obama administration directed the lost revenue to Social Security programs, so those initiatives didn’t lose money. The cuts added to the deficit, however.

The size of the cut could equate to a bigger tax cut for many families than the 2017 tax law.

The Trump administration discussions about whether to pursue a new payroll tax cut have only begun in recent days, the three people said, and specific details about the design have not been reached yet.

Trump and top aides have spent the past few days trying to convince the public that the economy is strong and that fears about a recession are misguided. But White House officials quietly have begun scrambling for new ideas to reverse public concerns and boost business confidence.

Some administration officials have felt that planning for an economic downturn would send a negative perception to the public and make things worse, but Trump has spent much of the past week conferring with business executives and other confidants seeking input on what they are seeing in the economy.

There are signs the U.S. economy is slowing, and economists fear that Germany and the United Kingdom already are tipping towards a recession. So far, consumer spending has remained one of the U.S. economy’s bright spots, and White House officials are aware that Trump’s reelection chances could hinge on the economy staying strong into next year.

Payroll tax cuts have remained popular with Democrats largely because they are seen as targeting working Americans, and the money is often immediately spent by consumers and not saved. That way, the money gives consumers more spending power, but it also helps businesses who rely on the income.

One of the biggest causes of economic downturns is a pullback in consumer spending. That hurts businesses, which then lay off workers, who then cut back on spending – a painful economic loop.

In the past, Democrats have strongly supported payroll tax cuts, while Republicans have been more resistent. Republicans have complained that these cuts do not help the economy and disproportionately harm the deficit.

White House officials have shifted wildly in recent days with varying assessments about the economy. White House economic adviser Larry Kudlow has sought to convey optimism, but Trump has been less consistent.

The president on Monday sought to play down the risk of a recession while also pinning the blame for a potential economic downturn on the Federal Reserve, chastising the central bank’s chairman, Jerome Powell, for a “horrendous lack of vision.”

In a tweet, Trump also called for the Fed to reduce interest rates by at least 100 basis points, marking an escalation of his demands on the central bank. Trump has frequently lashed out at Powell but had never used the phrase “basis points” in a tweet or made such a specific demand.

“Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to ‘will’ the Economy to be bad for purposes of the 2020 Election,” Trump tweeted. “Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world.”

He then declared that interest rates, “over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well.”

“If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!” he said.

The Fed funds rate, which Trump is trying to tell central bankers to cut, is currently set at 2.25%. Slashing it 100 basis points would lower this rate to 1.25%, giving them very little additional wiggle room to maneuver if a full-fledged recession began.

His directive for them to launch a new phase of “quantitative easing” is shorthand for asking the Fed to pump more money into the economy, a step that could weaken the U.S. dollar. This is also seen as an extreme step that central bankers take when they are trying to urgently address a slumping economy, not a tactic that is employed when the economy is still growing.

Fed officials have said they do not make decisions based on political pressure, but Trump has taken his attacks on the central bank to new extremes, particularly this month amid numerous signs that the U.S. economy is weakening more than expected.

After a tumultuous week in the markets suggested that the economy is heading onto shaky ground, Trump and his top officials have touted what they believe are the economy’s strengths, particularly consumer spending, and predicted that a recession will not occur.

As concerns mount, Kudlow has scheduled briefing calls this week with state and local business leaders, conservative groups, and others to both guage the economy’s strength and seek more input.

White House spokesman Judd Deere said the calls, which “have been long-planned,” will focus on Trump’s economic agenda, including issues such as deregulation and energy production.

But even as the White House has dismissed the notion that the country may be headed toward a recession, Trump and his aides have sent mixed messages.

In an exchange with reporters in Morristown, New Jersey, shortly before taking off for Washington on Sunday evening, Trump brushed aside the possibility of a downturn, saying, “I don’t see a recession.”

“I mean, the world is in a recession right now – although that’s too big a statement,” he added, in a remark that appeared to undercut his effort to calm fears.

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