Payroll Tax Cut: What Could it Mean For You?

The Trump Administration passed the U.S. Tax Cuts and Jobs Act about two years ago, which slashed corporate taxes and readjusted the tax brackets as a means of putting more money in people’s pockets with the intention of leading to an increase in consumer spending. And while the Trump Administration maintains that another tax cut isn’t imminent, there’s been a lot of chatter lately about a payroll tax cut.

Again, the Trump Administration has stated that no additional tax cuts are planned as of now, but at the same time it didn’t rule out any future cuts out down the road. And considering that the U.S. economy is inching closer to a recession (at least in theory), tax cuts are usually implemented during such times as a means of stimulating spending.

So, hypothetically speaking, we thought it would be fitting to take a closer look at what exactly a payroll tax cut would mean. While it doesn’t appear to be on the table now, the Trump Administration has also demonstrated how fast it can change course on certain things.

Here’s a closer look at a payroll tax cut and what it might mean for you and the economy.

Payroll Tax Cut: What You Need to Know

First, let’s start with payroll taxes and exactly what they are. Specifically, they’re taxes withheld from worker paychecks to help fund government programs like Social Security and Medicare. Currently, workers pay a 6.2 percent Social Security tax up to $132,900, and a 1.45 percent Medicare tax (workers who earn more than $200,000 annually are subject to an additional 0.9 percent Medicare tax).

Self-employed individuals, on the other hand, pay more for these programs — up to 12.4 percent for Social Security and nearly 3 percent for Medicare (not to mention the additional percentage if they earn more than $200,000).

If a payroll tax cut were to be implemented, it would be to the current percentage amounts that Americans pay toward these programs. But this is a complicated move. Yes, tax cuts are usually always embraced by Republicans and consumers who want their paychecks to go further. Yet, how much further any payroll tax cut would take their paychecks might not warrant enough to truly encourage more consumer spending. In fact, any payroll tax cut is likely to be modest, and might only net most workers an additional $700 for the year in savings. While any additional amount is nice, usually a lot more money than that is necessary to stimulate consumer spending and thereby the economy. Also consider that this savings would add up gradually, paycheck by paycheck, and not be in lump sum.

What’s more is that Social Security and Medicare are two programs that are already struggling to be funded appropriately. Any additional cuts to these programs could produce more hardships for senior citizens and Americans entering their twilight years. However, there could be a provision in any tax cut that replaces what would be lost with money from other revenues.

Is Now a Good Time for a Payroll Tax Cut?

Like we noted in the opening, tax cuts are usually carried out during periods of trying economic times in an effort to stimulate consumer spending and move the needle back in a positive direction. It’s partially why the U.S. Tax Cuts and Jobs Acts, while significant and beneficial for corporations and many Americans, was carried out at a peculiar time, as the economy was very strong.

If a payroll tax cut were to be made, it would likely come amid growing fears of a recession. And while stock market declines have occurred in recent weeks to cause some concern, we’re not there just yet. In fact, many economists consider something that would provide a minimal income boost like a payroll tax cut to be more of a last-ditch Hail Mary rather than something that’s just carried out routinely.

So how close is a payroll tax cut? Probably “not very.” But don’t be surprised if you start hearing more and more about this if the stock market continues to slide and the economy becomes further in doubt.

Regards,

Ethan Warrick
Editor
Wealth Authority

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