President Donald Trump has considered new payroll tax cuts to let American workers take home bigger pay checks.
But such a move could have negative consequences for both individuals and the economy, a number of experts warn.
The president told reporters on Tuesday that he is “thinking about” cutting payroll taxes. The move, however, would have nothing to do with talk of a looming downturn, he said.
“Payroll tax is something we think about, and a lot of people would like to see that, and that very much affects the workers of our country,” Trump said.
On Wednesday, however, the president said the economy is still too strong to warrant such a move.
How payroll taxes work
For Social Security, employee wages are currently subject to a 6.2% tax up to $132,900. Workers also pay a Medicare tax of 1.45%.
Employers match what workers contribute by also kicking in 6.2% toward Social Security and 1.45% for Medicare.
Workers who earn more than $200,000 individually, or $250,000 if they are married and filing jointly, pay an additional 0.9% Medicare tax.
Self-employed individuals pay 12.4% toward Social Security and 2.9% for Medicare. They also are subject to the Medicare surtax for wages over $200,000.
What a tax cut would mean
Trump has not elaborated on how large a payroll tax cut would be.
If he were to make such a move, he would not be the first to implement such changes. Former President Barack Obama previously reduced the taxes paid by employees to 4.2%, down from 6.2%, in 2011 and 2012.
Yet experts say that the boost consumers get to their pay checks might not be that noticeable.
If $10,000 was made exempt from payroll taxes, that would be just $700 for many workers, said Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance. That might not be enough to stimulate the economy, he said.
Still, with lunemployment down and historically low interest rates, it is probably not the most appropriate time to make such a move, Levine said.
“You don’t use your best play in the second quarter. You wait until you really need it at the end of the game,” Levine said. “When you need the play, you want to make sure you have something you can count on.”
Experts also worry that the trust funds for Social Security and Medicare, which are already facing funding shortfalls, would be further damaged by such a policy.
“If a payroll tax cut is enacted, those two funds would be directly impacted, unless provisions are made to replace the lost tax collections from general revenues,” said Tim Steffen, director of advanced planning at Baird Private Wealth Management.
Payroll tax cuts could not only jeopardize the benefits for individuals who are retired or who are approaching retirement, but could also point to bigger payroll tax hikes for younger generations, according to Laurence Kotlikoff, economics professor at Boston University and president of Economic Security Planning, a provider of financial planning tools.